UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended September
30, 2008
or
o
|
|
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 1-06446
Knight
Inc.
(Exact
name of registrant as specified in its charter)
Kansas
|
|
48-0290000
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
500
Dallas Street, Suite 1000, Houston, Texas 77002
|
(Address
of principal executive offices, including zip
code)
|
(713)
369-9000
|
(Registrant’s
telephone number, including area
code)
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
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
o No
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
þ
Number
of outstanding shares of Common stock, $0.01 par value, as of October 31, 2008
was 100 shares.
FORM
10-Q
QUARTER
ENDED SEPTEMBER 30, 2008
Contents
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Page
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3-4
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5-6
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7-8
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9-64
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65-103
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103
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103
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104
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104-107
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|
107
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|
107
|
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|
107
|
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|
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|
107
|
|
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|
|
108
|
|
|
|
|
109
|
CONSOLIDATED
BALANCE SHEETS (Unaudited)
(In
millions)
|
September
30,
2008
|
|
December
31,
2007
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
$
|
126.6
|
|
|
$
|
148.6
|
|
Restricted
Deposits
|
|
27.6
|
|
|
|
67.9
|
|
Accounts,
Notes and Interest Receivable, Net
|
|
981.4
|
|
|
|
975.2
|
|
Inventories
|
|
44.2
|
|
|
|
37.8
|
|
Gas
Imbalances
|
|
6.3
|
|
|
|
26.9
|
|
Assets
Held for Sale
|
|
-
|
|
|
|
3,353.3
|
|
Fair
Value of Derivative Instruments
|
|
37.8
|
|
|
|
37.1
|
|
Other
|
|
42.1
|
|
|
|
36.8
|
|
|
|
1,266.0
|
|
|
|
4,683.6
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, Net
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
16,648.9
|
|
|
|
15,080.9
|
|
Accumulated
Depreciation, Depletion and Amortization
|
|
(744.6
|
)
|
|
|
(277.0
|
)
|
|
|
15,904.3
|
|
|
|
14,803.9
|
|
|
|
|
|
|
|
|
|
Notes
Receivable – Related Parties
|
|
192.8
|
|
|
|
87.9
|
|
Investments
|
|
1,824.9
|
|
|
|
1,996.2
|
|
Goodwill
|
|
4,775.7
|
|
|
|
8,174.0
|
|
Other
Intangibles, Net
|
|
256.2
|
|
|
|
321.1
|
|
Assets
Held for Sale, Non-current
|
|
-
|
|
|
|
5,634.6
|
|
Fair
Value of Derivative Instruments, Non-current
|
|
260.0
|
|
|
|
142.4
|
|
Deferred
Charges and Other Assets
|
|
228.8
|
|
|
|
257.3
|
|
Total
Assets
|
$
|
24,708.7
|
|
|
$
|
36,101.0
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
KNIGHT
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Unaudited)
(In
millions except share and per share amounts)
|
September
30,
2008
|
|
December
31,
2007
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Current
Maturities of Long-term Debt
|
$
|
289.7
|
|
|
$
|
79.8
|
|
Notes
Payable
|
|
270.0
|
|
|
|
888.1
|
|
Cash
Book Overdrafts
|
|
74.2
|
|
|
|
30.7
|
|
Accounts
Payable
|
|
841.0
|
|
|
|
943.7
|
|
Accrued
Interest
|
|
95.9
|
|
|
|
242.7
|
|
Accrued
Taxes
|
|
252.7
|
|
|
|
728.2
|
|
Gas
Imbalances
|
|
19.9
|
|
|
|
23.7
|
|
Liabilities
Held for Sale
|
|
-
|
|
|
|
168.2
|
|
Fair
Value of Derivative Instruments
|
|
611.6
|
|
|
|
594.7
|
|
Other
|
|
274.0
|
|
|
|
240.0
|
|
|
|
2,729.0
|
|
|
|
3,939.8
|
|
|
|
|
|
|
|
|
|
Long-term
Debt
|
|
|
|
|
|
|
|
Outstanding
Notes and Debentures
|
|
10,800.6
|
|
|
|
14,714.6
|
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
|
35.7
|
|
|
|
283.1
|
|
Preferred
Interest in General Partner of Kinder Morgan Energy
Partners
|
|
100.0
|
|
|
|
100.0
|
|
Value
of Interest Rate Swaps
|
|
233.8
|
|
|
|
199.7
|
|
|
|
11,170.1
|
|
|
|
15,297.4
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes, Non-current
|
|
1,714.6
|
|
|
|
1,849.4
|
|
Liabilities
Held for Sale, Non-current
|
|
-
|
|
|
|
2,424.1
|
|
Fair
Value of Derivative Instruments, Non-current
|
|
1,018.7
|
|
|
|
836.8
|
|
Other
Long-term Liabilities and Deferred Credits
|
|
579.7
|
|
|
|
618.0
|
|
|
|
14,483.1
|
|
|
|
21,025.7
|
|
|
|
|
|
|
|
|
|
Minority
Interests in Equity of Subsidiaries
|
|
3,474.3
|
|
|
|
3,314.0
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Notes 13 and 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
Equity
|
|
|
|
|
|
|
|
Common
Stock – Authorized and Outstanding – 100 Shares, Par Value $0.01 Per
Share
|
|
-
|
|
|
|
-
|
|
Additional
Paid-in Capital
|
|
7,811.9
|
|
|
|
7,822.2
|
|
Retained
Earnings (Deficit)
|
|
(3,399.2
|
)
|
|
|
247.0
|
|
Accumulated
Other Comprehensive Loss
|
|
(390.4
|
)
|
|
|
(247.7
|
)
|
|
|
4,022.3
|
|
|
|
7,821.5
|
|
Total
Liabilities and Stockholder’s Equity
|
$
|
24,708.7
|
|
|
$
|
36,101.0
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
KNIGHT
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
(In
millions)
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
Operating
Revenues
|
|
|
|
|
|
|
|
Natural
Gas Sales
|
$
|
2,183.3
|
|
|
$
|
1,451.8
|
|
Transportation
and Storage
|
|
700.9
|
|
|
|
849.2
|
|
Oil
and Product Sales
|
|
412.4
|
|
|
|
308.0
|
|
Total
Operating Revenues
|
|
3,296.6
|
|
|
|
2,609.0
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
Gas
Purchases and Other Costs of Sales
|
|
2,179.2
|
|
|
|
1,482.8
|
|
Operations
and Maintenance
|
|
360.8
|
|
|
|
357.0
|
|
General
and Administrative
|
|
85.9
|
|
|
|
77.9
|
|
Depreciation,
Depletion and Amortization
|
|
217.2
|
|
|
|
204.1
|
|
Taxes,
Other Than Income Taxes
|
|
48.0
|
|
|
|
46.6
|
|
Other
Expense (Income), Net
|
|
7.2
|
|
|
|
(2.4
|
)
|
Total
Operating Costs and Expenses
|
|
2,898.3
|
|
|
|
2,166.0
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
398.3
|
|
|
|
443.0
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
Earnings
of Equity Investees
|
|
42.9
|
|
|
|
26.7
|
|
Interest
Expense, Net
|
|
(141.5
|
)
|
|
|
(252.6
|
)
|
Interest
Expense – Deferrable Interest Debentures, Net
|
|
(0.5
|
)
|
|
|
(5.4
|
)
|
Minority
Interests
|
|
(106.8
|
)
|
|
|
(52.4
|
)
|
Other,
Net
|
|
4.4
|
|
|
|
5.4
|
|
Total
Other Income and (Expenses)
|
|
(201.5
|
)
|
|
|
(278.3
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Income Taxes
|
|
196.8
|
|
|
|
164.7
|
|
Income
Taxes
|
|
87.9
|
|
|
|
74.6
|
|
Income
from Continuing Operations
|
|
108.9
|
|
|
|
90.1
|
|
Loss
from Discontinued Operations, Net of Tax
|
|
(0.2
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
$
|
108.7
|
|
|
$
|
85.7
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
(In
millions)
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Sales
|
$
|
6,369.8
|
|
|
$
|
2,013.7
|
|
|
|
$
|
2,430.6
|
|
Transportation
and Storage
|
|
2,187.5
|
|
|
|
1,124.7
|
|
|
|
|
1,350.5
|
|
Oil
and Product Sales
|
|
1,194.8
|
|
|
|
407.5
|
|
|
|
|
384.0
|
|
Total
Operating Revenues
|
|
9,752.1
|
|
|
|
3,545.9
|
|
|
|
|
4,165.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Purchases and Other Costs of Sales
|
|
6,433.9
|
|
|
|
2,040.0
|
|
|
|
|
2,490.4
|
|
Operations
and Maintenance
|
|
977.4
|
|
|
|
463.8
|
|
|
|
|
476.1
|
|
General
and Administrative
|
|
264.0
|
|
|
|
107.9
|
|
|
|
|
283.6
|
|
Depreciation,
Depletion and Amortization
|
|
651.0
|
|
|
|
276.3
|
|
|
|
|
261.0
|
|
Taxes,
Other Than Income Taxes
|
|
151.6
|
|
|
|
62.1
|
|
|
|
|
74.4
|
|
Other
Expense (Income), Net
|
|
4.5
|
|
|
|
(6.4
|
)
|
|
|
|
(2.3
|
)
|
Goodwill
Impairment
|
|
4,033.3
|
|
|
|
-
|
|
|
|
|
377.1
|
|
Total
Operating Costs and Expenses
|
|
12,515.7
|
|
|
|
2,943.7
|
|
|
|
|
3,960.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
(2,763.6
|
)
|
|
|
602.2
|
|
|
|
|
204.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
of Equity Investees
|
|
141.9
|
|
|
|
35.9
|
|
|
|
|
38.3
|
|
Interest
Expense, Net
|
|
(493.8
|
)
|
|
|
(336.1
|
)
|
|
|
|
(241.1
|
)
|
Interest
Expense – Deferrable Interest Debentures, Net
|
|
5.6
|
|
|
|
(7.3
|
)
|
|
|
|
(9.1
|
)
|
Minority
Interests
|
|
(359.4
|
)
|
|
|
(86.9
|
)
|
|
|
|
(90.7
|
)
|
Other,
Net
|
|
18.1
|
|
|
|
6.1
|
|
|
|
|
0.6
|
|
Total
Other Income and (Expenses)
|
|
(687.6
|
)
|
|
|
(388.3
|
)
|
|
|
|
(302.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
|
(3,451.2
|
)
|
|
|
213.9
|
|
|
|
|
(97.2
|
)
|
Income
Taxes
|
|
194.4
|
|
|
|
95.9
|
|
|
|
|
135.5
|
|
Income
(Loss) from Continuing Operations
|
|
(3,645.6
|
)
|
|
|
118.0
|
|
|
|
|
(232.7
|
)
|
Income
(Loss) from Discontinued Operations, Net of Tax
|
|
(0.6
|
)
|
|
|
(2.1
|
)
|
|
|
|
298.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
|
(3,646.2
|
)
|
|
$
|
115.9
|
|
|
|
$
|
65.9
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(In
millions)
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
|
(3,646.2
|
)
|
|
$
|
115.9
|
|
|
|
$
|
65.9
|
|
Adjustments
to Reconcile Net Income to Net Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
Loss from Discontinued Operations, Net of Tax
|
|
0.6
|
|
|
|
13.2
|
|
|
|
|
(287.9
|
)
|
Loss
from Goodwill Impairment
|
|
4,033.3
|
|
|
|
-
|
|
|
|
|
377.1
|
|
Loss
on Early Extinguishment of Debt
|
|
23.6
|
|
|
|
-
|
|
|
|
|
4.4
|
|
Depreciation,
Depletion and Amortization
|
|
651.0
|
|
|
|
278.6
|
|
|
|
|
264.9
|
|
Deferred
Income Taxes
|
|
46.4
|
|
|
|
14.2
|
|
|
|
|
138.7
|
|
Equity
in Earnings of Equity Investees
|
|
(141.9
|
)
|
|
|
(36.8
|
)
|
|
|
|
(39.1
|
)
|
Distributions
from Equity Investees
|
|
185.0
|
|
|
|
45.1
|
|
|
|
|
48.2
|
|
Minority
Interests in Income of Consolidated Subsidiaries
|
|
359.4
|
|
|
|
86.9
|
|
|
|
|
90.7
|
|
Gains
from Property Casualty Indemnifications
|
|
-
|
|
|
|
-
|
|
|
|
|
(1.8
|
)
|
Net
Losses (Gains) on Sales of Assets
|
|
4.4
|
|
|
|
(7.0
|
)
|
|
|
|
(2.6
|
)
|
Mark-to-Market
Interest Rate Swap Gain
|
|
(19.8
|
)
|
|
|
-
|
|
|
|
|
-
|
|
Foreign
Currency Loss
|
|
0.2
|
|
|
|
-
|
|
|
|
|
15.5
|
|
Changes
in Gas in Underground Storage
|
|
(28.0
|
)
|
|
|
34.5
|
|
|
|
|
(84.2
|
)
|
Changes
in Working Capital Items
|
|
(851.7
|
)
|
|
|
(13.6
|
)
|
|
|
|
(202.9
|
)
|
(Payment
for) Proceeds from Termination of Interest Rate Swaps
|
|
(2.5
|
)
|
|
|
(2.2
|
)
|
|
|
|
51.9
|
|
Kinder
Morgan Energy Partners’ Rate Reparations, Refunds and Reserve
Adjustments
|
|
(10.7
|
)
|
|
|
-
|
|
|
|
|
-
|
|
Other,
Net
|
|
(19.3
|
)
|
|
|
(16.7
|
)
|
|
|
|
54.4
|
|
Cash
Flows Provided by Continuing Operations
|
|
583.8
|
|
|
|
512.1
|
|
|
|
|
493.2
|
|
Net
Cash Flows (Used in) Provided by Discontinued Operations
|
|
(0.7
|
)
|
|
|
(2.5
|
)
|
|
|
|
109.8
|
|
Net
Cash Flows Provided by Operating Activities
|
|
583.1
|
|
|
|
509.6
|
|
|
|
|
603.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Predecessor Stock
|
|
-
|
|
|
|
(11,534.3
|
)
|
|
|
|
-
|
|
Capital
Expenditures
|
|
(1,922.8
|
)
|
|
|
(656.1
|
)
|
|
|
|
(652.8
|
)
|
Proceeds
from Sale of 80% Interest in NGPL PipeCo LLC, Net of $1.1
Million Cash Sold
|
|
2,899.3
|
|
|
|
-
|
|
|
|
|
-
|
|
Proceeds
from NGPL PipeCo LLC Restricted Cash
|
|
3,106.4
|
|
|
|
-
|
|
|
|
|
-
|
|
Acquisitions
|
|
(16.4
|
)
|
|
|
(119.7
|
)
|
|
|
|
(42.1
|
)
|
Net
Proceeds from (Investments in) Margin Deposits
|
|
40.3
|
|
|
|
(22.9
|
)
|
|
|
|
(54.8
|
)
|
Distributions
from Equity Investees
|
|
92.5
|
|
|
|
-
|
|
|
|
|
-
|
|
Other
Investments
|
|
(342.1
|
)
|
|
|
(17.5
|
)
|
|
|
|
(29.7
|
)
|
Change
in Natural Gas Storage and NGL Line Fill Inventory
|
|
(2.5
|
)
|
|
|
6.3
|
|
|
|
|
8.4
|
|
Property
Casualty Indemnifications
|
|
-
|
|
|
|
-
|
|
|
|
|
8.0
|
|
Net
Proceeds (Cost of Removal) from Sales of Other Assets
|
|
113.3
|
|
|
|
10.6
|
|
|
|
|
(1.5
|
)
|
Net
Cash Flows Provided by (Used in) Continuing Investing
Activities
|
|
3,968.0
|
|
|
|
(12,333.6
|
)
|
|
|
|
(764.5
|
)
|
Net
Cash Flows Provided by Discontinued Investing Activities
|
|
-
|
|
|
|
190.9
|
|
|
|
|
1,488.2
|
|
Net
Cash Flows Provided by (Used in) Investing Activities
|
$
|
3,968.0
|
|
|
$
|
(12,142.7
|
)
|
|
|
$
|
723.7
|
|
KNIGHT
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(In
millions)
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30, 2008
|
|
Four
Months
Ended
September
30, 2007
|
|
|
Five
Months Ended
May
31, 2007
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
Debt, Net
|
$
|
(323.1
|
)
|
|
$
|
62.7
|
|
|
|
$
|
(247.5
|
)
|
Long-term
Debt Issued
|
|
1,600.1
|
|
|
|
5,805.0
|
|
|
|
|
1,000.0
|
|
Long-term
Debt Retired
|
|
(5,878.3
|
)
|
|
|
(827.7
|
)
|
|
|
|
(302.4
|
)
|
Issuance
of Kinder Morgan, G.P., Inc. Preferred Stock
|
|
-
|
|
|
|
100.0
|
|
|
|
|
|
|
Discount
on Early Extinguishment of Debt
|
|
69.2
|
|
|
|
-
|
|
|
|
|
-
|
|
Cash
Book Overdraft
|
|
43.5
|
|
|
|
(2.0
|
)
|
|
|
|
(14.9
|
)
|
Common
Stock Issued
|
|
-
|
|
|
|
-
|
|
|
|
|
9.9
|
|
Excess
Tax Benefits from Share-based Payment Arrangements
|
|
-
|
|
|
|
-
|
|
|
|
|
56.7
|
|
Cash
Paid to Share-based Award Holders Due to Going Private
Transaction
|
|
-
|
|
|
|
(181.1
|
)
|
|
|
|
-
|
|
Issuance
of Kinder Morgan Management, LLC Shares
|
|
-
|
|
|
|
-
|
|
|
|
|
297.9
|
|
Contributions
from Successor Investors
|
|
-
|
|
|
|
5,112.0
|
|
|
|
|
-
|
|
Short-term
Advances (to) from Unconsolidated Affiliates
|
|
2.7
|
|
|
|
(2.7
|
)
|
|
|
|
2.3
|
|
Cash
Dividends, Common Stock
|
|
-
|
|
|
|
-
|
|
|
|
|
(234.9
|
)
|
Minority
Interests, Contributions
|
|
385.0
|
|
|
|
-
|
|
|
|
|
-
|
|
Minority
Interests, Distributions
|
|
(463.3
|
)
|
|
|
(127.6
|
)
|
|
|
|
(248.9
|
)
|
Debt
Issuance Costs
|
|
(14.3
|
)
|
|
|
(66.6
|
)
|
|
|
|
(13.1
|
)
|
Other,
Net
|
|
8.9
|
|
|
|
0.5
|
|
|
|
|
(4.3
|
)
|
Net
Cash Flows (Used in) Provided by Continuing Financing
Activities
|
|
(4,569.6
|
)
|
|
|
9,872.5
|
|
|
|
|
300.8
|
|
Net
Cash Flows Provided by Discontinued Financing Activities
|
|
-
|
|
|
|
-
|
|
|
|
|
140.1
|
|
Net
Cash Flows (Used in) Provided by Financing Activities
|
|
(4,569.6
|
)
|
|
|
9,872.5
|
|
|
|
|
440.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(3.5
|
)
|
|
|
(2.4
|
)
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Balance Included in Assets Held for Sale
|
|
-
|
|
|
|
-
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
(22.0
|
)
|
|
|
(1,763.0
|
)
|
|
|
|
1,772.5
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
148.6
|
|
|
|
1,902.3
|
|
|
|
|
129.8
|
|
Cash
and Cash Equivalents at End of Period
|
$
|
126.6
|
|
|
$
|
139.3
|
|
|
|
$
|
1,902.3
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
We
are a large energy transportation and storage company, operating or owning an
interest in approximately 37,000 miles of pipelines and approximately 165
terminals. We have both regulated and nonregulated operations. We also own all
the common equity of the general partner of, and a significant limited partner
interest in, Kinder Morgan Energy Partners, L.P., a publicly traded pipeline
limited partnership. Our executive offices are located at 500 Dallas Street,
Suite 1000, Houston, Texas 77002 and our telephone number is (713) 369-9000.
Unless the context requires otherwise, references to “we,” “us,” “our,” or the
“Company” are intended to mean Knight Inc. (formerly Kinder Morgan, Inc.) and
its consolidated subsidiaries both before and after the Going Private
transaction discussed in Note 2 below. Unless the context requires otherwise,
references to “Kinder Morgan Energy Partners” and “KMP” are intended to mean
Kinder Morgan Energy Partners, L.P. and its consolidated
subsidiaries.
Kinder
Morgan Management, LLC, referred to in this report as “Kinder Morgan Management”
or “KMR,” is a publicly traded Delaware limited liability company that was
formed on February 14, 2001. Kinder Morgan G.P., Inc., the general partner of
Kinder Morgan Energy Partners, owns all of Kinder Morgan Management’s voting
shares. Kinder Morgan Management, pursuant to a delegation of control agreement,
has been delegated, to the fullest extent permitted under Delaware law, all of
Kinder Morgan G.P., Inc.’s power and authority to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder
Morgan G.P., Inc.’s right to approve certain transactions.
2.
|
Significant
Accounting Policies
|
Basis
of Presentation
We
have prepared the accompanying unaudited interim consolidated financial
statements under the rules and regulations of the Securities and Exchange
Commission (“SEC”). Under such SEC rules and regulations, we have condensed or
omitted certain information and notes normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). Our management believes, however, that our
disclosures are adequate to make the information presented not misleading. The
consolidated financial statements reflect normal adjustments, and also recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of our financial results for the interim periods. You should read
these interim consolidated financial statements in conjunction with our
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2007 (“2007 Form
10-K”).
Our
consolidated financial statements include the accounts of Knight Inc. and our
majority-owned subsidiaries, as well as those of Kinder Morgan Energy Partners,
Kinder Morgan Management and Triton Power Company LLC, which we have the ability
to exercise significant influence over their operating and financial policies.
Investments in jointly owned operations in which we hold a 50% or less interest
(other than Kinder Morgan Energy Partners, Kinder Morgan Management and Triton
Power Company LLC) are accounted for under the equity method. All material
intercompany transactions and balances have been eliminated. Certain prior
period amounts have been reclassified to conform to the current
presentation.
On
May 30, 2007, we completed our Going Private transaction whereby Kinder Morgan,
Inc. merged with a wholly owned subsidiary of Knight Holdco LLC, with Kinder
Morgan, Inc. continuing as the surviving legal entity and subsequently renamed
Knight Inc. Knight Holdco LLC is a private company owned by Richard D. Kinder,
our Chairman and Chief Executive Officer; our co-founder William V. Morgan;
former Kinder Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan;
other members of our senior management, most of whom are also senior officers of
Kinder Morgan G.P., Inc. and Kinder Morgan Management; and affiliates of (i)
Goldman Sachs Capital Partners, (ii) American International Group, Inc., (iii)
The Carlyle Group, and (iv) Riverstone Holdings LLC. As a result of the Going
Private transaction, we are now privately owned, our stock is no longer traded
on the New York Stock Exchange, and we have adopted a new basis of accounting
for our assets and liabilities. This transaction was a “business combination”
for accounting purposes, requiring that these investors, pursuant to Statement
of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, record
the assets acquired and liabilities assumed at their fair market values as of
the acquisition date, resulting in a new basis of accounting.
As
a result of the application of the SEC rules and guidance regarding “push down”
accounting, the investors’ new accounting basis in our assets and liabilities is
reflected in our financial statements effective with the closing of the Going
Private transaction. Therefore, in the accompanying consolidated financial
statements, transactions and balances prior to the closing of the Going Private
transaction (the amounts labeled “Predecessor Company”) reflect the historical
accounting basis
in
our assets and liabilities, while the amounts subsequent to the closing (labeled
“Successor Company”) reflect the push down of the investors’ new accounting
basis to our financial statements. Hence, there is a blackline division on the
financial statements and relevant notes, which is intended to signify that the
amounts shown for periods prior to and subsequent to the Going Private
transaction are not comparable.
As
required by SFAS No. 141 (applied by the investors and pushed down to our
financial statements), effective with the closing of the Going Private
transaction, all of our assets and liabilities have been recorded at their
estimated fair market values based on an allocation of the aggregate purchase
price paid in the Going Private transaction. To the extent that we consolidate
less than wholly owned subsidiaries (such as Kinder Morgan Energy Partners,
Kinder Morgan Management and Triton Power Company LLC), the reported assets and
liabilities for these entities have been given a new accounting basis only to
the extent of our economic ownership interest in those entities. Therefore, the
assets and liabilities of these entities are included in our financial
statements, in part, at a new accounting basis reflecting the investors’
purchase of our economic interest in these entities (approximately 50% in the
case of Kinder Morgan Energy Partners and 14% in the case of Kinder Morgan
Management). The remaining percentage of these assets and liabilities,
reflecting the continuing minority ownership interest, is included at its
historical accounting basis. The purchase price paid in the Going Private
transaction and the allocation of that purchase price is as
follows:
|
(In
millions)
|
The
Total Purchase Price Consisted of the Following
|
|
|
|
Cash
Paid
|
$
|
5,112.0
|
|
Kinder
Morgan, Inc. Shares Contributed
|
|
2,719.2
|
|
Equity
Contributed
|
|
7,831.2
|
|
Cash
from Issuances of Long-term Debt
|
|
4,696.2
|
|
Total
Purchase Price
|
$
|
12,527.4
|
|
|
|
|
|
The
Allocation of the Purchase Price is as Follows
|
|
|
|
Current
Assets
|
$
|
1,551.2
|
|
Investments
|
|
897.8
|
|
Goodwill
|
|
13,674.3
|
|
Property,
Plant and Equipment, Net
|
|
15,520.0
|
|
Deferred
Charges and Other Assets
|
|
1,639.8
|
|
Current
Liabilities
|
|
(3,279.5
|
)
|
Other
Liabilities and Deferred Credits
|
|
|
|
Deferred
Income Taxes, Non-current
|
|
(2,519.4
|
)
|
Other
Deferred Credits
|
|
(1,786.3
|
)
|
Long-term
Debt
|
|
(9,855.9
|
)
|
Minority
Interests in Equity of Subsidiaries
|
|
(3,314.6
|
)
|
|
$
|
12,527.4
|
|
The
following is a reconciliation of shares purchased and contributed and the Going
Private transaction purchase price (in millions except per share
information):
|
|
Number
of
Shares
|
|
|
|
Price
per
Share
|
|
|
|
Total
Value
|
|
Shares
Purchased with Cash
|
|
107.6
|
|
|
$
|
107.50
|
|
|
$
|
11,561.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Contributed
|
|
|
|
|
|
|
|
|
|
|
|
Richard
D. Kinder
|
|
24.0
|
|
|
$
|
101.00
|
|
|
|
2,424.0
|
|
Other
Knight Inc. Management and Board Members
|
|
2.7
|
|
|
$
|
107.50
|
|
|
|
295.2
|
|
Total
Shares Contributed
|
|
26.7
|
|
|
|
|
|
|
|
2,719.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares Outstanding as of May 31, 2007
|
|
134.3
|
|
|
|
|
|
|
|
14,280.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Portion of Shares Acquired using Knight Inc. Cash on Hand
|
|
|
|
|
|
|
|
|
|
(1,756.8
|
)
|
Add:
Cash Contributions by Management At or After May 30, 2007
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Purchase
Price
|
|
|
|
|
|
|
|
|
$
|
12,527.4
|
|
The
shares contributed by members of management and the board members other than
Richard D. Kinder who were investors in the Going Private transaction were
valued at $107.50 per share, the same as the amount per share paid to the public
shareholders in the Going Private transaction. Richard D. Kinder agreed to value
the shares he contributed at $101.00 per share because Mr. Kinder agreed to
participate in the transaction at less than the merger price in order to help
increase the merger price for the other public shareholders.
Transfer
of Net Assets Between Entities Under Common Control
We
account for the transfer of net assets between entities under common control by
carrying forward the net assets recognized in the balance sheets of each
combining entity to the balance sheet of the combined entity, and no other
assets or liabilities are recognized as a result of the combination. Transfers
of net assets between entities under common control do not affect the income
statement of the combined entity.
Changes
in the carrying amount of our goodwill for the nine months ended September 30,
2008 are summarized as follows:
|
December
31,
2007
|
|
Acquisitions
and
Purchase
Price
Adjustments1
|
|
Impairment
of
Assets
|
|
Other2
|
|
September
30,
2008
|
|
(In
millions)
|
Products
Pipelines – KMP
|
$
|
2,179.4
|
|
|
|
$
|
(43.1
|
)
|
|
|
$
|
(1,266.5
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
862.9
|
|
Natural
Gas Pipelines – KMP
|
|
3,201.0
|
|
|
|
|
266.8
|
|
|
|
|
(2,090.2
|
)
|
|
|
(10.6
|
)
|
|
|
1,367.0
|
|
CO2
– KMP
|
|
1,077.6
|
|
|
|
|
457.2
|
|
|
|
|
-
|
|
|
|
(3.7
|
)
|
|
|
1,531.1
|
|
Terminals
– KMP
|
|
1,465.9
|
|
|
|
|
(3.2
|
)
|
|
|
|
(676.6
|
)
|
|
|
(4.5
|
)
|
|
|
781.6
|
|
Kinder
Morgan Canada – KMP
|
|
250.1
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(17.0
|
)
|
|
|
233.1
|
|
Consolidated
Total
|
$
|
8,174.0
|
|
|
|
$
|
677.7
|
|
|
|
$
|
(4,033.3
|
)
|
|
$
|
(42.7
|
)
|
|
$
|
4,775.7
|
|
_______________
1
|
Adjustments
relate primarily to a reallocation between goodwill and property, plant,
and equipment in our final purchase price
allocation.
|
2
|
Adjustments
include (i) the translation of goodwill denominated in foreign currencies
and (ii) reductions in the allocation of equity method goodwill due to
reductions in our ownership percentage of Kinder Morgan Energy
Partners.
|
We
evaluate for the impairment of goodwill in accordance with the provisions of
SFAS No. 142, Goodwill and
Other Intangible Assets. For this purpose, we have six reporting units as
follows: (i) Products Pipelines – KMP (excluding associated terminals), (ii)
Products Pipelines Terminals – KMP (evaluated separately from Products Pipelines
for goodwill purposes), (iii) Natural Gas Pipelines – KMP, (iv) CO2 – KMP, (v)
Terminals – KMP and (vi) Kinder Morgan Canada – KMP. For the investments we
continue to account for under the equity method of accounting, the premium or
excess cost over underlying fair value of net assets is referred to as equity
method goodwill and is not subject to amortization but rather to impairment
testing in accordance with APB No. 18, The Equity Method of Accounting for
Investments in Common Stock. As of both September 30, 2008 and December
31, 2007, we have reported $138.2 million of equity method goodwill within the
caption “Investments” in the accompanying interim Consolidated Balance
Sheets.
In
the second quarter of 2008, we finalized the purchase price allocation
associated with our May 2007 Going Private transaction, establishing the fair
values of our individual assets and liabilities including assigning the
associated goodwill to our six reporting units, in each case as of the May 31,
2007 acquisition date. The goodwill that arose in conjunction with this
acquisition, which constitutes all of our recorded goodwill, was determined to
be associated with the general partner and significant limited partner interests
in Kinder Morgan Energy Partners (a publicly traded master limited partnership,
or “MLP”) that we acquired as part of this business combination. The goodwill
was attributable, in part, to the difference between the market multiples that
are paid to acquire the general partner interest in an MLP and the market
multiples that are (or would be) paid to acquire the individual assets that
comprise the MLP.
In
conjunction with our annual impairment test of the carrying value of this
goodwill, performed as of May 31, 2008, we determined that the fair value of
certain reporting units that are part of our investment in Kinder Morgan Energy
Partners were less than the carrying values. In addition, the fair value of each
reporting unit was determined from the present value of the expected future cash
flows from the applicable reporting unit (inclusive of a terminal value
calculated using a market multiple for the individual assets). For the reporting
units where the fair value was less than the carrying value, we determined the
implied fair value of goodwill. The implied fair value of goodwill within each
reporting unit was then compared to the carrying value of goodwill of each such
unit, resulting in the following goodwill impairment by our reporting units:
Products Pipelines – KMP (excluding associated terminals) – $1.19 billion,
Products Pipelines Terminals –
KMP
(separate from Products Pipelines – KMP for goodwill impairment purposes) - $70
million, Natural Gas Pipelines – KMP – $2.09 billion, and Terminals – KMP – $677
million, for a total impairment of $4.03 billion. We have finalized our goodwill
impairment calculation initially recorded in the second quarter of 2008. This
resulted in an increase to the goodwill impairment by our Products Pipelines –
KMP (excluding associated terminals) reporting unit of $152.6 million and a
decrease to the goodwill impairment by our Natural Gas Pipelines – KMP reporting
unit of $152.6 million, with no net impact to the total goodwill impairment
charge. The goodwill impairment is a non-cash charge and does not have any
impact on our cash flow.
While
the fair value of the CO2 – KMP
segment exceeded its carrying value as of the date of our goodwill impairment
test, decreases in the market value of crude oil led us to reconsider this
analysis as of September 30, 2008. This analysis again showed that the fair
value of the CO2 – KMP
segment exceeded its carrying value, however the amount by which the fair value
exceeded the carrying value decreased. If the market price of crude oil
continues to decline, we may need to record non-cash goodwill impairment charges
on this reporting unit in future periods.
On
April 18, 2007, we announced that Kinder Morgan Energy Partners would acquire
the Trans Mountain pipeline system from us. This transaction was completed April
30, 2007. This transaction caused us to evaluate the fair value of the Trans
Mountain pipeline system in determining whether goodwill related to these assets
was impaired. Accordingly, based on our consideration of supporting information
obtained regarding the fair values of the Trans Mountain pipeline system assets,
we recorded a goodwill impairment charge of $377.1 million in the first quarter
of 2007.
Our
intangible assets other than goodwill include customer relationships, contracts
and agreements, technology-based assets, lease values and other long-term
assets. These intangible assets have definite lives, are being amortized on a
straight-line basis over their estimated useful lives, and are reported
separately as “Other Intangibles, Net” in the accompanying interim Consolidated
Balance Sheets. Following is information related to our intangible
assets:
|
September
30,
2008
|
|
December
31,
2007
|
|
(In
millions)
|
Customer
Relationships, Contracts and Agreements
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying Amount1
|
|
$
|
270.9
|
|
|
|
|
$
|
321.3
|
|
|
Accumulated
Amortization
|
|
|
(25.7
|
)
|
|
|
|
|
(11.6
|
)
|
|
Net
Carrying Amount
|
|
|
245.2
|
|
|
|
|
|
309.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based
Assets, Lease Values and Other
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying Amount
|
|
|
11.7
|
|
|
|
|
|
11.7
|
|
|
Accumulated
Amortization
|
|
|
(0.7
|
)
|
|
|
|
|
(0.3
|
)
|
|
Net
Carrying Amount
|
|
|
11.0
|
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Intangibles, Net
|
|
$
|
256.2
|
|
|
|
|
$
|
321.1
|
|
|
_______________
|
1
|
The
change in the Gross Carrying Amount is primarily due to (i) a decrease of
approximately $18 million for Kinder Morgan Energy Partners’ allocated
purchase price to Marine Terminals, Inc.’s bulk terminal assets and (ii) a
decrease of approximately $32 million for Knight Inc.’s allocated purchase
price to the assets belonging to the Products Pipelines, Natural Gas
Pipelines, CO2, and
Terminals segments, related to the Going Private transaction. These
adjustments had the effect of increasing “Goodwill” and decreasing “Other
Intangibles, Net” by the described
amounts.
|
Amortization
expense on our intangibles consisted of the following:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Three
Months Ended
September
30,
|
|
Nine
Months
Ended
September
30,
|
|
Four
Months Ended
September
30,
|
|
|
Five
Months Ended
May
31,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Customer
Relationships, Contracts and Agreements
|
$
|
4.6
|
|
|
$
|
3.9
|
|
|
$
|
14.1
|
|
|
$
|
5.1
|
|
|
|
$
|
6.1
|
|
Technology-based
Assets, Lease Value and Other
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
0.2
|
|
Total
Amortization
|
$
|
4.8
|
|
|
$
|
4.0
|
|
|
$
|
14.5
|
|
|
$
|
5.2
|
|
|
|
$
|
6.3
|
|
As
of September 30, 2008, the weighted-average useful lives for our intangible
assets was approximately 16.8 years.
The
caption “Minority Interests in Equity of Subsidiaries” in the accompanying
interim Consolidated Balance Sheets consists of the following:
|
September
30,
2008
|
|
December
31,
2007
|
|
(In
millions)
|
Kinder
Morgan Energy Partners
|
$
|
1,717.8
|
|
|
$
|
1,616.0
|
|
Kinder
Morgan Management
|
|
1,705.8
|
|
|
|
1,657.7
|
|
Triton
Power Company LLC
|
|
41.4
|
|
|
|
29.2
|
|
Other
|
|
9.3
|
|
|
|
11.1
|
|
|
$
|
3,474.3
|
|
|
$
|
3,314.0
|
|
6.
|
Related
Party Transactions
|
Significant
Investors
As
discussed in Note 2, as a result of the Going Private transaction, a number of
individuals and entities became significant investors in us via their investment
in Knight Holdco LLC. By virtue of the size of their ownership interest, two of
those investors became “related parties” to us as that term is defined in the
authoritative accounting literature: (i) American International Group, Inc. and
certain of its affiliates (“AIG”) and (ii) Goldman Sachs Capital Partners and
certain of its affiliates (“Goldman Sachs”). We enter into transactions with
certain AIG affiliates in the ordinary course of their conducting insurance and
insurance-related activities, although no individual transaction is, and all
such transactions collectively are not, material to our consolidated financial
statements. We conduct commodity risk management activities in the ordinary
course of implementing our risk management strategies in which the counterparty
to certain of our derivative transactions is an affiliate of Goldman Sachs. In
conjunction with these activities, we are a party (through one of our
subsidiaries engaged in the production of crude oil) to a hedging facility with
J. Aron & Company/Goldman Sachs, which requires us to provide certain
periodic information but does not require the posting of margin. As a result of
changes in the market value of our derivative positions, we have recorded both
amounts receivable from and payable to Goldman Sachs affiliates. At September
30, 2008 and December 31, 2007, the fair values of these derivative contracts
are included in the accompanying interim Consolidated Balance Sheets within the
captions indicated in the following table:
|
September
30,
2008
|
|
December
31,
2007
|
|
(In
millions)
|
Derivative
Assets (Liabilities)
|
|
|
|
|
|
|
|
Assets:
Fair Value of Derivative Instruments, Non-current
|
$
|
13.6
|
|
|
$
|
-
|
|
Current
Liabilities: Fair Value of Derivative Instruments
|
$
|
(256.3
|
)
|
|
$
|
(239.8
|
)
|
Liabilities
and Stockholder’s Equity: Fair Value of Derivative Instruments,
Non-current
|
$
|
(594.2
|
)
|
|
$
|
(386.5
|
)
|
Plantation
Pipe Line Company Note Receivable
Kinder
Morgan Energy Partners has a seven-year note receivable bearing interest at the
rate of 4.72% per annum from Plantation Pipe Line Company, its 51.17%-owned
equity investee. The outstanding note receivable balance was $88.5 million and
$89.7 million as of September 30, 2008 and December 31, 2007, respectively. Of
these amounts, $2.5 million and $2.4 million, respectively, were included within
“Current Assets: Accounts, Notes and Interest Receivable, Net” in our
accompanying interim Consolidated Balance Sheets as of September 30, 2008 and
December 31, 2007 and the remainder was included within “Notes Receivable –
Related Parties” in our accompanying interim Consolidated Balance Sheets at each
reporting date.
Express
US Holdings LP Note Receivable
On
June 30, 2008, we exchanged our C$113.6 million preferred equity interest in
Express US Holdings LP for two subordinated notes from Express US Holdings LP
with a combined face value of $111.4 million (C$113.6 million).
As
of September 30, 2008, the outstanding note receivable balance, representing the
translated amount included in our consolidated financial statements in U.S.
dollars, was $106.7
million, and we included this amount in the accompanying interim Consolidated
Balance Sheet within the caption “Notes Receivable – Related
Parties.”
On
August 28, 2008, Knight Inc. sold its one-third interest in the net assets of
the Express pipeline system (“Express”), as well as Knight Inc.’s full ownership
of the net assets of the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan
Energy Partners. This transaction included the sale of Knight Inc.’s
subordinated notes described above. Due to the inclusion of Kinder Morgan Energy
Partners and its subsidiaries in our consolidated financial statements
(resulting from the implementation of EITF 04-5), Knight Inc. accounted for this
transaction as a transfer of net assets between entities under common control.
Therefore, following Knight Inc.’s sale of Express and Jet Fuel to Kinder Morgan
Energy Partners, Kinder Morgan Energy Partners recognized the assets and
liabilities acquired at Knight Inc.’s carrying amounts (historical cost) at the
date of transfer; see Note 14 for additional information relating to this
sale.
NGPL
PipeCo LLC
On
February 15, 2008, Knight Inc. entered in to an Operations and Reimbursement
agreement with Natural Gas Pipeline Company of America LLC, a wholly owned
subsidiary of NGPL PipeCo LLC. The agreement provides for a $3.7 million monthly
charge from Knight Inc. to Natural Gas Pipeline Company of America LLC related
to general and administrative expenses. For the period from February 15, 2008 to
September 30, 2008 and the three months ended September 30, 2008, these charges
were $27.8 million and $11.1 million, respectively.
In
addition, Kinder Morgan Energy Partners purchases transportation and storage
services from NGPL PipeCo LLC. For the period from February 15, 2008 to
September 30, 2008 and the three months ended September 30, 2008, these
purchases totaled $5.0 million and $2.4 million, respectively.
We
consider all highly-liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
|
Changes
in Working Capital Items (Net of Effects of Acquisitions and
Sales)
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Accounts
Receivable
|
$
|
(55.5
|
)
|
|
$
|
70.2
|
|
|
|
$
|
(31.9
|
)
|
Materials
and Supplies Inventory
|
|
(7.3
|
)
|
|
|
0.8
|
|
|
|
|
(1.7
|
)
|
Other
Current Assets
|
|
29.0
|
|
|
|
3.6
|
|
|
|
|
0.5
|
|
Accounts
Payable
|
|
(89.3
|
)
|
|
|
(7.8
|
)
|
|
|
|
26.3
|
|
Accrued
Interest
|
|
(145.3
|
)
|
|
|
(51.1
|
)
|
|
|
|
(22.5
|
)
|
Accrued
Taxes
|
|
(502.3
|
)
|
|
|
(47.0
|
)
|
|
|
|
(114.0
|
)
|
Other
Current Liabilities
|
|
(81.0
|
)
|
|
|
17.7
|
|
|
|
|
(59.6
|
)
|
|
$
|
(851.7
|
)
|
|
$
|
(13.6
|
)
|
|
|
$
|
(202.9
|
)
|
Supplemental
Disclosures of Cash Flow Information
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30, 2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Cash
Paid During the Period for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
Net of Amount Capitalized
|
$
|
623.0
|
|
|
$
|
390.3
|
|
|
|
$
|
381.8
|
|
Income
Taxes Paid, Including Prior Period Amounts
|
$
|
622.9
|
|
|
$
|
141.8
|
|
|
|
$
|
133.3
|
|
During
the nine months ended September 30, 2008, the four months ended September 30,
2007 and the five months ended May 31, 2007, Kinder Morgan Energy Partners
acquired $3.4 million, $1.0 million and $18.5 million, respectively, of assets
by the assumption of liabilities.
During
the nine months ended September 30, 2008, we recognized non-cash activity of
$45.8 million for unamortized fair value adjustments recorded in purchase
accounting related to the Going Private transaction and $41.7 million for
unamortized debt issuance costs, both associated with the early extinguishment
of debt.
On
June 30, 2008, we exchanged our preferred equity interest in Express US Holdings
LP for two subordinated notes from Express US Holdings LP with a combined face
value of $111.4 million (C$113.6 million); see Note 11 for additional
information regarding this exchange.
In
May 2007, Kinder Morgan Energy Partners issued 266,813 common units,
representing approximately $15.0 million of value, in settlement of an
obligation included in the purchase price of seven bulk terminal operations
acquired from Trans-Global Solutions, Inc. on April 29, 2005.
Income
Taxes from Continuing Operations included in our Consolidated Statements of
Operations were as follows:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
Four
Months Ended
September
30,
|
|
|
Five
Months Ended
May
31,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Income
Taxes
|
$
|
87.9
|
|
|
$
|
74.6
|
|
|
$
|
194.4
|
|
|
$
|
95.9
|
|
|
|
$
|
135.5
|
|
Effective
Tax Rate1
|
|
44.7
|
%
|
|
|
45.3
|
%
|
|
|
33.4
|
%
|
|
|
44.8
|
%
|
|
|
|
48.4
|
%
|
_______________
|
1
|
Excludes
goodwill impairment charges related to non-deductible goodwill; see Note
3.
|
During
the nine months ended September 30, 2008, our effective tax rate was lower than
the statutory federal income tax rate of 35% primarily due to (i) a reduction of
approximately $53 million in deferred income tax liabilities, and income tax
expense, related to the termination of certain of our subsidiaries’ presence in
Canada resulting in the elimination of future taxable gains and (ii) the special
tax deduction permitted for dividends received from domestic corporations. These
decreases to the effective tax rate were partially offset by state income taxes
and the impact of consolidating the Kinder Morgan Management income tax
provision.
During
the three months ended September 30, 2008, three months ended September 30,
2007, four months ended September 30, 2007 and five months ended May 31, 2007,
our effective tax rate was higher than the statutory federal income tax rate of
35% due to (i) state income taxes, (ii) the impact of consolidating the Kinder
Morgan Management income tax provision, (iii) foreign earnings subject to
different tax rates and (iv) the impact of consolidating Kinder Morgan Energy
Partners’ income tax provision. During the five months ended May 31, 2007, our
effective tax rate was also higher due to non-deductible fees associated with
the Going Private transaction.
9.
|
Comprehensive
Income (Loss)
|
Our
comprehensive income (loss) is as follows:
|
Successor
Company
|
|
Three
Months
Ended
September 30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Net
Income
|
$
|
108.7
|
|
|
$
|
85.7
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
Change
in Fair Value of Derivatives Utilized for
Hedging Purposes
|
|
543.4
|
|
|
|
(25.5
|
)
|
Reclassification
of Change in Fair Value of Derivatives
to Net Income
|
|
(70.5
|
)
|
|
|
(20.2
|
)
|
Employee
Benefit Plans
|
|
|
|
|
|
|
|
Prior
Service Cost Arising During Period
|
|
(0.1
|
)
|
|
|
-
|
|
Net
Gain Arising During Period
|
|
0.2
|
|
|
|
-
|
|
Amortization
of Net Loss Included in Net
Periodic Benefit Costs
|
|
-
|
|
|
|
(0.1
|
)
|
Change
in Foreign Currency Translation Adjustment
|
|
(22.8
|
)
|
|
|
14.1
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
450.2
|
|
|
|
(31.7
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
$
|
558.9
|
|
|
$
|
54.0
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30, 2008
|
|
Four
Months
Ended
September
30, 2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Net
Income (Loss)
|
$
|
(3,646.2
|
)
|
|
$
|
115.9
|
|
|
|
$
|
65.9
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fair Value of Derivatives Utilized for Hedging Purposes
|
|
(253.5
|
)
|
|
|
(44.5
|
)
|
|
|
|
(21.3
|
)
|
Reclassification
of Change in Fair Value of Derivatives
to Net Income
|
|
140.9
|
|
|
|
(21.1
|
)
|
|
|
|
10.3
|
|
Employee
Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Cost Arising During Period
|
|
0.2
|
|
|
|
-
|
|
|
|
|
(1.7
|
)
|
Net
Gain Arising During Period
|
|
1.3
|
|
|
|
-
|
|
|
|
|
11.4
|
|
Amortization
of Prior Service Cost Included in Net
Periodic Benefit Costs
|
|
-
|
|
|
|
-
|
|
|
|
|
(0.4
|
)
|
Amortization
of Net Loss Included in Net Periodic Benefit Costs
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
1.4
|
|
Change
in Foreign Currency Translation Adjustment
|
|
(31.5
|
)
|
|
|
12.7
|
|
|
|
|
40.1
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
(142.7
|
)
|
|
|
(53.0
|
)
|
|
|
|
39.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
$
|
(3,788.9
|
)
|
|
$
|
62.9
|
|
|
|
$
|
105.7
|
|
The
Accumulated Other Comprehensive Loss balance of $390.4 million included in the
accompanying interim Consolidated Balance Sheet at September 30, 2008 consisted
of (i) $367.1 million representing unrecognized net losses on hedging
activities, (ii) $5.2 million representing foreign currency translation gain
adjustments and (iii) $0.2 million and $28.3 million representing unrecognized
prior service costs and net losses relating to the employee benefit plans,
respectively.
10.
|
Kinder
Morgan Management, LLC
|
On
August 14, 2008, Kinder Morgan Management made a share distribution of 0.018124
shares per outstanding share (1,359,153 total shares) to shareholders of record
as of July 31, 2008, based on the $0.99 per common unit distribution declared by
Kinder Morgan Energy Partners. On November 14, 2008, Kinder Morgan Management
will make a share distribution of 0.021570 shares per outstanding share
(1,646,891 total shares) to shareholders of record as of October 31, 2008, based
on the $1.02 per common unit distribution declared by Kinder Morgan Energy
Partners. Kinder Morgan Management’s distributions are paid in the form of
additional shares or fractions thereof calculated by dividing the Kinder Morgan
Energy Partners cash distribution per common unit by the average of the market
closing prices of a Kinder Morgan Management share determined for a ten-trading
day period ending on the trading day immediately prior to the ex-dividend date
for the shares.
11.
|
Business
Combinations, Investments, and
Sales
|
During
the first nine months of 2008, we recorded purchase price adjustments related to
Kinder Morgan Energy Partners’ previously completed acquisitions of bulk
terminal operations acquired effective May 30, 2007 and September 1, 2007,
respectively and made a preliminary purchase price allocation related to a
liquids terminal facility acquired by Kinder Morgan Energy Partners on August
15, 2008.
Vancouver
Wharves
On
May 30, 2007, Kinder Morgan Energy Partners purchased the Vancouver Wharves bulk
marine terminal from British Columbia Railway Company, a crown corporation owned
by the Province of British Columbia, for an aggregate consideration of $59.5
million, consisting of $38.8 million in cash and $20.7 million in assumed
liabilities. The Vancouver Wharves facility is located on the north shore of the
Port of Vancouver’s main harbor and includes five deep-sea vessel berths
situated on a 139-acre site. The terminal assets include significant rail
infrastructure, dry bulk and liquid storage, and material handling systems that
allow the terminal to handle over 3.5 million tons of cargo
annually.
The
acquisition both expanded and complemented Kinder Morgan Energy Partners’
existing terminal operations and all of the acquired assets are included in the
Terminals – KMP business segment. Final purchase price adjustments were made in
the first half of 2008 to reflect the fair value of acquired assets and expected
value of assumed liabilities. The adjustments increased “Property, Plant and
Equipment, Net” by $2.7 million, reduced working capital balances by $1.6
million, and increased “Other Long-term Liabilities and Deferred Credits” by
$1.1 million. Based on Kinder Morgan Energy Partners’ estimate of fair market
values, we allocated $53.4 million of the combined purchase price to “Property,
Plant and Equipment, Net,” and $6.1 million to items included within “Current
Assets.”
Marine
Terminals, Inc.
On
September 1, 2007, Kinder Morgan Energy Partners acquired certain bulk terminals
assets from Marine Terminals, Inc. for an aggregate consideration of
approximately $102.1 million, consisting of $100.8 million in cash and assumed
liabilities of $1.3 million. The acquired assets and operations are primarily
involved in the handling and storage of steel and alloys. The operations consist
of two separate facilities located in Blytheville, Arkansas, and individual
terminal facilities located in Decatur, Alabama, Hertford, North Carolina, and
Berkley, South Carolina. Combined, the five facilities handle approximately 13.5
million tons of alloys and steel products annually and also provide stevedoring
and harbor services, scrap handling, and scrap processing services to customers
in the steel and alloys industry. The acquisition both expanded and complemented
Kinder Morgan Energy Partners’ existing ferro alloy terminal operations and will
provide customers further access to Kinder Morgan Energy Partners’ growing
national network of marine and rail terminals. All of the acquired assets are
included in the Terminals – KMP business segment.
In
the first nine months of 2008, Kinder Morgan Energy Partners paid an additional
$0.5 million for purchase price settlements, and made purchase price adjustments
to reflect final fair value of acquired assets and final expected value of
assumed liabilities. Kinder Morgan Energy Partners’ 2008 adjustments primarily
reflected changes in the allocation of the purchase cost to intangible assets
acquired. Based on Kinder Morgan Energy Partners’ estimate of fair market
values, we allocated $60.8 million of the combined purchase price to “Property,
Plant and Equipment, Net,” $21.7 million to “Other Intangibles, Net,” $18.6
million to “Goodwill,” and $1.0 million to “Current Assets: Other” and “Deferred
Charges and Other Assets.”
The
allocation to “Other Intangibles, Net” included a $20.1 million amount
representing the fair value of a service contract entered into with Nucor
Corporation, a large domestic steel company with significant operations in the
Southeast region of the United States. For valuation purposes, the service
contract was determined to have a useful life of 20 years, and pursuant to the
contract’s provisions, the acquired terminal facilities will continue to provide
Nucor with handling, processing, harboring and warehousing
services.
The
allocation to “Goodwill,” which is expected to be deductible for tax purposes,
was based on the fact that this acquisition both expanded and complemented
Kinder Morgan Energy Partners’ existing ferro alloy terminal operations and will
provide Nucor and other customers further access to Kinder Morgan Energy
Partners’ growing national network of marine and rail terminals. We believe the
acquired value of the assets, including all contributing intangible assets,
exceeded the fair value of acquired identifiable net assets and liabilities—in
the aggregate, these factors represented goodwill.
Wilmington,
North Carolina Liquids Terminal
On
August 15, 2008, Kinder Morgan Energy Partners purchased certain terminal assets
from Chemserve, Inc. for an aggregate consideration of $12.7 million, consisting
of $11.8 million in cash and $0.9 million in assumed liabilities. The liquids
terminal facility is located in Wilmington, North Carolina and stores petroleum
products and chemicals. The terminal includes significant transportation
infrastructure, and provides liquid and heated storage and custom tank blending
capabilities for agricultural and chemical products. The acquisition both
expanded and complemented Kinder Morgan Energy Partners’ existing Mid-Atlantic
region terminal operations, and all of the acquired assets are included in the
Terminals – KMP business segment. In the third quarter of 2008, we made a
preliminary allocation of the purchase price to reflect the fair value of assets
acquired; however, the final purchase price allocation is expected to be made in
the fourth quarter of 2008, including a final allocation to
“Goodwill.”
Sale
of 80% of NGPL PipeCo LLC
On
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC
(formerly MidCon Corp.), which owns Natural Gas Pipeline of America and certain
affiliates, collectively referred to as “NGPL,” to Myria Acquisition Inc.
(“Myria”) for approximately $2.9 billion. We also received $3.0 billion of cash
previously held in escrow related to a notes offering by NGPL PipeCo LLC in
December 2007, the net proceeds of which were distributed to us principally as
repayment of intercompany indebtedness and partially as a dividend, immediately
prior to the closing of the sale to Myria. Pursuant to
the
purchase agreement, Myria acquired all 800 Class B shares and we retained all
200 Class A shares of NGPL PipeCo LLC. We will continue to operate NGPL’s assets
pursuant to a 15-year operating agreement. Myria is owned by a syndicate of
investors led by Babcock & Brown, an international investment and
specialized fund and asset management group. The total proceeds from this sale
of $5.9 billion were used to pay off the entire outstanding balances of our
senior secured credit facility’s Tranche A and Tranche B term loans, to
repurchase $1.67 billion of our outstanding debt securities and to reduce
balances outstanding under our $1.0 billion revolving credit facility (see Note
13).
Investment
in Rockies Express Pipeline
In
the first nine months of 2008, Kinder Morgan Energy Partners made capital
contributions of $306.0 million to West2East Pipeline LLC (the sole owner of
Rockies Express Pipeline LLC) to partially fund its Rockies Express Pipeline
construction costs. This cash contribution was recorded as an increase to
“Investments” in the accompanying interim Consolidated Balance Sheet as of
September 30, 2008, and it was included within “Cash Flows from Investing
Activities: Other Investments” in the accompanying interim Consolidated
Statement of Cash Flows for the nine months ended September 30, 2008. Kinder
Morgan Energy Partners owns a 51% equity interest in West2East Pipeline
LLC.
On
June 24, 2008, Rockies Express Pipeline LLC completed a private offering of an
aggregate $1.3 billion in principal amount of fixed rate senior notes. Rockies
Express Pipeline LLC received net proceeds of approximately $1.29 billion from
this offering, after deducting the initial purchasers’ discount and estimated
offering expenses, and virtually all of the net proceeds from the sale of the
notes were used to repay Rockies Express Pipeline LLC’s short-term commercial
paper borrowings.
All
payments of principal and interest in respect of these senior notes are the sole
obligation of Rockies Express Pipeline LLC. Noteholders will have no recourse
against Kinder Morgan Energy Partners, Sempra Energy or ConocoPhillips (the two
other member owners of West2East Pipeline LLC), or against any of Kinder Morgan
Energy Partners’ or their respective officers, directors, employees,
shareholders, members, managers, unitholders or affiliates for any failure by
Rockies Express Pipeline LLC to perform or comply with its obligations pursuant
to the notes or the indenture.
Midcontinent
Express Pipeline LLC
In
the first nine months of 2008, Kinder Morgan Energy Partners made capital
contributions of $27.5 million to Midcontinent Express Pipeline LLC to partially
fund its Midcontinent Express Pipeline construction costs. This cash
contribution has been recorded as an increase to “Investments” in the
accompanying Consolidated Balance Sheet as of September 30, 2008, and has been
included within “Cash Flows from Investing Activities: Other Investments” in the
accompanying Consolidated Statement of Cash Flows for the nine months ended
September 30, 2008. Kinder Morgan Energy Partners owns a 50% equity interest in
Midcontinent Express Pipeline LLC.
Kinder
Morgan Energy Partners received, in the first nine months of 2008, an $89.1
million return of capital from Midcontinent Express Pipeline LLC. In February
2008, Midcontinent Express Pipeline LLC entered into and then made borrowings
under a new $1.4 billion three-year, unsecured revolving credit facility due
February 28, 2011. Midcontinent then made distributions (in excess of cumulative
earnings) to its two member owners to reimburse them for prior contributions
made to fund its pipeline construction costs, and this cash receipt has been
included in “Distributions from Equity Investees” in the accompanying
Consolidated Statement of Cash Flows for the nine months ended September 30,
2008.
Fayetteville
Express Pipeline LLC
On
October 1, 2008, Kinder Morgan Energy Partners announced that it has entered
into a 50/50 joint venture with Energy Transfer Partners, L.P. to build and
develop the Fayetteville Express Pipeline, a new natural gas pipeline that will
provide shippers in the Arkansas Fayetteville Shale area with takeaway natural
gas capacity, added flexibility, and further access to growing markets.
Fayetteville Express Pipeline LLC will construct the approximately 185-mile
pipeline, which will originate in Conway County, Arkansas, continue eastward
through White County, Arkansas, and terminate at an interconnect with Trunkline
Gas Company’s pipeline in Quitman County, Mississippi. The new pipeline will
also interconnect with NGPL’s pipeline in White County, Arkansas, Texas Gas
Transmission LLC’s pipeline in Coahoma County, Mississippi, and ANR Pipeline
Company’s pipeline in Quitman County, Mississippi. NGPL’s pipeline is operated
and 20% owned by us.
The
Fayetteville Express Pipeline will have an initial capacity of 2.0 billion cubic
feet of natural gas per day. Pending necessary regulatory approvals, the
approximately $1.3 billion pipeline project is expected to be in service by late
2010 or early 2011. Fayetteville Express Pipeline LLC has secured binding
10-year commitments totaling approximately 1.85 billion cubic feet per day, and
depending on shipper support, capacity on the proposed pipeline may be
increased.
Other
Sales
On
January 25, 2008, we sold our interests in three natural gas-fired power plants
in Colorado to Bear Stearns. We received net proceeds of $63.1
million.
On
April 1, 2008, Kinder Morgan Energy Partners sold its 25% interest in Thunder
Creek Gas Services, LLC. Kinder Morgan Energy Partners received cash proceeds of
approximately $50.7 million for its investment.
On
June 30, 2008, Knight Inc. exchanged a $111.4 million (C$113.6 million)
preferred equity interest in Express US Holdings LP and the accrued interest
thereon for $40.5 million in cash (the majority of which was received in July
2008) and two subordinated notes issued by Express US Holdings LP with a
combined face value of $111.4 million (C$113.6 million). Immediately prior to
the exchange, the subordinated notes were held by two other partners in Express
US Holdings LP. On August 28, 2008, Knight Inc. sold the one-third interest in
the net assets of Express and our full ownership of Jet Fuel to Kinder Morgan
Energy Partners. This transaction included the sale of the aforementioned
subordinated notes. Due to the inclusion of Kinder Morgan Energy Partners and
its subsidiaries in Knight Inc.’s consolidated financial statements (resulting
from the implementation of EITF 04-5), Knight Inc. accounted for this
transaction as a transfer of net assets between entities under common control.
Therefore, following Kinder Morgan Energy Partners’ acquisition of Express and
Jet Fuel from Knight Inc., Kinder Morgan Energy Partners recognized the assets
and liabilities acquired at Knight Inc.’s carrying amounts (historical cost) at
the date of transfer; see Note 14. These notes are included in the accompanying
interim Consolidated Balance Sheet at September 30, 2008, under the caption
“Notes Receivable – Related Parties.” The two notes have an interest rate of
12%, payable quarterly, and are due on January 9, 2023.
12.
|
Discontinued
Operations
|
North
System Natural Gas Liquids Pipeline System
In
October 2007, Kinder Morgan Energy Partners completed the sale of its North
System and its 50% ownership interest in the Heartland Pipeline Company to ONEOK
Partners, L.P. for approximately $298.6 million in cash. In the nine months
ended September 30, 2008, Kinder Morgan Energy Partners paid $2.4 million to
ONEOK Partners, L.P. to fully settle both the sale of working capital items and
the allocation of pre-acquisition investee distributions, and to partially
settle the sale of liquids inventory balances. Due to the fair market valuation
resulting from the Going Private transaction (see Note 2), the consideration
Kinder Morgan Energy Partners received from the sale of its North System was
equal to its carrying value; therefore no gain or loss was recorded on this
disposal transaction. The North System consists of an approximately 1,600-mile
interstate common carrier pipeline system that delivers natural gas liquids and
refined petroleum products from south central Kansas to the Chicago area. Also
included in the sale were eight propane truck-loading terminals located at
various points in three states along the pipeline system, and one multi-product
terminal complex located in Morris, Illinois. All of the assets were included in
our Products Pipelines – KMP business segment.
Terasen
Pipelines (Corridor) Inc.
In
June 2007, we completed the sale of Terasen Pipelines (Corridor) Inc.
(“Corridor”) to Inter Pipeline Fund, a Canada-based company. Corridor transports
diluted bitumen from the Athabasca Oil Sands Project near Fort McMurray,
Alberta, to the Scotford Upgrader near Fort Saskatchewan, Alberta. The sale did
not include any other assets of Kinder Morgan Canada (formerly Terasen
Pipelines). The sale price was approximately $711 million (C$760 million) plus
the buyer’s assumption of all of the debt related to Corridor, including the
debt associated with the expansion taking place on Corridor at the time of the
sale. The consideration was equal to Corridor’s carrying value, therefore no
gain or loss was recorded on this disposal transaction.
Terasen
Inc.
We
closed the sale of Terasen Inc. to Fortis Inc. on May 17, 2007, for sales
proceeds of approximately $3.4 billion (C$3.7 billion) including cash plus the
buyers’ assumption of debt. The sale did not include the assets of Kinder Morgan
Canada (formerly Terasen Pipelines) discussed in the preceding paragraph. We
recorded a book gain on this disposition of $55.7 million in the second quarter
of 2007. The sale resulted in a capital loss of $998.6 million for tax purposes.
Approximately $223.3 million of this loss was utilized to reduce capital gains
principally associated with the sale of our U.S.-based retail gas operations
(see below) resulting in a tax benefit of approximately $82.2 million. The
remaining capital loss carryforward of $775.3 million was utilized to reduce the
capital gain associated with our sale of an 80% ownership interest in NGPL
PipeCo LLC (see Note 11).
Natural
Gas Distribution and Retail Operations
In
March 2007, we completed the sale of our U.S.-based retail natural gas
distribution and related operations to GE Energy Financial Services, a
subsidiary of General Electric Company, and Alinda Investments LLC for $710
million and an adjustment for working capital. In conjunction with this sale, we
recorded a pre-tax gain of $251.8 million (net of $3.9 million of transaction
costs) in the first quarter of 2007. Our Natural Gas Pipelines – KMP business
segment (i) provides natural gas transportation and storage services and sells
natural gas to and (ii) receives natural gas transportation and storage
services, natural gas and natural gas liquids and other gas supply services from
the discontinued U.S.-based retail natural gas distribution business. These
transactions are continuing after the sale of this business and will likely
continue to a similar extent into the future. For the five months ended May 31,
2007, revenues and expenses of our continuing operations totaling $3.1 million
and $1.2 million, respectively for products and services sold to and purchased
from our discontinued U.S.-based retail natural gas distribution operations
prior to its sale in March 2007, have been eliminated in our accompanying
interim Consolidated Statements of Operations. We are currently receiving fees
from SourceGas, a subsidiary of General Electric Company, to provide certain
administrative functions for a limited period of time and for the lease of
office space. We do not have any significant continuing involvement in or retain
any ownership interest in these operations and, therefore, the continuing cash
flows discussed above are not considered direct cash flows of the disposed
assets.
Earnings
of Discontinued Operations
The
financial results of discontinued operations have been reclassified for all
periods presented and reported in the caption, “Income (Loss) from Discontinued
Operations, Net of Tax” in our accompanying interim Consolidated Statements of
Operations. Summarized financial results of these operations are as
follows:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Three
Months Ended
September
30,
|
|
Nine
Months
Ended
September
30,
|
|
Four
Months
Ended
September
30,
|
|
|
Five
Months
Ended
May
31,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues
|
$
|
-
|
|
|
$
|
14.4
|
|
|
$
|
-
|
|
|
$
|
19.2
|
|
|
|
$
|
921.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Discontinued Operations Before Income Taxes
|
|
(0.2
|
)
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)
|
|
|
0.9
|
|
|
|
|
393.2
|
|
Income
Taxes
|
|
-
|
|
|
|
(3.0
|
)
|
|
|
-
|
|
|
|
(3.0
|
)
|
|
|
|
(94.6
|
)
|
Income
(Loss) from Discontinued Operations
|
$
|
(0.2
|
)
|
|
$
|
(4.4
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(2.1
|
)
|
|
|
|
298.6
|
|
The
cash flows attributable to discontinued operations are included in our
accompanying interim Consolidated Statements of Cash Flows for the nine months
ended September 30, 2008, the four months ended September 30, 2007, and the five
months ended May 31, 2007 in the captions “Net Cash Flows (Used in) Provided by
Discontinued Operations,” “Net Cash Flows Provided by Discontinued Investing
Activities” and “Net Cash Flows Provided by Discontinued Financing
Activities.”
Credit
Facilities
|
September
30, 2008
|
|
Short-term
Notes
Payable
|
|
Commercial
Paper
Outstanding
|
|
Weighted-
Average
Interest
Rate
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knight
Inc. – Secured Debt1
|
|
$
|
270.0
|
|
|
$
|
-
|
|
|
|
3.62
|
%
|
|
Kinder
Morgan Energy Partners – Unsecured Debt2
|
|
$
|
295.0
|
|
|
$
|
-
|
|
|
|
5.00
|
%
|
|
|
1
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $196.8 million (3.61%) and $185.6 million (4.38%) during the
three and nine months ended September 30, 2008,
respectively.
|
|
2
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $163.5 million (3.34%) and $329.6 million (3.48%) during the
three and nine months ended September 30, 2008,
respectively.
|
The
Knight Inc. $1.0 billion six-year senior secured credit facility matures on May
30, 2013 and includes a sublimit of $300 million for the issuance of letters of
credit and a sublimit of $50 million for swingline loans. Knight Inc. does not
have a commercial paper program.
The
Kinder Morgan Energy Partners $1.85 billion five-year unsecured bank credit
facility matures August 18, 2010 and can be amended to allow for borrowings up
to $2.1 billion. Borrowings under the credit facility can be used for
partnership purposes and as a backup for Kinder Morgan Energy Partners’
commercial paper program. Borrowings under Kinder Morgan Energy Partners’
commercial paper program reduce the borrowings allowed under its credit
facility. On October 13, 2008, Standard & Poor’s Rating Services lowered
Kinder Morgan Energy Partners’ short-term credit rating to A-3 from A-2. See
Note 20 regarding subsequent events.
The
outstanding balance under Kinder Morgan Energy Partners’ five-year credit
facility was $295.0 million as of September 30, 2008. As of December 31, 2007,
there were no borrowings under the credit facility. As of December 31, 2007,
Kinder Morgan Energy Partners had $589.1 million of commercial paper outstanding
with an average interest rate of 5.58%. The borrowings under Kinder Morgan
Energy Partners’ commercial paper program were used principally to finance the
acquisitions and capital expansions that Kinder Morgan Energy Partners made
during 2007.
Kinder
Morgan Energy Partners’ five-year credit facility is with a syndicate of
financial institutions and Wachovia Bank, National Association is the
administrative agent. On September 15, 2008, Lehman Brothers Holdings Inc. filed
for bankruptcy protection under the provisions of Chapter 11 of the U.S.
Bankruptcy Code. No Lehman Brothers affiliate is an administrative agent for
Kinder Morgan Energy Partners or any of its subsidiaries; however, one of the
Lehman entities is a lending bank providing less than 5% of the commitments in
Kinder Morgan Energy Partners’ bank credit facility. Since Lehman Brothers
declared bankruptcy, its affiliate, which is a party to Kinder Morgan Energy
Partners’ credit facility, has notified Kinder Morgan Energy Partners that it
will not meet obligations to lend under that agreement. Thus, the available
capacity of Kinder Morgan Energy Partners’ facility will be reduced by the
Lehman commitment (less than 5% of the facility). The commitments of the other
banks remain unchanged and the facility is not defaulted.
As
of September 30, 2008, the amount available for borrowing under Kinder Morgan
Energy Partners’ credit facility was reduced by an aggregate amount of
$681.5 million, consisting of (i) a combined $375 million in three letters of
credit that support its hedging of commodity price risks associated with the
sale of natural gas, natural gas liquids and crude oil, (ii) a $100 million
letter of credit that supports certain proceedings with the California Public
Utilities Commission involving refined products tariff charges on the intrastate
common carrier operations of Kinder Morgan Energy Partners’ Pacific operations’
pipelines in the state of California, (iii) a combined $86.9 million in three
letters of credit that support tax-exempt bonds, (iv) a combined $55.9 million
in letters of credit that support Kinder Morgan Energy Partners’ pipeline and
terminal operations in Canada, (v) a $26.8 million letter of credit that
supports Kinder Morgan Energy Partners’ indemnification obligations on the
Series D note borrowings of Cortez Capital Corporation, (vi) a $19.9 million
letter of credit that supports the construction of Kinder Morgan Energy
Partners’ Kinder Morgan Louisiana Pipeline (a natural gas pipeline), and (vii) a
combined $17 million in other letters of credit supporting other obligations of
Kinder Morgan Energy Partners and its subsidiaries.
Significant
Debt Financing Transactions
On
June 6, 2008, Kinder Morgan Energy Partners completed a public offering of a
total of $700 million in principal amount of senior notes, consisting of $375
million of 5.95% notes due February 15, 2018, and $325 million of 6.95% notes
due January 15, 2038. Kinder Morgan Energy Partners received proceeds from the
issuance of the notes, after underwriting discounts and commissions, of
approximately $687.7 million, and used the proceeds to reduce the borrowings
under its commercial paper program. The notes due in 2018 constitute a further
issuance of the $600 million aggregate principal amount of 5.95% notes Kinder
Morgan Energy Partners issued on February 12, 2008 and form a single series with
those notes. The notes due in 2038 constitute a further issuance of the combined
$850 million aggregate principal amount of 6.95% notes Kinder Morgan Energy
Partners issued on June 21, 2007 and February 12, 2008 and form a single series
with those notes.
On
February 12, 2008, Kinder Morgan Energy Partners completed a public offering of
senior notes. Kinder Morgan Energy Partners issued a total of $900 million in
principal amount of senior notes, consisting of $600 million of 5.95% notes due
February 15, 2018, and $300 million of 6.95% notes due January 15, 2038. Kinder
Morgan Energy Partners received proceeds from the issuance of the notes, after
underwriting discounts and commissions, of approximately $894.1 million, and
used the proceeds to reduce the borrowings under its commercial paper program.
The notes due in 2038 constitute a further issuance of the $550 million
aggregate principal amount of 6.95% notes Kinder Morgan Energy Partners issued
on June 21, 2007 and form a single series with those notes.
In
February 2008, approximately $4.6 billion of the proceeds from the completed
sale of an 80% ownership interest in NGPL PipeCo LLC were used to pay off and
retire our senior secured credit facility’s Tranche A and Tranche B term loans
and to pay down amounts outstanding at that time under our $1.0 billion
revolving credit facility as follows:
|
Debt
Paid Down
and/or
Retired
|
|
(In
millions)
|
Knight
Inc.
|
|
|
|
|
|
Senior
Secured Credit Term Loan Facilities
|
|
|
|
|
|
Tranche
A Term Loan, Due 2013
|
|
$
|
995.0
|
|
|
Tranche
B Term Loan, Due 2014
|
|
|
3,183.5
|
|
|
Credit
Facility
|
|
|
|
|
|
$1.0
billion Secured Revolver, Due May 2013
|
|
|
375.0
|
|
|
Total
Paid Down and/or Retired
|
|
$
|
4,553.5
|
|
|
In
March 2008, using primarily proceeds from the completed sale of an 80% ownership
interest in NGPL PipeCo LLC, along with cash on hand and borrowings under our
$1.0 billion revolving credit facility, we repurchased approximately $1.67
billion par value of our outstanding debt securities for $1.6 billion in cash as
follows:
|
Par
Value of
Debt
Repurchased
|
|
(In
millions)
|
Knight
Inc.
|
|
|
|
|
|
Debentures
|
|
|
|
|
|
6.50%
Series, Due 2013
|
|
$
|
18.9
|
|
|
6.67%
Series, Due 2027
|
|
|
143.0
|
|
|
7.25%
Series, Due 2028
|
|
|
461.0
|
|
|
7.45%
Series, Due 2098
|
|
|
124.1
|
|
|
Senior
Notes
|
|
|
|
|
|
6.50%
Series, Due 2012
|
|
|
160.7
|
|
|
Kinder
Morgan Finance Company, LLC
|
|
|
|
|
|
6.40%
Series, Due 2036
|
|
|
513.6
|
|
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
|
|
|
|
|
8.56%
Junior Subordinated Deferrable Interest Debentures
Due 2027
|
|
|
87.3
|
|
|
7.63%
Junior Subordinated Deferrable Interest Debentures
Due 2028
|
|
|
160.6
|
|
|
Repurchase
of Outstanding Debt Securities
|
|
$
|
1,669.2
|
|
|
On
May 30, 2007, we terminated our $800 million five-year credit facility dated
August 5, 2005 and entered into a $5.8 billion credit agreement with a syndicate
of financial institutions and Citibank, N.A., as administrative agent. The
senior secured credit facilities consist of the following: (i) a $1.0 billion
senior secured Tranche A term loan facility with a term of six years and six
months (subsequently retired), (ii) a $3.3 billion senior secured Tranche B term
loan facility, with a term of seven years (subsequently retired), (iii) a $455
million senior secured Tranche C term loan facility with a term of three years
(subsequently retired), and (iv) a $1.0 billion
senior secured revolving credit facility with a term of six years. The revolving
credit facility includes a sublimit of $300 million for the issuance of letters
of credit and a sublimit of $50 million swingline loans and can be used for
general corporate purposes.
On
January 30, 2007, Kinder Morgan Energy Partners completed a public offering of
senior notes, issuing a total of $1.0 billion in principal amount of senior
notes, consisting of $600 million of 6.00% notes due February 1, 2017 and $400
million of 6.50% notes due February 1, 2037. Kinder Morgan Energy Partners
received proceeds from the issuance of the notes, after underwriting discounts
and commissions, of approximately $992.8 million, and used the proceeds to
reduce the borrowings under its commercial paper program.
Since
we are accounting for the Going Private transaction in accordance with SFAS No.
141, Business
Combinations, we have adjusted our basis in our long-term debt to reflect
its fair value and the adjustments are being amortized until the debt securities
mature. The unamortized fair value adjustment balances reflected within the
caption “Long-term Debt” in the accompanying interim Consolidated Balance Sheet
at September 30, 2008 were $46.4 million and $0.6 million, representing a
decrease to the carrying value of our long-term debt and an increase in the
balance of our value of interest rate swaps,
respectively.
Kinder
Morgan Operating L.P. “A” and Kinder Morgan Canada Company
As
part of the purchase price consideration for Kinder Morgan Energy Partners’
January 1, 2007 acquisition of the remaining approximately 50.2% interest in the
Cochin pipeline system that it did not already own, two of its subsidiaries
issued a long-term note payable to the seller having a fair value of $42.3
million. Kinder Morgan Energy Partners valued the debt equal to the present
value of amounts to be paid, determined using an annual interest rate of 5.40%.
The principal amount of the note, along with interest, is due in five equal
annual installments of $10.0 million on March 31 in each of 2008, 2009, 2010,
2011 and 2012. Kinder Morgan Energy Partners’ subsidiaries Kinder Morgan
Operating L.P. “A” and Kinder Morgan Canada Company are the obligors on the
note, and as of September 30, 2008 and December 31, 2007, the outstanding
balance under the note was $36.1 million and $44.6 million,
respectively.
Central
Florida Pipeline LLC Debt
On
July 23, 2008, Central Florida Pipeline LLC, a Kinder Morgan Energy Partners
subsidiary, paid $5.0 million to retire the outstanding principal amount of its
7.84% senior notes that matured on that date.
Kinder
Morgan Operating L.P. “B” Debt
As
of December 31, 2007, Kinder Morgan Energy Partners’ subsidiary, Kinder Morgan
Operating L.P. “B,” was the obligor of a principal amount of $23.7 million of
tax-exempt bonds due April 1, 2024. The bonds were issued by the Jackson-Union
Counties Regional Port District, a political subdivision embracing the
territories of Jackson County and Union County in the state of Illinois. These
variable rate demand bonds bear interest at a weekly floating market rate and as
of December 31, 2007, Kinder Morgan Energy Partners had an outstanding letter of
credit issued by Wachovia in the amount of $24.1 million that backed-up the
$23.7 million principal amount of the bonds and $0.4 million of accrued
interest.
In
September 2008, pursuant to the standby purchase agreement provisions contained
in the bond indenture—which require the sellers of those guarantees to buy the
debt back—certain investors elected to put (sell) back their bonds at par plus
accrued interest. A total principal and interest amount of $5.2 million was
tendered and drawn against Kinder Morgan Energy Partners’ letter of credit and
accordingly, Kinder Morgan Energy Partners paid this amount pursuant to the
letter of credit reimbursement provisions. As of September 30, 2008, Kinder
Morgan Energy Partners’ outstanding balance under the bonds was $18.5 million,
and the interest rate on these bonds was 9.65%. Kinder Morgan Energy Partners’
outstanding letter of credit issued by Wachovia totaled $18.9 million, which
backs-up the $18.5 million principal amount of the bonds and $0.4 million of
interest on the bonds for up to 55 days computed at 12% per annum on the
principal amount thereof.
Rockies
Express Pipeline LLC
Pursuant
to certain guaranty agreements, all three member owners of West2East Pipeline
LLC (which owns all of the member interests in Rockies Express Pipeline LLC)
have agreed to guarantee, severally in the same proportion as their percentage
ownership of the member interests in West2East Pipeline LLC, borrowings under
Rockies Express Pipeline LLC’s (i) $2.0 billion five-year, unsecured revolving
credit facility due April 28, 2011, (ii) $2.0 billion commercial paper program,
and (iii) $600 million in principal amount of floating rate senior notes due
August 20, 2009. The three member owners and their respective ownership
interests consist of the following: Kinder Morgan Energy Partners’ subsidiary
Kinder Morgan W2E Pipeline LLC – 51%, a subsidiary of Sempra Energy – 25%, and a
subsidiary of ConocoPhillips – 24%.
Borrowings
under the Rockies Express Pipeline LLC commercial paper program are primarily
used to finance the construction of the Rockies Express interstate natural gas
pipeline and to pay related expenses. The credit facility, which can be amended
to allow for borrowings up to $2.5 billion, supports borrowings under the
commercial paper program, and borrowings under the commercial paper program
reduce the borrowings allowed under the credit facility. The $600 million in
principal amount of senior notes were issued on September 20, 2007. The notes
are unsecured and are not redeemable prior to maturity. Interest on the notes is
paid and computed quarterly at an interest rate of three-month LIBOR (with a
floor of 4.25%) plus a spread of 0.85%. See Note 20 regarding subsequent
events.
Upon
issuance of the notes, Rockies Express Pipeline LLC entered into two
floating-to-fixed interest rate swap agreements having a combined notional
principal amount of $600 million and maturity dates of August 20, 2009. On
September 24, 2008, Rockies Express Pipeline LLC terminated one of the
aforementioned interest rate swaps that had Lehman Brothers as the counterparty.
The notional principal amount of the terminated swap agreement was $300 million.
The remaining interest rate swap agreement effectively converts the interest
expense associated with $300 million of these senior notes from its stated
variable rate to a fixed rate of 5.47%.
As
of September 30, 2008, in addition to the $600 million in senior notes, Rockies
Express Pipeline LLC had $406.7 million of commercial paper outstanding with a
weighted-average interest rate of approximately 3.58%, and outstanding
borrowings of $447.5 million under its five-year facility. Accordingly, as of
September 30, 2008, Kinder Morgan Energy Partners’ contingent share of Rockies
Express Pipeline LLC’s debt was $741.6 million (51% of total guaranteed
borrowings). In addition, there is a $31.4 million letter of credit outstanding
as of September 30, 2008, issued by JP Morgan Chase. Kinder Morgan Energy
Partners’ contingent responsibility with regard to this letter of
credit was $16.0 million (51% of face amount).
In
October 2008, Standard & Poor’s Rating Services lowered Rockies Express
Pipeline LLC short-term credit rating to A-3 from A-2. As a result of this
revision and current commercial paper market conditions, Rockies Express
Pipeline LLC is unable to access additional commercial paper borrowings.
However, Rockies Express Pipeline LLC expects that short-term financing and
liquidity needs will continue to be met through borrowings made under its $2.0
billion five-year, unsecured revolving credit facility.
No
Lehman Brothers affiliate is an administrative agent for Rockies Express
Pipeline LLC; however, one of the Lehman affiliates is a lending bank providing
less than 5% of Rockies Express Pipeline LLC’s $2.0 billion credit facility.
Since Lehman Brothers declared bankruptcy, its affiliate, which is a party to
the Rockies Express Pipeline LLC credit facility, notified Rockies Express
Pipeline LLC that it will not meet its obligations to lend under this agreement.
Thus, the available capacity of Rockies Express Pipeline LLC’s facility will be
reduced by the Lehman commitment (less than 5% of the facility). The commitments
of the other banks remain unchanged and the facility is not
defaulted.
Midcontinent
Express Pipeline LLC
Pursuant
to certain guaranty agreements, each of the two member owners of Midcontinent
Express Pipeline LLC have agreed to guarantee, severally in the same proportion
as their percentage ownership of the member interests in Midcontinent Express
Pipeline LLC, borrowings under Midcontinent Express Pipeline LLC’s $1.4 billion
three-year, unsecured revolving credit facility, entered into on February 29,
2008 and due February 28, 2011. The facility is with a syndicate of financial
institutions with The Royal Bank of Scotland plc as the administrative agent.
Borrowings under the credit agreement will be used to finance the construction
of the Midcontinent Express Pipeline system and to pay related expenses. No
Lehman Brothers affiliate is an administrative agent for Midcontinent Express
Pipeline LLC; however, one of the Lehman affiliates is a lending bank providing
less than 10% of Midcontinent Express Pipeline LLC’s $1.4 billion credit
facility. Since Lehman Brothers declared bankruptcy, its affiliate, which is a
party to the Midcontinent Express Pipeline LLC credit facility, has notified
Midcontinent Express Pipeline LLC that it will not meet its obligations to lend
under that agreement. Thus, the available capacity of Midcontinent Express
Pipeline LLC’s facility will be reduced by the Lehman commitment (less than 10%
of the facility). The commitments of the other banks remain unchanged and the
facility is not defaulted.
Midcontinent
Express Pipeline LLC is an equity method investee of Kinder Morgan Energy
Partners, and the two member owners and their respective ownership interests
consist of the following: Kinder Morgan Energy Partners’ subsidiary Kinder
Morgan Operating L.P. “A” – 50%, and Energy Transfer Partners, L.P. – 50%. As of
September 30, 2008, Midcontinent Express Pipeline LLC had borrowed $525.0
million under its three-year credit facility. Accordingly, as of September 30,
2008, Kinder Morgan Energy Partners’ contingent share of Midcontinent Express
Pipeline LLC’s debt was $262.5 million (50% of total borrowings). Furthermore,
the revolving credit facility can be used for the issuance of letters of credit
to support the construction of the Midcontinent Express Pipeline, and as of
September 30, 2008, a letter of credit having a face amount of $33.3 million was
issued under the credit facility. Accordingly, as of September 30, 2008, Kinder
Morgan Energy Partners’ contingent responsibility with regard to this
outstanding letter of credit was $16.7 million (50% of total face
amount).
In
addition, Midcontinent Express Pipeline LLC entered into a $197 million
reimbursement agreement dated September 4, 2007, with JPMorgan Chase as the
administrative agent. The agreement included covenants and required payments of
fees that are common in such arrangements, and both Kinder Morgan Energy
Partners and Energy Transfer Partners, L.P. agreed to guarantee borrowings under
the reimbursement agreement in the same proportion as the associated percentage
membership interests. This reimbursement agreement expired on September 3,
2008.
Kinder
Morgan Energy Partners’ Common Units
On
October 14, 2008, Kinder Morgan Energy Partners declared a cash distribution of
$1.02 per common unit for the third quarter of 2008, payable on November 14,
2008 to unitholders of record as of October 31, 2008. On August 14, 2008, Kinder
Morgan Energy Partners paid a quarterly distribution of $0.99 per common unit
for the quarterly period ended June 30, 2008, of which $161.1 million was paid
to the public holders (included in minority interests) of Kinder Morgan Energy
Partners common units.
On
March 3, 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units at a price of $57.70 per unit, including common
units sold pursuant to the underwriters’ over-allotment option, less commissions
and underwriting expenses. Kinder Morgan Energy Partners received net proceeds
of $324.2 million for the issuance of these common units, and used the proceeds
to reduce the borrowings under its commercial paper program.
On
February 12, 2008, Kinder Morgan Energy Partners completed an offering of
1,080,000 of its common units at a price of $55.65 per unit in a privately
negotiated transaction. Kinder Morgan Energy Partners received net proceeds of
$60.1 million for the issuance of these 1,080,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
The
combined effect of the above transactions had the associated effects of
increasing our (i) minority interests associated with Kinder Morgan Energy
Partners by $368.9 million and (ii) associated accumulated deferred income taxes
by $5.6 million and reducing our (i) goodwill by $25.8 million and (ii) paid-in
capital by $16.0 million.
In
connection with Kinder Morgan Energy Partners’ acquisition on August 28, 2008 of
Knight Inc.’s one-third ownership interest in Express and Knight Inc.’s full
ownership of Jet Fuel, Kinder Morgan Energy Partners issued 2,014,693 common
units to Knight Inc. The units were valued at $116.0 million. See Note 11 for
additional information regarding this transaction.
Kinder
Morgan G.P., Inc. Preferred Shares
On
October 15, 2008, Kinder Morgan G.P., Inc.’s board of directors declared a
quarterly cash distribution on its Series A Fixed-to-Floating Rate Term
Cumulative Preferred Stock of $20.825 per share payable on November 18, 2008 to
shareholders of record as of October 31, 2008. On July 16, 2008, Kinder Morgan
G.P., Inc.’s board of directors declared a quarterly cash dividend on its Series
A Fixed-to-Floating Rate Term Cumulative Preferred Stock of $20.825 per share,
which was paid on August 18, 2008 to shareholders on record as of July 31,
2008.
Interest
Expense
“Interest
Expense, Net” as presented in the accompanying interim Consolidated Statements
of Operations is interest expense net of the debt component of the allowance for
funds used during construction, which was $11.0 million and $30.4 million for
the three and nine months ended September 30, 2008, respectively and $11.7
million, $14.6 million, and $12.2 million for the three months ended September
30, 2007, the four months ended September 30, 2007, and the five months ended
May 31, 2007, respectively. We also record as interest expense gains and losses
from (i) the reacquisition of debt, (ii) the termination of interest rate swaps
designated as fair value hedges for which the hedged liability has been
extinguished and (iii) the termination of interest rate swaps designated as cash
flow hedges for which the forecasted interest payments will no longer occur.
During the nine months ended September 30, 2008, we recorded a $34.4 million
loss from the early extinguishment of debt in the caption “Interest Expense,
Net,” consisting of an $18.1 million gain on the debt repurchased in the tender
more than offset by a $41.7 million loss from the write-off of debt issuance
costs associated with the $5.8 billion secured credit facility. We also recorded
$10.8 million in gains from the early extinguishment of debt in the caption
“Interest Expense – Deferred Interest Debentures,” and $19.8 million of gains
from the termination of interest rate swaps designated as fair value hedges, for
which the hedged liability was extinguished, in the caption “Interest Expense,
Net” in the accompanying interim Consolidated Statements of
Operations.
In
accordance with the manner in which we manage our businesses, including the
allocation of capital and evaluation of business segment performance, we report
our operations in the following segments: (1) Natural Gas Pipeline Company of
America LLC and certain affiliates (“NGPL”), a major interstate natural gas
pipeline and storage system in which we currently have a 20% interest; (2)
Power, the ownership and operation of natural gas-fired electric generation
facilities; (3) Products Pipelines – KMP, the ownership and operation of refined
petroleum products pipelines that deliver gasoline, diesel fuel, jet fuel and
natural gas liquids to various markets plus the ownership and/or operation of
associated product terminals and petroleum pipeline transmix facilities; (4)
Natural Gas Pipelines – KMP, the ownership and operation of major interstate and
intrastate natural gas pipeline and storage systems; (5) CO2 – KMP, the
production, transportation and marketing of carbon dioxide (“CO2”) to oil
fields that use CO2 to
increase production of oil plus ownership interests in and/or operation of oil
fields in West Texas and the ownership and operation of a crude oil pipeline
system in West Texas; (6) Terminals – KMP, the ownership and/or operation of
liquids and bulk terminal facilities and rail transloading and materials
handling facilities located throughout the United States and Canada; and (7)
Kinder Morgan Canada – KMP, the ownership and operation of (i) a pipeline system
that transports crude oil and refined products from Edmonton, Alberta, Canada to
marketing terminals and refineries in British Columbia, Canada and the State of
Washington, (ii) a one-third interest in a crude oil pipeline system
that
transports
crude oil from Hardisty, Alberta, Canada through Casper, Wyoming to the Wood
River, Illinois area and (iii) a 25-mile long pipeline system, transporting jet
fuel to Vancouver International Airport.
In
conjunction with our annual impairment test of the carrying value of this
goodwill, performed as of May 31, 2008, we determined that the fair value of
certain reporting units that are part of our investment in Kinder Morgan Energy
Partners were less than the carrying values. The fair value of each reporting
unit was determined from the present value of the expected future cash flows
from the applicable reporting unit (inclusive of a terminal value calculated
using a market multiple for the individual assets). The implied fair value of
goodwill within each reporting unit was then compared to the carrying value of
goodwill of each such unit, resulting in the following goodwill impairments by
our reporting unit:
|
·
|
Products
Pipelines – KMP (excluding associated terminals) – $1.19
billion,
|
|
·
|
Products
Pipelines Terminals – KMP (separate from Products Pipelines – KMP for
goodwill impairment purposes) - $70
million,
|
|
·
|
Natural
Gas Pipelines – KMP – $2.09 billion,
and
|
|
·
|
Terminals
– KMP – $677 million, for a total impairment of $4.03
billion.
|
We
have finalized our goodwill impairment calculation initially recorded in the
second quarter of 2008. This resulted in an increase to the goodwill impairment
by our Products Pipelines – KMP (excluding associated terminals) reporting unit
of $152.6 million and a decrease to the goodwill impairment by our Natural Gas
Pipelines – KMP reporting unit of $152.6 million, with no net impact to the
total goodwill impairment charge. The goodwill impairment is a non-cash charge
and does not have any impact on our cash flow.
While
the fair value of the CO2 – KMP
segment exceeded its carrying value as of the date of our goodwill impairment
test, decreases in the market value of crude oil led us to reconsider this
analysis as of September 30, 2008. This analysis again showed that the fair
value of the CO2 – KMP
segment exceeded its carrying value, however the amount by which the fair value
exceeded the carrying value decreased. If the market price of crude oil
continues to decline, we may need to record non-cash goodwill impairment charges
on this reporting unit in future periods. (See Note 3.)
On
August 28, 2008, Knight Inc. sold its one-third interest in the net assets of
Express and of the net assets of Jet Fuel to Kinder Morgan Energy Partners for
approximately 2 million Kinder Morgan Energy Partners’ common units worth
approximately $116 million. Express is a crude oil pipeline system that runs
from Alberta to Illinois. Jet Fuel is a fuel pipeline that serves the Vancouver,
British Columbia airport. Results for Express were previously reported in the
segment referred to as “Express” and are now reported in the Kinder Morgan
Canada – KMP segment. Due to the inclusion of Kinder Morgan Energy Partners and
its subsidiaries in Knight Inc.’s consolidated financial statements (resulting
from the implementation of EITF 04-5), Knight Inc. accounted for this
transaction as a transfer of net assets between entities under common control.
Therefore, following Kinder Morgan Energy Partners’ acquisition of Express and
Jet Fuel from Knight Inc., Kinder Morgan Energy Partners recognized the assets
and liabilities acquired at Knight Inc.’s carrying amounts (historical cost) at
the date of transfer.
On
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC
(formerly MidCon Corp.), which owns NGPL, to Myria Acquisition Inc. (See Note
11). As a result of the sale, beginning February 15, 2008, we account for our
20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
On
January 25, 2008, we sold our interests in three natural gas-fired power plants
in Colorado to Bear Stearns, effective January 1, 2008. We received net proceeds
of $63.1 million (see Note 11).
On
October 5, 2007, Kinder Morgan Energy Partners completed the sale of its North
System and its 50% ownership interest in the Heartland Pipeline Company to ONEOK
Partners, L.P. for approximately $300 million in cash. In prior periods, the
North System and the equity investment in the Heartland Pipeline were reported
in the Products Pipelines – KMP business segment (see Note 12).
On
June 15, 2007, we sold Corridor to Inter Pipeline Fund, a Canada-based company
(see Note 12).
On
April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to
Kinder Morgan Energy Partners for approximately $550 million. The transaction
was approved by the independent members of our board of directors and those of
Kinder Morgan Management following the receipt, by each board, of separate
fairness opinions from different investment banks. Due to the inclusion of
Kinder Morgan Energy Partners and its subsidiaries in our consolidated financial
statements
(resulting
from the implementation of EITF 04-5), we accounted for this transaction as a
transfer of net assets between entities under common control. Therefore,
following Kinder Morgan Energy Partners’ acquisition of Trans Mountain from us,
Kinder Morgan Energy Partners recognized the Trans Mountain assets and
liabilities acquired at our carrying amounts (historical cost) at the date of
transfer. As discussed in Note 3, based on an evaluation of the fair value of
the Trans Mountain pipeline system, we recorded an estimated goodwill impairment
charge of approximately $377.1 million in the first quarter of 2007. In April
2008, as a result of finalizing certain “true-up” provisions in Kinder Morgan
Energy Partners’ acquisition agreement related to Trans Mountain pipeline
expansion spending, Kinder Morgan Energy Partners received a cash contribution
of $23.4 million from us.
The
results of Trans Mountain and Express were previously reported in the “Trans
Mountain-KMP” and “Express” segments, respectively. Knight Inc. sold Express and
Jet Fuel to Kinder Morgan Energy Partners on August 28, 2008. Trans Mountain,
Express, and Jet Fuel are now reported in the Kinder Morgan Canada – KMP
segment.
In
March 2007, we completed the sale of our U.S. retail natural gas distribution
and related operations to GE Energy Financial Services, a subsidiary of General
Electric Company, and Alinda Investments LLC. In prior periods, we referred to
these operations as the Kinder Morgan Retail business segment (see Note
12).
On
May 17, 2007, we completed the sale of Terasen Inc. to Fortis Inc., a
Canada-based company with investments in regulated distribution utilities (see
Note 12). Execution of this sale agreement constituted a subsequent event of the
type that, under GAAP, required us to consider the market value indicated by the
definitive sales agreement in our 2006 goodwill impairment evaluation.
Accordingly, an estimated goodwill impairment charge of approximately $650.5
million was recorded in 2006.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 80% of the assets and liabilities
associated with NGPL PipeCo LLC are included in our interim Consolidated Balance
Sheet at December 31, 2007 in the captions “Current Assets: Assets Held for
Sale,” “Assets Held for Sale, Non-current,” “Current Liabilities: Liabilities
Held for Sale” and “Liabilities Held for Sale, Non-current” with the remaining
20% included in the caption “Investments.” The financial results of Terasen Gas,
Corridor, Kinder Morgan Retail, the North System and the equity investment in
the Heartland Pipeline Company have been reclassified to discontinued operations
for all periods presented. See Note 12 for additional information regarding
discontinued operations.
The
accounting policies we apply in the generation of business segment earnings are
generally the same as those applied to our consolidated operations and described
in Note 2, except that (i) certain items below the “Operating Income” line (such
as interest expense) are either not allocated to business segments or are not
considered by management in its evaluation of business segment performance, (ii)
equity in earnings of equity method investees are included in segment earnings
(these equity method earnings are included in “Other Income and (Expenses)” in
the accompanying interim Consolidated Statements of Operations), (iii) certain
items included in operating income (such as general and administrative expenses
and depreciation, depletion and amortization (“DD&A”)) are not considered by
management in its evaluation of business segment performance and, thus, are not
included in reported performance measures, (iv) gains and losses from incidental
sales of assets are included in segment earnings and (v) our business segments
that are also segments of Kinder Morgan Energy Partners include certain other
income and expenses and income taxes in their segment earnings. With adjustment
for these items, we currently evaluate business segment performance primarily
based on Earnings before DD&A (“EBDA”) in relation to the level of capital
employed. We account for intersegment sales at market prices, while we account
for asset transfers between Knight Inc. and Kinder Morgan Energy Partners at
either market value or, in some instances, book value.
Business
Segment Information
|
Three
Months
Ended
September
30,
2008
|
|
Three
Months
Ended
September
30,
2007
|
|
(In
millions)
|
Segment
Earnings before Depreciation, Depletion, Amortization and Amortization of
Excess Cost of Equity Investments
|
|
|
|
|
|
|
|
NGPL1
|
$
|
11.5
|
|
|
$
|
158.1
|
|
Power
|
|
1.6
|
|
|
|
5.0
|
|
Products
Pipelines – KMP2,4
|
|
(22.4
|
)
|
|
|
127.0
|
|
Natural
Gas Pipelines – KMP2,4
|
|
337.6
|
|
|
|
142.3
|
|
CO2 –
KMP2
|
|
237.7
|
|
|
|
184.2
|
|
Terminals
– KMP2
|
|
117.3
|
|
|
|
84.4
|
|
Kinder
Morgan Canada – KMP2
|
|
44.5
|
|
|
|
31.0
|
|
Total
Segment Earnings Before DD&A
|
|
727.8
|
|
|
|
732.0
|
|
Depreciation,
Depletion and Amortization
|
|
(217.2
|
)
|
|
|
(204.1
|
)
|
Amortization
of Excess Cost of Equity Investments
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
Other
Operating Income
|
|
11.1
|
|
|
|
0.2
|
|
General
and Administrative Expense
|
|
(85.9
|
)
|
|
|
(77.9
|
)
|
Interest
and Other, Net3
|
|
(246.4
|
)
|
|
|
(304.9
|
)
|
Add
Back: Income Taxes Included in Segments Above2
|
|
8.8
|
|
|
|
20.8
|
|
Income
from Continuing Operations Before Income Taxes
|
$
|
196.8
|
|
|
$
|
164.7
|
|
Revenues
from External Customers
|
|
|
|
|
|
|
|
NGPL1
|
$
|
-
|
|
|
$
|
311.3
|
|
Power
|
|
17.5
|
|
|
|
21.0
|
|
Products
Pipelines – KMP
|
|
205.6
|
|
|
|
202.7
|
|
Natural
Gas Pipelines – KMP
|
|
2,359.4
|
|
|
|
1,526.8
|
|
CO2 –
KMP
|
|
339.6
|
|
|
|
256.8
|
|
Terminals
– KMP
|
|
306.0
|
|
|
|
247.1
|
|
Kinder
Morgan Canada – KMP
|
|
57.2
|
|
|
|
43.3
|
|
Other
|
|
11.3
|
|
|
|
-
|
|
Total
Revenues
|
$
|
3,296.6
|
|
|
$
|
2,609.0
|
|
Intersegment
Revenues
|
|
|
|
|
|
|
|
NGPL1
|
$
|
-
|
|
|
$
|
2.1
|
|
Terminals
– KMP
|
|
0.2
|
|
|
|
0.1
|
|
Total
Intersegment Revenues
|
$
|
0.2
|
|
|
$
|
2.2
|
|
Depreciation,
Depletion and Amortization
|
|
|
|
|
|
|
|
NGPL1
|
$
|
-
|
|
|
$
|
17.8
|
|
Power
|
|
-
|
|
|
|
0.1
|
|
Products
Pipelines – KMP
|
|
30.0
|
|
|
|
25.1
|
|
Natural
Gas Pipelines – KMP
|
|
24.2
|
|
|
|
20.9
|
|
CO2 –
KMP
|
|
116.0
|
|
|
|
109.6
|
|
Terminals
– KMP
|
|
39.4
|
|
|
|
24.8
|
|
Kinder
Morgan Canada – KMP
|
|
7.6
|
|
|
|
5.8
|
|
Total
Consolidated Depreciation, Depletion and Amortization
|
$
|
217.2
|
|
|
$
|
204.1
|
|
Capital
Expenditures – Continuing Operations
|
|
|
|
|
|
|
|
NGPL1
|
$
|
-
|
|
|
$
|
54.8
|
|
Products
Pipelines – KMP
|
|
46.6
|
|
|
|
68.1
|
|
Natural
Gas Pipelines – KMP
|
|
280.8
|
|
|
|
63.7
|
|
CO2 –
KMP
|
|
135.8
|
|
|
|
111.7
|
|
Terminals
– KMP
|
|
105.4
|
|
|
|
139.0
|
|
Kinder
Morgan Canada – KMP
|
|
83.2
|
|
|
|
70.0
|
|
Other
|
|
0.3
|
|
|
|
-
|
|
Total
Capital Expenditures – Continuing Operations
|
$
|
652.1
|
|
|
$
|
507.3
|
|
____________
1
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
|
2
|
Income
taxes of Kinder Morgan Energy Partners of $8.8 million and $20.8 million
for the three months ended September 30, 2008 and 2007, respectively, are
included in segment earnings before depreciation, depletion, amortization
and amortization of excess cost of equity
investments.
|
3
|
Includes
(i) interest expense, (ii) minority interests and (iii) miscellaneous
other income and expenses not allocated to business
segments.
|
4
|
2008
amount includes non-cash goodwill impairment charge (see Note
3).
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Segment
Earnings (Loss) before Depreciation, Depletion, Amortization and
Amortization of Excess Cost of Equity
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL1
|
$
|
116.2
|
|
|
$
|
217.5
|
|
|
|
$
|
267.4
|
|
Power
|
|
4.4
|
|
|
|
7.4
|
|
|
|
|
8.9
|
|
Products
Pipelines – KMP2,
4
|
|
(859.3
|
)
|
|
|
174.4
|
|
|
|
|
224.4
|
|
Natural
Gas Pipelines – KMP2,
4
|
|
(1,546.9
|
)
|
|
|
192.1
|
|
|
|
|
228.5
|
|
CO2 –
KMP2
|
|
721.6
|
|
|
|
241.4
|
|
|
|
|
210.0
|
|
Terminals
– KMP2,
4
|
|
(293.2
|
)
|
|
|
122.7
|
|
|
|
|
172.3
|
|
Kinder
Morgan Canada – KMP2,5
|
|
114.0
|
|
|
|
42.7
|
|
|
|
|
(332.0
|
)
|
Total
Segment Earnings (Loss) Before DD&A
|
|
(1,743.2
|
)
|
|
|
998.2
|
|
|
|
|
779.5
|
|
Depreciation,
Depletion and Amortization
|
|
(651.0
|
)
|
|
|
(276.3
|
)
|
|
|
|
(261.0
|
)
|
Amortization
of Excess Cost of Equity Investments
|
|
(4.3
|
)
|
|
|
(1.9
|
)
|
|
|
|
(2.4
|
)
|
Other
Operating Income
|
|
27.9
|
|
|
|
0.6
|
|
|
|
|
2.9
|
|
General
and Administrative Expense
|
|
(264.0
|
)
|
|
|
(107.9
|
)
|
|
|
|
(283.6
|
)
|
Interest
and Other, Net3
|
|
(836.7
|
)
|
|
|
(419.6
|
)
|
|
|
|
(348.2
|
)
|
Add
Back: Income Taxes Included in Segments Above2
|
|
20.1
|
|
|
|
20.8
|
|
|
|
|
15.6
|
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
$
|
(3,451.2
|
)
|
|
$
|
213.9
|
|
|
|
$
|
(97.2
|
)
|
Revenues
from External Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL1
|
$
|
132.1
|
|
|
$
|
410.5
|
|
|
|
$
|
424.5
|
|
Power
|
|
38.2
|
|
|
|
29.9
|
|
|
|
|
19.9
|
|
Products
Pipelines – KMP
|
|
602.5
|
|
|
|
269.4
|
|
|
|
|
331.8
|
|
Natural
Gas Pipelines – KMP
|
|
6,916.6
|
|
|
|
2,114.7
|
|
|
|
|
2,637.6
|
|
CO2 –
KMP
|
|
1,002.1
|
|
|
|
336.6
|
|
|
|
|
324.2
|
|
Terminals
– KMP
|
|
886.4
|
|
|
|
326.6
|
|
|
|
|
364.2
|
|
Kinder
Morgan Canada – KMP
|
|
145.4
|
|
|
|
58.2
|
|
|
|
|
62.9
|
|
Other
|
|
28.8
|
|
|
|
-
|
|
|
|
|
-
|
|
Total
Revenues
|
$
|
9,752.1
|
|
|
$
|
3,545.9
|
|
|
|
$
|
4,165.1
|
|
Intersegment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL1
|
$
|
0.9
|
|
|
$
|
2.7
|
|
|
|
$
|
2.0
|
|
Natural
Gas Pipelines – KMP
|
|
-
|
|
|
|
-
|
|
|
|
|
3.0
|
|
Terminals
– KMP
|
|
0.7
|
|
|
|
0.2
|
|
|
|
|
0.3
|
|
Other
|
|
(0.9
|
)
|
|
|
-
|
|
|
|
|
-
|
|
Total
Intersegment Revenues
|
$
|
0.7
|
|
|
$
|
2.9
|
|
|
|
$
|
5.3
|
|
Depreciation,
Depletion and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL1
|
$
|
9.3
|
|
|
$
|
23.7
|
|
|
|
$
|
45.3
|
|
Power
|
|
-
|
|
|
|
0.1
|
|
|
|
|
(4.2
|
)
|
Products
Pipelines – KMP
|
|
86.7
|
|
|
|
33.6
|
|
|
|
|
33.6
|
|
Natural
Gas Pipelines – KMP
|
|
75.5
|
|
|
|
27.7
|
|
|
|
|
26.8
|
|
CO2 –
KMP
|
|
338.8
|
|
|
|
149.4
|
|
|
|
|
116.3
|
|
Terminals
– KMP
|
|
117.8
|
|
|
|
34.3
|
|
|
|
|
34.4
|
|
Kinder
Morgan Canada – KMP
|
|
22.9
|
|
|
|
7.3
|
|
|
|
|
8.2
|
|
Other
|
|
-
|
|
|
|
0.2
|
|
|
|
|
0.6
|
|
Total
Consolidated Depreciation, Depletion and Amortization
|
$
|
651.0
|
|
|
$
|
276.3
|
|
|
|
$
|
261.0
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Capital
Expenditures – Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL1
|
$
|
10.2
|
|
|
$
|
69.9
|
|
|
|
$
|
77.3
|
|
Products
Pipelines – KMP
|
|
167.4
|
|
|
|
91.4
|
|
|
|
|
79.5
|
|
Natural
Gas Pipelines – KMP
|
|
697.6
|
|
|
|
96.2
|
|
|
|
|
66.6
|
|
CO2 –
KMP
|
|
384.2
|
|
|
|
140.1
|
|
|
|
|
133.3
|
|
Terminals
– KMP
|
|
346.0
|
|
|
|
180.9
|
|
|
|
|
169.9
|
|
Kinder
Morgan Canada – KMP
|
|
319.2
|
|
|
|
76.0
|
|
|
|
|
109.0
|
|
Other
|
|
(3.3
|
)
|
|
|
1.6
|
|
|
|
|
17.2
|
|
Total
Capital Expenditures – Continuing Operations
|
$
|
1,921.3
|
|
|
$
|
656.1
|
|
|
|
$
|
652.8
|
|
____________
1
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
|
2
|
Income
taxes of Kinder Morgan Energy Partners of $20.1 million, $20.8 million and
$15.6 million for the nine months ended September 30, 2008, the four
months ended September 30, 2007 and the five months ended May 31, 2007,
respectively, are included in segment earnings before depreciation,
depletion, amortization and amortization of excess cost of equity
investments.
|
3
|
Includes
(i) interest expense, (ii) minority interests and (iii) miscellaneous
other income and expenses not allocated to business
segments.
|
4
|
Nine
months ended September 30, 2008 includes non-cash goodwill impairment
charges (see Note 3).
|
5
|
Five
months ended May 31, 2007 includes a non-cash goodwill impairment charge
(see Note 3).
|
|
September
30, 2008
|
|
(In
millions)
|
Assets
|
|
|
|
NGPL1
|
$
|
724.2
|
|
Power
|
|
62.6
|
|
Products
Pipelines – KMP
|
|
5,516.7
|
|
Natural
Gas Pipelines – KMP
|
|
7,412.7
|
|
CO2 –
KMP
|
|
4,436.9
|
|
Terminals
– KMP
|
|
4,299.1
|
|
Kinder
Morgan Canada – KMP
|
|
1,803.6
|
|
Total
segment assets
|
|
24,255.8
|
|
Other2
|
|
452.9
|
|
Total
Consolidated Assets
|
$
|
24,708.7
|
|
____________
1
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
|
2
|
Includes
assets of cash, restricted deposits, market value of derivative
instruments (including interest rate swaps) and miscellaneous corporate
assets (such as information technology and telecommunications equipment)
not allocated to individual
segments.
|
15.
|
Accounting
for Derivative Instruments and Hedging
Activities
|
We
are exposed to risks associated with changes in the market price of natural gas,
natural gas liquids and crude oil as a result of our expected future purchase or
sale of these products. We have exposure to interest rate risk as a result of
the issuance of variable and fixed rate debt and commercial paper and to foreign
currency risk from our investments in businesses owned and operated outside the
United States. Pursuant to our risk management policy, we engage in derivative
transactions for the purpose of mitigating some of these risks, which
transactions are accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and associated amendments (“SFAS No.
133”).
Commodity
Price Risk Management
Our
normal business activities expose us to risks associated with changes in the
market price of natural gas, natural gas liquids and crude oil. Reflecting the
portion of changes in the value of derivative contracts that were not effective
in offsetting underlying changes in expected cash flows (the ineffective portion
of hedges), we recognized a pre-tax gain of less than $0.1 million and a pre-tax
loss of $8.4 million in the three and nine months ended September 30, 2008,
respectively. We recognized a pre-tax loss of approximately $0.2 million and a
pre-tax gain of $0.3 million in the three months and four months ended September
30, 2007, respectively, and a pre-tax loss of $0.7 million in the five months
ended May 31, 2007. The gains and losses for each respective period were a
result of ineffectiveness of these hedges, which amounts are reported within the
captions “Natural Gas Sales,” “Oil and Product Sales” and “Gas Purchases and
Other Costs of Sales” in the accompanying interim Consolidated Statements of
Operations. As the hedged sales and purchases take place and we record them into
earnings, we also reclassify the associated gains and losses included in
accumulated other comprehensive income into earnings. During the three and nine
months ended September 30, 2008, we reclassified $70.5 million of accumulated
other comprehensive income and $140.9 million of accumulated other comprehensive
loss, respectively, into earnings, as a result of hedged forecasted transactions
occurring during these periods. During the three months and four months ended
September 30, 2007 and the five months ended May 31, 2007, we reclassified
accumulated other comprehensive income of $20.2 million and $21.1 million, and
accumulated other comprehensive losses of $11.4 million, respectively, into
earnings, as a result of hedged forecasted transactions occurring during these
periods. Furthermore, during the three and nine months ended September 30, 2008,
we reclassified $12.2 million of net gains, and $0.9 million of net losses,
respectively, as a result of the discontinuance of cash flow hedges. During the
five months ended May 31, 2007, we reclassified $1.1 million of net gains as a
result of the discontinuance of cash flow hedges. During the third quarter of
2007, we did not reclassify any of our accumulated other comprehensive loss into
earnings as a result of the discontinuance of cash flow hedges. During the next
twelve months, we expect to reclassify approximately $120.3 million of
accumulated other comprehensive loss into earnings.
Derivative
instruments that are entered into for the purpose of mitigating commodity price
risk include swaps, futures and options. The fair values of these derivative
contracts reflect the amounts that we would receive or pay to terminate the
contracts at the reporting date and are included in the accompanying interim
Consolidated Balance Sheets within the captions indicated in the following
table:
|
September
30,
2008
|
|
December
31,
2007
|
|
(In
millions)
|
Derivatives
Asset (Liability)
|
|
|
|
|
|
|
|
Current
Assets: Fair Value of Derivative Instruments
|
$
|
36.9
|
|
|
$
|
37.1
|
|
Current
Assets: Assets Held for Sale
|
$
|
-
|
|
|
$
|
8.4
|
|
Assets:
Fair Value of Derivative Instruments
|
$
|
49.3
|
|
|
$
|
4.4
|
|
Current
Liabilities: Fair Value of Derivative Instruments,
Non-current
|
$
|
(611.6
|
)
|
|
$
|
(594.7
|
)
|
Current
Liabilities: Liabilities Held for Sale
|
$
|
-
|
|
|
$
|
(0.4
|
)
|
Liabilities
and Stockholders’ Equity: Fair Value of Derivative Instruments,
Non-current
|
$
|
(1,007.2
|
)
|
|
$
|
(836.8
|
)
|
Interest
Rate Risk Management
In
order to maintain a cost effective capital structure, it is our policy to borrow
funds using a mix of fixed rate debt and variable rate debt. We use interest
rate swap agreements to manage the interest rate risk associated with the fair
value of our fixed rate borrowings and to effectively convert a portion of the
underlying cash flows related to our long-term fixed rate debt securities into
variable rate cash flows in order to achieve our desired mix of fixed and
variable rate debt.
Prior
to the Going Private transaction, all of our interest rate swaps qualified for,
and since the Going Private transaction, the new interest rate swaps that Kinder
Morgan Energy Partners entered into in February 2008, discussed below, qualify
for the “short-cut” method prescribed in SFAS No. 133 for qualifying fair value
hedges. Under this method, the carrying value of the swap is adjusted to its
fair value as of the end of each reporting period, and an offsetting entry is
made to adjust the carrying value of the debt securities whose fair value is
being hedged. Interest expense is equal to the floating rate payments, which is
accrued monthly and paid semi-annually.
In
connection with the Going Private transaction, all of our debt, including debt
of our subsidiary, Kinder Morgan Energy Partners, was remeasured and recorded on
our balance sheet at fair value. Except for Corridor’s outstanding interest rate
swap agreements classified as held for sale, all of our interest rate swaps, and
swaps of our subsidiary, Kinder Morgan Energy Partners, were re-designated as
fair value hedges effective June 1, 2007. Because these swaps did not have a
fair value of zero as of June 1, 2007, they did not meet the requirements for
the “short-cut” method of assessing their effectiveness. Accordingly, the
carrying value of the swap is adjusted to its fair value as of the end of each
subsequent reporting period, and an offsetting entry is made to adjust the
carrying value of the debt securities whose fair value is being hedged. Any
hedge ineffectiveness resulting from the difference between the change in fair
value of the interest rate swap and the change in fair value of the hedged debt
instrument is recorded as interest expense in the current period. During the
three and nine months ended September 30, 2008, no hedge ineffectiveness related
to these hedges was recognized. Interest expense equal to the floating rate
payments is accrued monthly and paid semi-annually.
As
of December 31, 2007, we, and our subsidiary Kinder Morgan Energy Partners, were
parties to interest rate swap agreements with notional principal amounts of $275
million and $2.3 billion, respectively, for a consolidated total of $2.575
billion. On March 7, 2008, we paid $2.5 million to terminate our remaining
interest rate swap agreement having a notional value of $275 million associated
with Kinder Morgan Finance Company, LLC’s 6.40% senior notes due 2036. In
February 2008, Kinder Morgan Energy Partners entered into two additional
fixed-to-floating interest rate swap agreements having a combined notional
principal amount of $500 million related to its $600 million 5.95% senior notes
issued on February 12, 2008. Additionally, on June 6, 2008, following Kinder
Morgan Energy Partner’s issuance of $700 million in principal amount of senior
notes in two separate series, Kinder Morgan Energy Partners entered into two
additional fixed-to-floating interest rate swap agreements having a combined
notional principal amount of $700 million. Therefore, as of September 30, 2008,
we were not party to any interest rate swap agreements and Kinder Morgan Energy
Partners was a party to fixed-to-floating interest rate swap agreements with a
combined notional principal amount of $3.5 billion;
effectively converting the interest expense associated with certain series of
its senior notes from fixed rates to variable rates based on an interest rate of
LIBOR plus a spread.
The
fair value of interest rate swaps at September 30, 2008 of $199.2 million
reflects $210.7 million and $11.5 million included in the accompanying interim
Consolidated Balance Sheet within the captions “Assets: Fair Value of Derivative
Instruments, Non-current” and “Liabilities and Stockholders’ Equity: Fair Value
of Derivative Instruments, Non-current,” respectively. The fair value of
interest rate swaps of $139.1 million as of December 31, 2007 is included in the
accompanying interim Consolidated Balance Sheet within the caption “Assets: Fair
Value of Derivative Instruments, Non-current.” The total unamortized net gain on
the termination of interest rate swaps of $27.2 million is included within the
caption “Long-term Debt: Value of Interest Rate Swaps” in the accompanying
interim Consolidated Balance Sheet at September 30, 2008. All of Kinder Morgan
Energy Partners’ swap agreements have termination dates that correspond to the
maturity dates of the related series of senior notes and, as of September 30,
2008, the maximum length of time over which Kinder Morgan Energy Partners has
hedged a portion of its exposure to the variability in the value of this debt
due to interest rate risk is through January 15, 2038.
Net
Investment Hedges
We
are exposed to foreign currency risk from our investments in businesses owned
and operated outside the United States. To hedge the value of our investment in
Canadian operations, we have entered into various cross-currency interest rate
swap transactions that have been designated as net investment hedges in
accordance with SFAS No. 133. We have recognized no ineffectiveness through the
income statement as a result of these hedging relationships during the three and
nine months ended September 30, 2008, the three and four months ended September
30, 2007 and the five months ended May 31, 2007. The effective portion of the
changes in fair value of these swap transactions is reported as a cumulative
translation adjustment included in the caption “Accumulated Other Comprehensive
Loss” in the accompanying interim Consolidated Balance Sheets. The combined
notional value of our remaining cross-currency interest rate swaps at September
30, 2008 was approximately C$281.6 million. The fair value of the swaps as of
September 30, 2008 was a liability of US$13.3 million, which is included in the
caption “Other Long-term Liabilities and Deferred Credits” in the accompanying
interim Consolidated Balance Sheet. In October 2008, we terminated
cross-currency interest rate swaps with a notional amount of C$126.9 million for
a net cash receipt of $150,000.
Credit
Risk
As
discussed in our 2007 Form 10-K, we and Kinder Morgan Energy Partners, our
subsidiary, have counterparty credit risk as a result of our use of financial
derivative contracts. Our counterparties consist primarily of financial
institutions, major energy companies and local distribution companies. This
concentration of counterparties may impact our overall exposure to credit risk,
either positively or negatively in that the counterparties may be similarly
affected by changes in economic, regulatory or other conditions.
We
maintain credit policies with regard to our counterparties that we believe
minimize our overall credit risk. These policies include (i) an evaluation of
potential counterparties’ financial condition (including credit ratings), (ii)
collateral requirements under certain circumstances and (iii) the use of
standardized agreements which allow for netting of positive and negative
exposure associated with a single counterparty. Based on our policies, exposure,
credit and other reserves, our management does not anticipate a material adverse
effect on our financial position, results of operations, or cash flows as a
result of counterparty performance.
Our
over-the-counter swaps and options are entered into with counter parties outside
central trading organizations such as a futures, options or stock exchange.
These contracts are with a number of parties, all of which have investment grade
credit ratings. While we enter into derivative transactions principally with
investment grade counterparties and actively monitor their ratings, it is
nevertheless possible that from time to time losses will result from
counterparty credit risk in the future.
In
addition, in conjunction with the purchase of exchange-traded derivative
contracts or when the market value of our derivative contracts with specific
counterparties exceeds established limits, we are required to provide collateral
to our counterparties, which may include posting letters of credit or placing
cash in margin accounts. As of September 30, 2008 and December 31, 2007, we had
three outstanding letters of credit totaling $375.0 million and $298.0 million,
respectively, in support of our hedging of commodity price risks associated with
the sale of natural gas, natural gas liquids and crude oil. Additionally, as of
September 30, 2008 and December 31, 2007, we had cash margin deposits associated
with our commodity contract positions and over-the-counter swap partners
totaling $27.6 million and $67.9 million, respectively, and we reported these
amounts as “Current Assets: Restricted Deposits” in our accompanying
consolidated balance sheets.
We
are also exposed to credit related losses in the event of nonperformance by
counterparties to our interest rate swap agreements, and while we enter into
these agreements primarily with investment grade counterparties and actively
monitor their credit ratings, it is nevertheless possible that from time to time
losses will result from counterparty credit risk. As of September 30, 2008, all
of our interest rate swap agreements were with counterparties with investment
grade credit ratings. Of the $210.7 million interest rate swap derivative asset
at September 30, 2008, $92.2 million and $70.1 million of this value related to
open positions with Citigroup and Merrill Lynch, respectively.
SFAS
No. 157
On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value
Measurements (“SFAS No. 157”). In general, fair value measurements and
disclosures are made in accordance with the provisions of this Statement and,
while not requiring material new fair value measurements, SFAS No. 157
established a single definition of fair value in GAAP and expanded disclosures
about fair value measurements. The provisions of this Statement apply to other
accounting pronouncements that require or permit fair value measurements; the
FASB, having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. On February 12, 2008, the FASB
issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157, (“FAS No. 157-2”). FAS No. 157-2 delayed the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually).
Accordingly,
we have not applied the provisions of SFAS No. 157 to (i) nonfinancial assets
and liabilities initially measured at fair value in business combinations, (ii)
reporting units or nonfinancial assets and liabilities measured at fair value in
conjunction with goodwill impairment testing, (iii) other nonfinancial assets
measured at fair value in conjunction with impairment assessments, and (iv)
asset retirement obligations initially measured at fair value, although the fair
value measurements we have made in these circumstances are not necessarily
different from those that would be made had the provisions of SFAS No. 157 been
applied. We adopted the remainder of SFAS No. 157 effective January 1, 2008, and
the adoption did not have a material impact on our financial position, results
of operations, or cash flows since we already apply its basic concepts in
measuring fair value.
On
October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FAS No.
157-3”). FAS No. 157-3 provides clarification regarding the application of SFAS
No. 157 in inactive markets. The provisions of FAS No. 157-3 are effective
immediately. This Staff
Position
did not have any material effect on our consolidated financial
statements.
The
degree of judgment utilized in measuring the fair value of financial instruments
generally correlates to the level of pricing observability. Pricing
observability is affected by a number of factors, including the type of
financial instrument, whether the financial instrument is new to the market and
the characteristics specific to the transaction. Financial instruments with
readily available active quoted prices or for which fair value can be measured
from actively quoted prices generally will have a higher degree of pricing
observability and a lesser degree of judgment utilized in measuring fair value.
Conversely, financial instruments rarely traded or not quoted will generally
have less (or no) pricing observability and a higher degree of judgment utilized
in measuring fair value.
SFAS
No. 157 established a hierarchal disclosure framework associated with the level
of pricing observability utilized in measuring fair value. This framework
defined three levels of inputs to the fair value measurement process, and
requires that each fair value measurement be assigned to a level corresponding
to the lowest level input that is significant to the fair value measurement in
its entirety. The three broad levels of inputs defined by the SFAS No. 157
hierarchy are as follows:
|
·
|
Level
1 Inputs—quoted prices (unadjusted) in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date;
|
|
·
|
Level
2 Inputs—inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. If
the asset or liability has a specified (contractual) term, a Level 2 input
must be observable for substantially the full term of the asset or
liability; and
|
|
·
|
Level
3 Inputs—unobservable inputs for the asset or liability. These
unobservable inputs reflect the entity’s own assumptions about the
assumptions that market participants would use in pricing the asset or
liability, and are developed based on the best information available in
the circumstances (which might include the reporting entity’s own
data).
|
Derivative
contracts can be exchange-traded or over-the-counter, referred to in this report
as OTC. Exchange-traded derivatives typically fall within Level 1 of the
fair value hierarchy if they are traded in an active market. We and Kinder
Morgan Energy Partners value exchange-traded derivatives using quoted market
prices for identical securities.
OTC
derivatives are valued using models utilizing a variety of inputs including
contractual terms; commodity, interest rate and foreign currency curves; and
measures of volatility. The selection of a particular model and particular
inputs to value an OTC derivative depends upon the contractual terms of the
instrument as well as the availability of pricing information in the market. We
and Kinder Morgan Energy Partners use similar models to value similar
instruments. For OTC derivatives that trade in liquid markets, such as generic
forwards and swaps, model inputs can generally be verified and model selection
does not involve significant management judgment. Such instruments are typically
classified within Level 2 of the fair value hierarchy.
Certain
OTC derivatives trade in less liquid markets with limited pricing information,
and the determination of fair value for these derivatives is inherently more
difficult. Such instruments are classified within Level 3 of the fair value
hierarchy. The valuations of these less liquid OTC derivatives are typically
impacted by Level 1 and/or Level 2 inputs that can be observed in the
market, as well as unobservable Level 3 inputs. Use of a different
valuation model or different valuation input values could produce a
significantly different estimate of fair value. However, derivatives valued
using inputs unobservable in active markets are generally not material to our
financial statements.
When
appropriate, valuations are adjusted for various factors including credit
considerations. Such adjustments are generally based on available market
evidence. In the absence of such evidence, management’s best estimate is used.
Our fair value measurements of derivative contracts are adjusted for credit risk
in accordance with SFAS No. 157, and as of September 30, 2008, our consolidated
“Accumulated Other Comprehensive Loss” balance includes a gain of $14.1 million
related to discounting the value of our energy commodity derivative liabilities
for the effect of credit risk.
The
following tables summarize the fair value measurements of ours and Kinder Morgan
Energy Partners’ (i) energy commodity derivative contracts, (ii) interest rate
swap agreements and (iii) cross currency swaps as of September 30, 2008, based
on the three levels established by SFAS No. 157 and do not include cash margin
deposits, which are reported within the caption “Current Assets: Restricted
Deposits” in the accompanying interim Consolidated Balance Sheets:
|
Asset
Fair Value Measurements as of September 30, 2008 Using
|
|
Total
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In
millions)
|
Energy
Commodity Derivative Contracts1
|
$
|
86.2
|
|
|
$
|
1.8
|
|
|
$
|
31.8
|
|
|
$
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Agreements
|
$
|
210.7
|
|
|
$
|
-
|
|
|
$
|
210.7
|
|
|
$
|
-
|
|
|
|
Liability
Fair Value Measurements as of September 30, 2008 Using
|
|
Total
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In
millions)
|
Energy
Commodity Derivative Contracts2
|
$
|
(1,618.8
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(1,485.5
|
)
|
|
$
|
(133.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap Agreements
|
$
|
(11.5
|
)
|
|
$
|
-
|
|
|
$
|
(11.5
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross
Currency Swaps
|
$
|
(13.3
|
)
|
|
$
|
-
|
|
|
$
|
(13.3
|
)
|
|
$
|
-
|
|
|
____________
1
|
Level
2 consists primarily of OTC West Texas Intermediate derivatives. Level 3
consists primarily of West Texas Sour derivatives and West Texas
Intermediate options.
|
2
|
Level
1 consists primarily of New York Mercantile Exchange (“NYMEX”) Natural Gas
futures. Level 2 consists primarily of OTC West Texas
Intermediate derivatives. Level 3 consists primarily of West Texas Sour
derivatives and West Texas Intermediate
options.
|
The
table below provides a summary of changes in the fair value of our Level 3
energy commodity derivative contracts for the three and nine months ended
September 30, 2008:
|
Significant
Unobservable
Inputs (Level
3)
|
|
Three
Months
Ended
September
30,
2008
|
|
Nine
Months
Ended
September
30,
2008
|
|
(In
millions)
|
Net
Asset (Liability)
|
|
|
|
|
|
|
|
Beginning
Balance
|
$
|
(233.0
|
)
|
|
$
|
(100.3
|
)
|
Realized
and Unrealized Net Losses
|
|
133.4
|
|
|
|
(52.9
|
)
|
Purchases
and Settlements
|
|
19.0
|
|
|
|
72.6
|
|
Balance
as of September 30, 2008
|
$
|
(80.6
|
)
|
|
$
|
(80.6
|
)
|
Change
in Unrealized Net Losses Relating to Contracts Still Held as of September
30, 2008
|
$
|
138.5
|
|
|
$
|
(22.3
|
)
|
Knight
Inc.
Retirement
Plans – Components of Net Periodic Pension Cost
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
Four
Months Ended
September
30,
|
|
|
Five
Months Ended
May
31,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Service
Cost
|
$
|
2.9
|
|
|
$
|
2.7
|
|
|
$
|
8.5
|
|
|
$
|
3.6
|
|
|
|
$
|
4.5
|
|
Interest
Cost
|
|
3.6
|
|
|
|
3.3
|
|
|
|
10.8
|
|
|
|
4.5
|
|
|
|
|
5.6
|
|
Expected
Return on Assets
|
|
(5.8
|
)
|
|
|
(5.7
|
)
|
|
|
(17.4
|
)
|
|
|
(7.7
|
)
|
|
|
|
(9.6
|
)
|
Amortization
of Prior Service Credit
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
0.1
|
|
Amortization
of Net Loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
0.2
|
|
Net
Periodic Pension Cost
|
$
|
0.7
|
|
|
$
|
0.3
|
|
|
$
|
1.9
|
|
|
$
|
0.4
|
|
|
|
$
|
0.8
|
|
As
of September 30, 2008, no contributions have been made and we do not expect to
make any additional contributions to these plans during 2008. However, we may
make contributions during 2009.
Other
Postretirement Employee Benefits – Components of Net Periodic Benefit
Cost
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Three
Months Ended
September
30,
|
|
Nine
Months
Ended
September
30,
|
|
Four
Months
Ended
September
30,
|
|
|
Five
Months
Ended
May
31,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Service
Cost
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
|
$
|
0.2
|
|
Interest
Cost
|
|
1.2
|
|
|
|
1.1
|
|
|
|
3.4
|
|
|
|
1.5
|
|
|
|
|
1.9
|
|
Expected
Return on Assets
|
|
(1.8
|
)
|
|
|
(1.6
|
)
|
|
|
(5.0
|
)
|
|
|
(2.1
|
)
|
|
|
|
(2.7
|
)
|
Amortization
of Prior Service Credit
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(0.7
|
)
|
Amortization
of Net Loss
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
(0.4
|
)
|
|
|
-
|
|
|
|
|
2.0
|
|
Net
Periodic Pension Cost
|
$
|
(0.6
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(0.5
|
)
|
|
|
$
|
0.7
|
|
In
the nine months ended September 30, 2008, we contributed $1.5 million and NGPL
contributed $7.2 million for a total of $8.7 million of plan contributions. We
sold 80% of NGPL on February 15, 2008, and retain a 20% interest in NGPL (see
Note 11). We do not expect to make any additional contributions to these plans
during 2008.
Terasen
Inc. – Sold effective May 17, 2007; see Note 12
Terasen
Inc. Retirement Plans – Components of Net Periodic Pension Cost
|
Predecessor
Company
|
|
For
the Period
January
1 – May 17,
2007
|
|
(In
millions)
|
Service
Cost
|
|
$
|
2.7
|
|
|
Interest
Cost
|
|
|
4.4
|
|
|
Expected
Return on Assets
|
|
|
(5.5
|
)
|
|
Other
|
|
|
0.1
|
|
|
Net
Periodic Pension Cost
|
|
$
|
1.7
|
|
|
Other
Postretirement Employee Benefits – Components of Net Periodic Benefit
Cost
|
Predecessor
Company
|
|
For
the Period
January
1 – May 17,
2007
|
|
(In
millions)
|
Service
Cost
|
|
$
|
0.6
|
|
|
Interest
Cost
|
|
|
1.4
|
|
|
Net
Periodic Postretirement Benefit Cost
|
|
$
|
2.0
|
|
|
Kinder
Morgan Energy Partners
Due
to its acquisition of Trans Mountain, Kinder Morgan Energy Partners is a sponsor
of pension plans for eligible Trans Mountain employees. The plans include
registered defined benefit pension plans, supplemental unfunded arrangements
that provide pension benefits in excess of Canadian statutory limits, and
defined contributory plans. Kinder Morgan Energy Partners also provides
postretirement benefits other than pensions for retired employees. The combined
net periodic benefit costs for these Trans Mountain pension and postretirement
benefit plans for the first nine months of 2008 was approximately $2.3 million.
The combined net periodic benefit costs for these Trans Mountain pension and
postretirement benefit plans for the five months ended May 31, 2007 and the four
months ended September 30, 2007 were approximately $1.8 million and $1.4
million, respectively.
As
of September 30, 2008, Kinder Morgan Energy Partners estimates that its overall
net 2008 periodic pension and postretirement benefit costs for these plans will
be approximately $3.1 million, recognized ratably over the year, although this
estimate could change if there is a significant event, such as a plan amendment
or a plan curtailment, which would require a remeasurement of liabilities.
Kinder Morgan Energy Partners expects to contribute approximately $2.6 million
to these benefit plans in 2008.
In
connection with Kinder Morgan Energy Partners’ acquisition of SFPP, L.P.
(referred to in this report as SFPP) and Kinder Morgan Bulk Terminals, Inc. in
1998, Kinder Morgan Energy Partners acquired certain liabilities for pension and
postretirement benefits. Kinder Morgan Energy Partners provides medical and life
insurance benefits to current employees, their covered dependents and
beneficiaries of SFPP and Kinder Morgan Bulk Terminals. Kinder Morgan Energy
Partners also provides the same benefits to former salaried employees of SFPP.
Additionally, Kinder Morgan Energy Partners will continue to fund these costs
for those employees currently in the plan during their retirement years. SFPP’s
postretirement benefit plan is frozen, and no additional participants may join
the plan.
The
noncontributory defined benefit pension plan covering the former employees of
Kinder Morgan Bulk Terminals is the Knight Inc. Retirement Plan. The benefits
under this plan are based primarily upon years of service and final average
pensionable earnings; however, benefit accruals were frozen as of December 31,
1998.
As
of September 30, 2008, Kinder Morgan Energy Partners estimates no overall net
periodic postretirement benefit cost for the SFPP postretirement benefit plan
for the year 2008; however, this estimate could change if a future significant
event would require a remeasurement of liabilities. Net periodic benefit costs
for the SFPP postretirement benefit plan was a credit of approximately $0.1
million in the five month period ended May 31, 2007, recognized ratably over the
period, and $0.1 million for the four months ended September 30, 2007. The
credits resulted in increases to income, largely due to amortization of an
actuarial gain and a negative prior service cost. In addition, Kinder Morgan
Energy Partners expects to contribute approximately $0.4 million to this
postretirement benefit plan in 2008.
The
following updates the disclosure in Note 16 to the
Consolidated Financial Statements included in our 2007 Form 10-K with respect to
developments that occurred during the nine months ended September 30,
2008.
FERC
Order No. 2004/690/717
Since
November 2003, the FERC issued Orders No. 2004, 2004-A, 2004-B, 2004-C, and
2004-D, adopting new Standards of Conduct as applied to natural gas pipelines.
The primary change from existing regulation was to make such standards
applicable to an interstate natural gas pipeline’s interaction with many more
affiliates (referred to as “energy affiliates”). The Standards of Conduct
require, among other things, separate staffing of interstate pipelines and their
energy affiliates (but support functions and senior management at the central
corporate level may be shared) and strict limitations on communications from an
interstate pipeline to an energy affiliate.
However,
on November 17, 2006, the United States Court of Appeals for the District of
Columbia Circuit, in Docket No. 04-1183, vacated FERC Orders 2004, 2004-A,
2004-B, 2004-C, and 2004-D as applied to natural gas pipelines, and remanded
these same orders back to the FERC.
On
January 9, 2007, the FERC issued an Interim Rule, effective January 9, 2007, in
response to the court’s action. In the Interim Rule, the FERC readopted the
Standards of Conduct, but revised or clarified with respect to issues that had
been appealed to the court. Specifically, the following changes were
made:
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·
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the
Standards of Conduct apply only to the relationship between interstate
natural gas transmission pipelines and their marketing affiliates, not
their energy affiliates;
|
|
·
|
all
risk management personnel can be
shared;
|
|
·
|
the
requirement to post discretionary tariff actions was eliminated (but
interstate natural gas pipelines must still maintain a log of
discretionary tariff waivers);
|
|
·
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lawyers
providing legal advice may be shared employees;
and
|
|
·
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new
interstate natural gas transmission pipelines are not subject to the
Standards of Conduct until they commence
service.
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The
FERC clarified that all exemptions and waivers issued under Order No. 2004
remain in effect. On January 18, 2007, the FERC issued a notice of proposed
rulemaking (“NOPR”) seeking comments regarding whether or not the Interim Rule
should be made permanent for natural gas transmission providers (“January 18
NOPR”). On March 21, 2007, the FERC issued an Order on Clarification and
Rehearing of the Interim Rule that granted clarification that the Standards of
Conduct only apply to natural gas transmission providers that are affiliated
with a marketing or brokering entity that conducts transportation transactions
on such natural gas transmission provider’s pipeline.
On
March 21, 2008, as part of an effort to undertake a broader review of the
existing Standards of Conduct, the FERC issued a new notice of proposed
rulemaking revamping the Standards of Conduct in order to make compliance and
enforcement easier, rather than issuing a Final Rule on the January 18 NOPR. The
intention of this action is to return to the core principles of the original
Standards of Conduct, which established a functional separation between
transmission and merchant personnel for natural gas and electric transmission
providers. The new NOPR is made up of three rules: (i) independent functioning
of transmission function employees from marketing function employees, (ii) the
no-conduit rule prohibiting the passing and receipt of non-public transmission
information and (iii) the transparency rule to detect undue discrimination. On
October 16, 2008, the FERC issued a Final Rule in Order 717 revising the FERC
Standards of Conduct for natural gas and electric transmission providers by
eliminating Order No. 2004’s concept of Energy Affiliates and corporate
separation in favor of an employee functional approach as used in Order No. 497.
A transmission provider is prohibited from disclosing to a marketing function
employee non-public information about the transmission system or a transmission
customer. The final rule also retains the long-standing no-conduit rule, which
prohibits a transmission function provider from disclosing non-public
information to marketing function employees by using a third party conduit.
Additionally, the final rule requires that a transmission provider provide
annual training on the Standards of Conduct to all transmission function
employees, marketing
function
employees, officers, directors, supervisory employees, and any other employees
likely to become privy to transmission function information. This rule will
become effective on November 26, 2008.
Notice
of Inquiry – Financial Reporting
On
February 15, 2007, the FERC issued a notice of inquiry seeking comment on the
need for changes or revisions to the FERC’s reporting requirements contained in
the financial forms for gas and oil pipelines and electric utilities. Initial
comments were filed by numerous parties on March 27, 2007, and reply comments
were filed on April 27, 2007.
On
September 20, 2007, the FERC issued for public comment in Docket No. RM07-9 a
proposed rule that would revise its financial forms to require that additional
information be reported by natural gas companies. The proposed rule would
require, among other things, that natural gas companies (i) submit additional
revenue information, including revenue from shipper-supplied gas, (ii) identify
the costs associated with affiliate transactions, and (iii) provide additional
information on incremental facilities and on discounted and negotiated rates.
The FERC proposed an effective date of January 1, 2008, which means that forms
reflecting the new requirements for 2008 would be filed in early 2009. Comments
on the proposed rule were filed by numerous parties on November 13,
2007.
On
March 21, 2008, the FERC issued a Final Rule regarding changes to the Form 2,
2-A and 3Q. The revisions were designed to enhance the forms’ usefulness by
updating them to reflect current market and cost information relevant to
interstate pipelines and their customers. The rule is effective January 1, 2008
with the filing of the revised Form 3-Q beginning with the first quarter of
2009. The revised Form 2 and 2-A for calendar year 2008 material would be filed
by April 30, 2009. On June 20, 2008, the FERC issued an Order Granting in Part
and Denying in Part Rehearing and Granting Request for Clarification. No
substantive changes were made to the March 21, 2008 Final Rule.
Notice
of Inquiry – Fuel Retention Practices
On
September 20, 2007, the FERC issued a Notice of Inquiry seeking comment on
whether it should change its current policy and prescribe a uniform method for
all interstate gas pipelines to use in recovering fuel gas and gas lost and
unaccounted for. The Notice of Inquiry included numerous questions regarding
fuel recovery issues and the effects of fixed fuel percentages as compared with
tracking provisions. Comments on the Notice of Inquiry were filed by numerous
parties on November 30, 2007.
Notice
of Proposed Rulemaking – Promotion of a More Efficient Capacity Release
Market-Order 712
On
November 15, 2007, the FERC issued a notice of proposed rulemaking in Docket No.
RM 08-1-000 regarding proposed modifications to its Part 284 regulations
concerning the release of firm capacity by shippers on interstate natural gas
pipelines. The FERC proposes to remove, on a permanent basis, the rate ceiling
on capacity release transactions of one year or less. Additionally, the FERC
proposes to exempt capacity releases made as part of an asset management
arrangement from the prohibition on tying and from the bidding requirements of
section 284.8. Initial comments were filed by numerous parties on January 25,
2008. On June 19, 2008, the FERC issued a final rule in Order 712 regarding
changes to the capacity release program. The FERC permitted market based pricing
for short-term capacity releases of a year or less. Long-term capacity releases
and a pipeline’s sale of its own capacity remains subject to a price cap. The
ruling would facilitate asset management arrangements by relaxing the FERC’s
prohibitions on tying and on its bidding requirements for certain capacity
releases. The FERC further clarified that its prohibition on tying does not
apply to conditions associated with gas inventory held in storage for releases
for firm storage capacity. Finally, the FERC waived the prohibition on tying and
bidding requirements for capacity releases made as part of state-approved retail
open access programs. The final rule became effective on July 30,
2008.
Notice
of Proposed Rulemaking – Natural Gas Price Transparency
On
April 19, 2007, the FERC issued a notice of proposed rulemaking in Docket Nos.
RM07-10-000 and AD06-11-000 regarding price transparency provisions of Section
23 of the Natural Gas Act and the Energy Policy Act. In the notice, the FERC
proposed to revise its regulations to (i) require that intrastate pipelines post
daily the capacities of, and volumes flowing through, their major receipt and
delivery points and mainline segments in order to make available the information
to track daily flows of natural gas throughout the United States; and (ii)
require that buyers and sellers of more than a de minimis volume of natural gas
report annual numbers and volumes of relevant transactions to the FERC in order
to make possible an estimate of the size of the physical U.S. natural gas
market, assess the importance of the use of index pricing in that market, and
determine the size of the fixed-price trading market that produces the
information. The FERC believes these revisions to its regulations will
facilitate price transparency in markets for the sale or transportation of
physical natural gas in interstate commerce. Initial comments were filed on July
11, 2007 and reply comments were filed on August 23, 2007. In
addition,
the FERC conducted an informal workshop in this proceeding on July 24, 2007, to
discuss implementation and other technical issues associated with the proposals
set forth in the notice of proposed rulemaking.
In
addition, on December 21, 2007, the FERC issued a new notice of proposed
rulemaking in Docket No. RM08-2-000 regarding the daily posting provisions that
were contained in Docket Nos. RM07-10-000 and AD06-11-000. The new notice of
proposed rulemaking proposes to exempt from the daily posting requirements those
non-interstate pipelines that (i) flow less than ten million MMBtus of natural
gas per year, (ii) fall entirely upstream of a processing plant, and (iii)
deliver more than ninety-five percent (95%) of the natural gas volumes they flow
directly to end-users. However, the new notice of proposed rulemaking expands
the proposal to require that both interstate and non-exempt non-interstate
pipelines post daily the capacities of, volumes scheduled at, and actual volumes
flowing through, their major receipt and delivery points and mainline segments.
Initial comments were filed by numerous parties on March 13, 2008. A Technical
Conference was held on April 3, 2008. Numerous reply comments were received on
April 14, 2008.
On
December 26, 2007, the FERC issued Order No. 704 in this docket implementing
only the annual reporting provisions of the notice of proposed rulemaking with
minimal changes to the original proposal. The order became effective February 4,
2008. The initial report is due May 1, 2009 for calendar year 2008. Subsequent
reports are due by May 1 of each year for the previous calendar year. Order 704
will require most, if not all Kinder Morgan natural gas pipelines to report
annual volumes of relevant transactions to the FERC. Technical workshops were
held on April 22, 2008 and May 19, 2008. The FERC issued Order 704-A on
September 18, 2008. This order generally affirmed the rule, while clarifying
what information certain natural gas market participants must report in Form
552. The revisions pertain to the reporting of transactions occurring in
calendar year 2008. The first report is due May 1, 2009 and each May 1st
thereafter for subsequent calendar years. Order 704-A became effective October
27, 2008.
FERC
Equity Return Allowance
On
April 17, 2008, the FERC adopted a new policy under Docket No. PL07-2-000 that
allows master limited partnerships to be included in proxy groups for the
purpose of determining rates of return for both interstate natural gas and oil
pipelines. Additionally, the policy statement concluded that (i) there should be
no cap on the level of distributions included in the FERC’s current discounted
cash flow methodology, (ii) the Institutional Brokers Estimated System forecasts
should remain the basis for the short-term growth forecast used in the
discounted cash flow calculation, (iii) there should be an adjustment to the
long-term growth rate used to calculate the equity cost of capital for a master
limited partnership, specifically the long-term growth rate would be set at 50%
of the gross domestic product, and (iv) there should be no modification to the
current respective two-thirds and one-third weightings of the short-term and
long-term growth factors. Additionally, the FERC decided not to explore other
methods for determining a pipeline’s equity cost of capital at this time. The
policy statement governs all future gas and oil rate proceedings involving the
establishment of a return on equity, as well as those cases that are currently
pending before either the FERC or an administrative law judge. On May 19, 2008,
an application for rehearing was filed by The American Public Gas Association.
On June 13, 2008, the FERC dismissed the request for rehearing.
Notice
of Proposed Rulemaking - Rural Onshore Low Stress Hazardous Liquids
Pipelines
On
September 6, 2006, the U.S. Department of Transportation Pipeline and Hazardous
Materials Safety Administration, referred to in this report as the PHMSA,
published a notice of proposed rulemaking (PHMSA 71 FR 52504) that proposed to
extend certain threat-focused pipeline safety regulations to rural onshore
low-stress hazardous liquid pipelines within a prescribed buffer of previously
defined U.S. states. Low-stress hazardous liquid pipelines, except those in
populated areas or that cross commercially navigable waterways, have not been
subject to the safety regulations in PHMSA 49 C.F.R. Part 195.1. According to
the PHMSA, unusually sensitive areas are areas requiring extra protection
because of the presence of sole-source drinking water resources, endangered
species, or other ecological resources that could be adversely affected by
accidents or leaks occurring on hazardous liquid pipelines.
The
notice proposed to define a category of “regulated rural onshore low-stress
lines” (rural lines operating at or below 20% of specified minimum yield
strength, with a diameter of eight and five-eighths inches or greater, located
in or within a quarter-mile of a U.S. state) and to require operators of these
lines to comply with a threat-focused set of requirements in Part 195 that
already apply to other hazardous liquid pipelines. The proposed safety
requirements addressed the most common threats—corrosion and third party
damage—to the integrity of these rural lines. The proposal is intended to
provide additional integrity protection, to avoid significant adverse
environmental consequences, and to improve public confidence in the safety of
unregulated low-stress lines.
Since
the new notice is a proposed rulemaking in which the PHMSA will consider initial
and reply comments from industry participants, it is not clear what impact the
final rule will have on the business of our intrastate and interstate liquids
pipeline companies.
Natural
Gas Pipeline Expansion Filings
Rockies
Express Pipeline-Currently Certificated Facilities
Kinder
Morgan Energy Partners operates and owns a 51% ownership interest in West2East
Pipeline LLC, a limited liability company that is the sole owner of Rockies
Express Pipeline LLC, and operates Rockies Express Pipeline. ConocoPhillips owns
a 24% ownership interest in West2East Pipeline LLC and Sempra Energy holds the
remaining 25% interest. When construction of the entire Rockies Express Pipeline
project is completed, Kinder Morgan Energy Partners’ ownership interest will be
reduced to 50% at which time the capital accounts of West2East Pipeline LLC will
be trued up to reflect Kinder Morgan Energy Partners’ 50% economics in the
project. According to the provisions of current accounting standards, because
Kinder Morgan Energy Partners will receive 50% of the economic benefits from the
Rockies Express project on an ongoing basis, Kinder Morgan Energy Partners is
not considered the primary beneficiary of West2East Pipeline LLC and thus,
accounts for its investment under the equity method of accounting.
On
August 9, 2005, the FERC approved the application of Rockies Express Pipeline
LLC, formerly known as Entrega Gas Pipeline LLC, to construct 327 miles of
pipeline facilities in two phases. For phase I (consisting of two pipeline
segments), Rockies Express was granted authorization to construct and operate
approximately 136 miles of pipeline extending northward from the Meeker Hub,
located at the northern end of Kinder Morgan Energy Partners’ TransColorado
pipeline system in Rio Blanco County, Colorado, to the Wamsutter Hub in
Sweetwater County, Wyoming (segment 1), and then construct approximately 191
miles of pipeline eastward to the Cheyenne Hub in Weld County, Colorado (segment
2). Construction of segments 1 and 2 has been completed, with interim service
commencing on segment 1 on February 24, 2006, and full in-service of both
segments on February 14, 2007. For phase II, Rockies Express was authorized to
construct three compressor stations, referred to as the Meeker, Big Hole and
Wamsutter compressor stations. The Meeker and Wamsutter stations went into
service in January 2008. Construction of the Big Hole compressor station
commenced in the second quarter of 2008, and the expected in service date for
the compressor station is in the second quarter of 2009.
Rockies
Express Pipeline-West Project
On
April 19, 2007, the FERC issued a final order approving the Rockies Express
application for authorization to construct and operate certain facilities
comprising its proposed “Rockies Express-West Project.” This project is the
first planned segment extension of the Rockies Express’ facilities described
above, and it is comprised of approximately 713 miles of 42-inch diameter
pipeline extending from the Cheyenne Hub to an interconnection with Panhandle
Eastern Pipe Line located in Audrain County, Missouri. The project also includes
certain improvements to existing Rockies Express facilities located to the west
of the Cheyenne Hub. Construction on Rockies Express-West commenced on May 21,
2007. Rockies Express-West began interim service for up to 1.4 billion cubic
feet per day of natural gas on the West segment’s first 503 miles of pipe on
January 12, 2008. The project commenced deliveries to Panhandle Eastern Pipe
Line, at Audrain County, Missouri, on the remaining 210 miles of pipe on May 20,
2008. The Rockies Express-West pipeline segment transports approximately 1.5
million cubic feet per day of natural gas across five states: Wyoming, Colorado,
Nebraska, Kansas and Missouri.
Rockies
Express replaced certain pipe to reflect a higher class location and conducted
further hydrostatic testing of portions of its system during September 2008 to
satisfy DOT testing requirements to operate at its targeted higher operating
pressure. This pipe replacement and hydrostatic testing, conducted from
September 3, 2008 through September 26, 2008, resulted in the temporary outage
of pipeline delivery points and an overall reduction of firm capacity available
to firm shippers. By the terms of the Rockies Express FERC Gas Tariff, firm
shippers are entitled to daily reservation revenue credits for non-force majeure
and planned maintenance outages. The estimated impact of these revenue credits
is included in results of operations for the three and nine months ended
September 30, 2008.
Rockies
Express Pipeline-East Project
On
April 30, 2007, Rockies Express filed an application with the FERC requesting a
certificate of public convenience and necessity that would authorize
construction and operation of the Rockies Express-East Project. The Rockies
Express-East Project will be comprised of approximately 639 miles of 42-inch
diameter pipeline commencing from the terminus of the Rockies Express-West
pipeline to a terminus near the town of Clarington in Monroe County, Ohio and
will be capable of transporting approximately 1.8 billion cubic feet per day of
natural gas.
By
order issued May 30, 2008, the FERC authorized the certificate to construct the
Rockies Express Pipeline-East Project. Construction commenced on the Rockies
Express-East pipeline segment on June 26, 2008. Delays in securing permits and
regulatory approvals, as well as weather-related delays, have caused Rockies
Express to set revised project completion dates. Rockies Express-East is
currently projected to commence service on April 1, 2009 to interconnects
upstream of Lebanon, followed by service to the Lebanon Hub in Warren County,
Ohio beginning June 15, 2009, with final completion and
deliveries
to Clarington, Ohio commencing by November 1, 2009.
Current
market conditions for consumables, labor and construction equipment along with
certain provisions in the final regulatory orders have resulted in increased
costs for the project and have impacted certain projected completion dates. For
example, our current estimate of total completed costs on the Rockies Express
Pipeline is approximately $6.0 billion (consistent with Kinder Morgan Energy
Partners’ October 15, 2008 third quarter earnings press release).
Kinder
Morgan Interstate Gas Transmission Pipeline
On
August 6, 2007, Kinder Morgan Interstate Gas Transmission Pipeline LLC (referred
to in this report as KMIGT) filed in FERC Docket CP07-430, for regulatory
approval to construct and operate a 41-mile, $30 million natural gas pipeline
from the Cheyenne Hub to markets in and around Greeley, Colorado, referred to in
this report as the Colorado Lateral. When completed, the Colorado Lateral will
provide firm transportation of up to 55 million cubic feet per day to a local
utility under long-term contract. The FERC issued a draft environmental
assessment on the project on January 11, 2008, and comments on the project were
received February 11, 2008. On February 21, 2008, the FERC granted the
certificate application. On July 8, 2008, in response to a rehearing request by
Public Service Company of Colorado (referred to in this report as PSCo) the FERC
granted rehearing and denied KMIGT recovery in initial transportation rates $6.2
million in costs associated with non-jurisdictional laterals constructed by
KMIGT to serve Atmos. The recourse rate adjustment does not have any material
effect on the negotiated rate paid by Atmos to KMIGT or the economics of the
project. On July 25, 2008, KMIGT filed an amendment to its certification
application seeking authorization to revise its initial rates for transportation
service on the Colorado Lateral to reflect updated construction costs for
jurisdictional mainline facilities. The FERC approved the revised initial
recourse rates on August 22, 2008.
PSCo,
a competitor serving markets off the Colorado Lateral, also filed a complaint
before the State of Colorado Public Utilities Commission (“CoPUC”) against
Atmos, the anchor shipper on the project. The CoPUC conducted a hearing on April
14, 2008 on the complaint. On June 9, 2008, PSCo also filed before the CoPUC
seeking a temporary cease and desist order to halt construction of the lateral
facilities being constructed by KMIGT to serve Atmos. Atmos filed a response to
that motion on June 24, 2008. By order dated June 27, 2008 an administrative law
judge for the CoPUC denied PSCo’s request for a cease and desist order. On
September 4, 2008, an administrative law judge for the CoPUC issued an order
wherein it denied PSCo’s claim to exclusivity to serve Atmos and the Greeley
market area but affirmed PSCo’s claim that Atmos’ acquisition of the delivery
laterals is not in the ordinary course of business and requires separate
approvals. Accordingly, Atmos may require a certificate of public convenience
and necessity (“CPCN”) related to the delivery lateral facilities from KMIGT.
Atmos’ application and approval for a CPCN is not expected to delay the November
2008 commencement of service on the facilities.
On
December 21, 2007, KMIGT filed, in Docket CP 08-44, for approval to expand its
system in Nebraska to serve incremental ethanol and industrial load. No protests
to the application were filed and the project was approved by the FERC.
Construction commenced on April 9, 2008. These facilities went into service in
October 2008.
Kinder
Morgan Louisiana Pipeline
On
September 8, 2006, in FERC Docket No. CP06-449-000, Kinder Morgan Louisiana
Pipeline LLC filed an application with the FERC requesting approval to construct
and operate the Kinder Morgan Louisiana Pipeline. The natural gas pipeline will
extend approximately 135 miles from Cheniere’s Sabine Pass liquefied natural gas
terminal in Cameron Parish, Louisiana, to various delivery points in Louisiana
and will provide interconnects with many other natural gas pipelines, including
NGPL. The project is supported by fully subscribed capacity and long-term customer
commitments with Chevron and Total. The entire estimated project cost is now
expected to be approximately $1.0 billion (consistent with our October 15, 2008
third quarter earnings press release), and it is expected to be fully
operational during the second quarter of 2009.
On
March 15, 2007, the FERC issued a preliminary determination that the
authorizations requested, subject to some minor modifications, will be in the
public interest. This order does not consider or evaluate any of the
environmental issues in this proceeding. On April 19, 2007, the FERC issued the
final environmental impact statement, or (“EIS”), which addressed the potential
environmental effects of the construction and operation of the Kinder Morgan
Louisiana Pipeline. The final EIS was prepared to satisfy the requirements of
the National Environmental Policy Act. It concluded that approval of the Kinder
Morgan Louisiana Pipeline project would have limited adverse environmental
impacts. On June 22, 2007, the FERC issued an order granting construction and
operation of the project. Kinder Morgan Louisiana Pipeline officially accepted
the order on July 10, 2007.
On
July 11, 2008, Kinder Morgan Louisiana Pipeline filed an amendment to its
certificate application, seeking authorization to revise its initial rates for
transportation service on the Kinder Morgan Louisiana Pipeline system to reflect
updated construction costs for the project. The amendment was accepted by the
FERC on August 14, 2008.
Midcontinent
Express Pipeline
On
October 9, 2007, in Docket No. CP08-6-000, Midcontinent Express Pipeline LLC
filed an application with the FERC requesting a certificate of public
convenience and necessity that would authorize construction and operation of the
approximately 500-mile Midcontinent Express Pipeline natural gas transmission
system.
The
Midcontinent Express Pipeline will create long-haul, firm transportation
takeaway capacity either directly or indirectly connected to natural gas
producing regions located in Texas, Oklahoma and Arkansas. The pipeline will
originate in southeastern Oklahoma and traverse east through Texas, Louisiana,
Mississippi, and terminate at an interconnection with the Transco Pipeline near
Butler, Alabama. The Midcontinent Express Pipeline is a 50/50 joint venture
between Kinder Morgan Energy Partners and Energy Transfer Partners, L.P., and it
has a total capital cost of approximately $1.9 billion including the expansion
capacity (consistent with Kinder Morgan Energy Partners’ October 15, 2008 third
quarter earnings press release). Initial design capacity for the pipeline was
1.5 billion cubic feet of natural gas per day, which was fully subscribed with
long-term binding commitments from creditworthy shippers. A successful binding
open season was recently completed which will increase the main segment of the
pipeline’s capacity to 1.8 billion cubic feet per day subject to regulatory
approval.
On
July 25, 2008, the FERC approved the application made by Midcontinent Express
Pipeline to construct and operate the 500-mile Midcontinent Express Pipeline
natural gas transmission system along with the lease of 272 million cubic feet
of capacity on the Oklahoma intrastate system of Enogex Inc. Midcontinent
Express Pipeline accepted the FERC Certificate on July 30, 2008. Mobilization
for construction of the pipeline began in the third quarter of 2008, and subject
to the receipt of regulatory approvals, interim service on the first portion of
the pipeline is expected to be available by the second quarter of 2009 with full
in service in the third quarter of 2009.
Kinder
Morgan Liquid Terminals
With
regard to several of Kinder Morgan Energy Partners’ liquids terminals, it is
working with the U.S. Department of Transportation to supplement its compliance
program for certain of its tanks and internal piping. Kinder Morgan Energy
Partners anticipates the program will call for incremental capital spending over
the next several years to improve and/or add to its facilities. These
improvements will enhance the tanks and piping previously considered outside the
jurisdiction of DOT to conduct DOT jurisdictional transfers of products. Kinder
Morgan Energy Partners’ original estimate called for an incremental $3 million
to $5 million of annual capital spending over the next six to ten years for this
work; however, it continues to assess the amount of capital that will be
required and the amount may exceed the original estimate.
Kinder
Morgan Texas Pipeline LLC
On
May 30, 2008, Kinder Morgan Texas Pipeline LLC filed in Docket No. PR08-25-000 a
petition seeking market-based rate authority for firm and interruptible storage
services performed under section 311 of the Natural Gas Policy Act of 1978
(NGPA) at the North Dayton Gas Storage Facility in Liberty County, Texas, and at
the Markham Gas Storage Facility in Matagorda County, Texas. On October 3, 2008,
the FERC approved this petition that became effective May 30, 2008.
Herscher
Galesville Storage Field
On
December 7, 2007, NGPL filed an application with the FERC seeking approval to
expand its Herscher Galesville storage field in Kankakee County, Illinois to add
10 Bcf of incremental firm storage service for five expansion shippers. The FERC
issued its Certificate Order approving the expansion on August 11, 2008 and on
August 15, 2008, it was accepted. The project is fully supported by contracts
ranging from 5 to 10 years. We own 20% of NGPL through our equity investment in
PipeCo LLC.
Other
Current
market conditions for, among other things, consumables, labor and construction
equipment, and permitting conditions, have adversely affected and will likely
continue to adversely affect, final costs and completion dates for our natural
gas construction projects.
18.
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Litigation,
Environmental and Other
Contingencies
|
Below
is a brief description of our ongoing material legal proceedings including any
material developments that occurred in such proceedings during the nine months
ended September 30, 2008. Additional information with respect to these
proceedings can be found in Note 17 to the Consolidated Financial Statements
included in our 2007 Form 10-K. The note also contains a description of any
material legal proceedings that were initiated against us during the three
months ended September 30, 2008.
Federal
Energy Regulatory Commission Proceedings
Kinder
Morgan Energy Partners’ SFPP, L.P. and Calnev Pipe Line LLC subsidiaries are
involved in various proceedings before the FERC. The tariffs and rates charged
by SFPP and Calnev are subject to numerous ongoing proceedings at the FERC,
including shippers’ complaints and protests regarding interstate rates on these
pipeline systems. In general, these complaints allege the rates and tariffs
charged by SFPP and Calnev are not just and reasonable.
As
to SFPP, the issues involved in these proceedings include, among others (i)
whether certain of Kinder Morgan Energy Partners’ Pacific operations’ rates are
“grandfathered” under the Energy Policy Act of 1992, referred to in this note as
EPAct 1992, and therefore deemed to be just and reasonable, (ii) whether
“substantially changed circumstances” have occurred with respect to any
grandfathered rates such that those rates could be challenged, (iii) whether
indexed rate increases may become effective without investigation, (iv) the
capital structure to be used in computing the “starting rate base” of Kinder
Morgan Energy Partners’ Pacific operations, (v) the level of income tax
allowance SFPP may include in its rates, and (vi) the recovery of civil and
regulatory litigation expenses and certain pipeline reconditioning and
environmental costs incurred by Kinder Morgan Energy Partners’ Pacific
operations.
In
May 2005, the FERC issued a statement of general policy stating it will permit
pipelines to include in cost of service a tax allowance to reflect actual or
potential tax liability on their public utility income attributable to all
partnership or limited liability company interests, if the ultimate owner of the
interest has an actual or potential income tax liability on such income. Whether
a pipeline’s owners have such actual or potential income tax liability will be
reviewed by the FERC on a case-by-case basis. Although the revised policy is
generally favorable for pipelines that are organized as tax pass-through
entities, it still entails rate risk due to the case-by-case review
requirement.
In
this note, we refer to SFPP, L.P. as SFPP; Calnev Pipe Line LLC as Calnev;
Chevron Products Company as Chevron; Navajo Refining Company, L.P. as Navajo;
ARCO Products Company as ARCO; BP West Coast Products, LLC as BP WCP; Texaco
Refining and Marketing Inc. as Texaco; Western Refining Company, L.P. as Western
Refining; Mobil Oil Corporation as Mobil; ExxonMobil Oil Corporation as
ExxonMobil ; Tosco Corporation as Tosco; ConocoPhillips Company as
ConocoPhillips; Ultramar Diamond Shamrock Corporation/Ultramar Inc. as Ultramar;
Valero Energy Corporation as Valero; Valero Marketing and Supply Company as
Valero Marketing; and America West Airlines, Inc., Continental Airlines, Inc.,
Northwest Airlines, Inc., Southwest Airlines Co. and US Airways, Inc.,
collectively, as the Airline Complainants.
Following
are a summary of developments during the nine months of 2008 and a listing of
certain active FERC proceedings pertaining to Kinder Morgan Energy Partners’
Pacific operations:
|
·
|
FERC
Docket No. OR92-8, et
al.—Complainants/Protestants: Chevron; Navajo; ARCO; BP WCP;
Western Refining; ExxonMobil ; Tosco; and Texaco (Ultramar is an
intervenor)—Defendant: SFPP
|
Consolidated
proceeding involving shipper complaints against certain East Line and West Line
rates. All six issues (and others) described above are involved in these
proceedings. Portions of this proceeding were appealed (and re-appealed) to the
United States Court of Appeals for the District of Columbia Circuit, referred to
in this note as the D.C. Court, and remanded to the FERC. Portions of this
proceeding are currently being held in abeyance by the D.C. Court pending
completion of agency proceedings. BP WCP, Chevron, and ExxonMobil requested a
hearing before the FERC on remanded grandfathering and income tax allowance
issues. The FERC issued an Order on Rehearing, Remand, Compliance, and Tariff
Filings on December 26, 2007, which denied the requests for a hearing, and ruled
on SFPP’s March 7, 2006 compliance filing and remand issues. The FERC,
inter alia, affirmed
its income tax allowance policy, further clarified the implementation of that
policy with respect to SFPP, and required SFPP to file a compliance filing. On
February 15, 2008, the FERC issued an order granting and denying rehearing
regarding certain findings in the December 2007 order;
|
·
|
FERC
Docket No. OR92-8-025—Complainants/Protestants: BP WCP; ExxonMobil ;
Chevron; ConocoPhillips; and Ultramar—Defendant:
SFPP
|
Proceeding
involving shipper complaints against rates charged prior to April 1, 1999
at SFPP’s Watson Station drain-dry facilities. A settlement reserved
the issue of whether reparations were owed for the period prior to April
1,
1999.
On February 12, 2008, the FERC ruled that SFPP owed reparations for shipments
prior to April 1, 1999, and in March 2008, SFPP made the required reparation
payments of $23.3 million. SFPP filed a petition for review of the February 12,
2008 order at the D.C. Court, and the case is now being briefed;
|
·
|
FERC
Docket No. OR96-2, et
al.—Complainants/Protestants: All Shippers except Chevron (which is
an intervenor)—Defendant: SFPP
|
Consolidated
proceeding involving shipper complaints against all SFPP rates. All six issues
(and others) described above are involved in these proceedings. Portions of this
proceeding were appealed (and re-appealed) to the D.C. Court and remanded to the
FERC. Portions of this proceeding are currently being held in abeyance by the
D.C. Court pending completion of agency proceedings. The FERC issued an Order on
Rehearing, Remand, Compliance, and Tariff Filings on December 26, 2007, which
denied the requests for a hearing and ruled on SFPP’s March 7, 2006 compliance
filing and remand issues. The FERC, inter alia, affirmed its
income tax allowance policy and further clarified the implementation of that
policy with respect to SFPP, and required SFPP to file a compliance filing. On
February 15, 2008, the FERC issued an order granting and denying rehearing
regarding certain findings in the December 2007 order. On May 2, 2008, the FERC
issued an order reopening the record for a paper hearing on issues related to
rate of return on equity applicable to the Sepulveda Line service in light of
the FERC’s policy statement issued in April 2008 regarding the methodology for
determining returns on equity. The parties have filed a settlement regarding the
sole issue of the numeric value of the rate of return on equity to be applied in
this proceeding with respect to the Sepulveda Line service that, upon approval
by the FERC, would obviate the need for the paper hearing;
|
·
|
FERC
Docket Nos. OR02-4 and OR03-5—Complainant/Protestant: Chevron—Defendant:
SFPP
|
Chevron
initiated proceeding to permit Chevron to become complainant in OR96-2. Appealed
to the D.C. Court and held in abeyance pending final disposition of the OR96-2
proceedings;
|
·
|
FERC
Docket No. OR04-3—Complainants/Protestants: America West Airlines;
Southwest Airlines; Northwest Airlines; and Continental
Airlines—Defendant: SFPP
|
Complaint
alleges that West Line and Watson Station rates are unjust and unreasonable.
Unsettled Watson Station issues severed and consolidated into a proceeding
focused only on Watson-related issues, which has now been settled (see above
under FERC Docket No. OR92-8-025)The FERC has set the complaints against the
West Line rates for hearing (see below FERC Docket Nos. OR03-5-000, OR05-4, and
OR05-5);
|
·
|
FERC
Docket Nos. OR03-5, OR05-4 and OR05-5—Complainants/Protestants: BP WCP;
ExxonMobil; and ConocoPhillips (other shippers intervened)—Defendant:
SFPP
|
Complaints
allege that SFPP’s interstate rates are not just and reasonable. The portion of
the complaints challenging SFPP’s West Line and East Line rates (OR03-5-000) is
scheduled for hearing in November 2008. A hearing was held in May of 2008
regarding the portion of the complaints challenging SFPP’s North Line and Oregon
Line rates (see below under FERC Docket No. OR03-5-001);
|
·
|
FERC
Docket No. OR03-5-001—Complainants/Protestants: BP WCP; ExxonMobil ; and
ConocoPhillips (other shippers intervened)—Defendant:
SFPP
|
The
FERC severed the portions of the complaints in Docket Nos. OR03-5, OR05-4, and
OR05-5 regarding SFPP’s North and Oregon Line rates into a separate proceeding
in Docket No. OR03-5-001. A hearing was held in May 2008 and an initial decision
is expected in December 2008;
|
·
|
FERC
Docket No. OR07-1—Complainant/Protestant: Tesoro—Defendant:
SFPP
|
Complaint
alleges that SFPP’s North Line rates are not just and reasonable. The FERC is
holding the complaint in abeyance pending resolution at the D.C. Court of, among
other things, income tax allowance and grandfathering issues. The D.C. Court
issued an opinion on these issues on May 29, 2007, upholding the FERC’s income
tax allowance policy;
|
·
|
FERC
Docket No. OR07-2—Complainant/Protestant: Tesoro—Defendant:
SFPP
|
Complaint
alleges that SFPP’s West Line rates are not just and reasonable. The FERC is
holding the complaint in abeyance pending resolution at the D.C. Court of, among
other things, income tax allowance and grandfathering issues. The D.C. Court
issued an opinion on these issues on May 29, 2007, upholding the FERC’s income
tax allowance policy. A request that the FERC set the complaint for hearing –
which SFPP opposed – is pending before the FERC;
|
·
|
FERC
Docket No. OR07-3—Complainants/Protestants: BP WCP; Chevron; ExxonMobil;
Tesoro; and Valero Marketing—Defendant:
SFPP
|
|
Complaint
alleges that SFPP’s North Line indexed rate increase was not just and
reasonable. The FERC dismissed the complaint and denied rehearing.
Petitions for review were filed by BP WCP and ExxonMobil at the D.C.
Court. This proceeding is currently in abeyance pending a decision by the
D.C. Court in the Tesoro review proceeding related to Docket No.
OR07-16;
|
|
·
|
FERC
Docket No. OR07-4—Complainants/Protestants: BP WCP; Chevron; and
ExxonMobil—Defendants: SFPP; Kinder Morgan G.P., Inc.; and Knight
Inc.
|
Complaint
alleges that SFPP’s rates are not just and reasonable. The FERC is holding the
complaint in abeyance pending resolution at the D.C. Court of, among other
things, income tax allowance and grandfathering issues. The D.C. Court issued an
opinion on these issues on May 29, 2007, upholding the FERC’s income tax
allowance policy. Complainants have withdrawn the portions of the complaint
directed to SFPP’s affiliates;
|
·
|
FERC
Docket Nos. OR07-5 and OR07-7 (consolidated)—Complainants/Protestants:
ExxonMobil and Tesoro—Defendants: Calnev; Kinder Morgan G.P., Inc.; and
Knight Inc.
|
Complaints
allege that none of Calnev’s current rates are just or reasonable. On July 19,
2007, the FERC accepted and held in abeyance the portion of the complaints
against the non-grandfathered portion of Calnev’s rates, dismissed with
prejudice the complaints against Calnev’s affiliates, and allowed complainants
to file amended complaints regarding the grandfathered portion of Calnev’s
rates. Pursuant
to a settlement, ExxonMobil filed a notice in April of 2008 withdrawing its
complaint in Docket No. OR07-5 and its motion to intervene in Docket No. OR07-7.
Tesoro’s complaint in Docket No. OR07-7 is still pending before the
FERC;
|
·
|
FERC
Docket No. OR07-6—Complainant/Protestant: ConocoPhillips—Defendant:
SFPP
|
Complaint
alleges that SFPP’s North Line indexed rate increase was not just and
reasonable. The
FERC dismissed the complaints in Docket Nos. OR07-3 and OR07-6 in a single
order, without consolidating the complaints, and denied the request for
rehearing of the dismissal filed in Docket No. OR07-3. Although the FERC
orders in these dockets have been appealed by certain of the complainants in
Docket No. OR07-3, they were not appealed by ConocoPhillips in Docket
No. OR07-6. The FERC’s decision in Docket No. OR07-6 is now
final;
|
·
|
FERC
Docket Nos. OR07-8 and OR07-11 (consolidated)—Complainants/Protestants: BP
WCP and ExxonMobil —Defendant: SFPP
|
Complaints
allege that SFPP’s 2005 indexed rate increase was not just and reasonable.
Although the FERC dismissed challenges to SFPP’s underlying rate, the FERC
declined to dismiss the portion of the OR07-8 Complaint addressing SFPP’s July
1, 2005 index-based rate increases. A settlement has been certified to the FERC,
and FERC action on the settlement is pending;
|
·
|
FERC
Docket No. OR07-9—Complainant/Protestant: BP WCP—Defendant:
SFPP
|
Complaint
alleges that SFPP’s ultra low sulphur diesel (ULSD) recovery fee violates the
filed rate doctrine and that, in any event, the recovery fee is unjust and
unreasonable. Following dismissal of the complaint by FERC, BP WCP filed a
petition for review which the D.C. Court dismissed in March of
2008;
|
·
|
FERC
Docket No. OR07-14—Complainants/Protestants: BP WCP and
Chevron—Defendants: SFPP; Calnev, and several
affiliates
|
Complaint
alleges violations of the Interstate Commerce Act and FERC’s cash management
regulations, seeks review of the FERC Form 6 annual reports of SFPP and Calnev,
and again requests interim refunds and reparations. The FERC dismissed the
complaints, but directed SFPP and Calnev to review their cash management
agreements and records to confirm compliance with FERC requirements and to make
corrections, if necessary. Cash management agreements have been filed in
compliance with the FERC’s directive;
|
·
|
FERC
Docket No. OR07-16—Complainant/Protestant: Tesoro—Defendant:
Calnev
|
Complaint
challenges Calnev’s 2005, 2006, and 2007 indexing adjustments. The FERC
dismissed the complaint. A petition for review was filed at the D.C. Court by
Tesoro, briefing is complete, and oral argument is scheduled for November 18,
2008;
|
·
|
FERC
Docket No. OR07-18—Complainants/Protestants: Airline Complainants;
Chevron; and Valero Marketing—Defendant:
Calnev
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. In December 2007, the FERC
issued an order accepting and holding in abeyance the portion of the complaint
against the non-grandfathered portion of Calnev’s rates. Pursuant to a FERC
order, an amended complaint regarding the grandfathering issue has been filed.
The FERC has not acted on the amended complaint;
|
·
|
FERC
Docket No. OR07-19—Complainant/Protestant: ConocoPhillips—Defendant:
Calnev
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. In December 2007, the FERC
issued an order accepting and holding in abeyance the portion of the complaint
against the non-grandfathered portion of Calnev’s rates. Pursuant to the FERC
order, an amended complaint regarding the grandfathering issue has been filed.
The FERC has not acted on the amended complaint;
|
·
|
FERC
Docket No. OR07-20—Complainant/Protestant: BP WCP—Defendant:
SFPP
|
Complaint
alleges that SFPP’s 2007 indexed rate increase was not just and reasonable. The
FERC dismissed the complaint and complainant filed a request for rehearing.
Prior to a FERC ruling on the request for rehearing, the parties reached a
settlement. In February 2008, FERC accepted a joint offer of settlement that
dismissed, with prejudice, the East Line index rate portion of the complaint in
OR07-20 for the period from June 1, 2006 through and to November 30, 2007.
Petition for review was filed by BP WCP at the D.C. Court. This proceeding is
currently in abeyance pending a decision by the D.C. Court in the Tesoro review
proceeding related to Docket No. OR07-16;
|
·
|
FERC
Docket No. OR07-22—Complainant/Protestant: BP WCP—Defendant:
Calnev
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. Pursuant to a FERC order, and
amended complaint regarding the grandfathering issue has been filed, but the
FERC has not acted on the amended complaint;
|
·
|
FERC
Docket No. OR08-13—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: SFPP
|
Complaint
alleges that all of SFPP’s rates are unjust and unreasonable. SFPP filed an
answer on August 28, 2008. The FERC has not acted on the complaint. A settlement
has been filed with the FERC with respect to the East Line portion of this
complaint, and FERC action on the settlement is pending;
|
·
|
FERC
Docket No. OR08-15—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: SFPP
|
Complaint
challenges SFPP’s indexing adjustments that went into effect on July 1,
2008. SFPP filed an answer on September 8, 2008. The FERC has not
acted on the complaint. A settlement has been filed with the FERC with respect
to the East Line portion of this complaint, and FERC action on the settlement is
pending;
|
·
|
FERC
Docket No. IS05-230 (North Line rate case)—Complainants/Protestants:
Shippers—Defendant: SFPP
|
SFPP
filed to increase North Line rates to reflect increased costs due to
installation of new pipe between Concord and Sacramento, California. Various
shippers protested. Administrative law judge’s decision is pending before the
FERC on exceptions. On August 31, 2007, BP WCP and ExxonMobil filed a motion to
reopen the record on the issue of SFPP’s appropriate rate of return on equity,
which SFPP answered on September 18, 2007. On May 2, 2008, the FERC issued an
order reopening the record in Docket No. IS05-230 for a paper hearing on issues
related to rate of return on equity in light of the FERC’s policy statement
issued in April of 2008 regarding the methodology for determining returns on
equity. The parties have filed a settlement regarding the sole issue of the
numeric value of the rate of return on equity to be applied in this proceeding
that, upon approval by the FERC, would obviate the need for the paper
hearing;
|
·
|
FERC
Docket No. IS05-327—Complainants/Protestants: Shippers—Defendant:
SFPP
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s indexing
methodology. Various shippers protested, but the FERC determined that the tariff
filings were consistent with its regulations. The FERC denied rehearing. The
D.C. Court dismissed a petition for review, citing a lack of jurisdiction to
review a decision by the FERC not to order an investigation;
|
·
|
FERC
Docket No. IS06-283 (East Line rate case)—Complainants/Protestants:
Shippers—Defendant: SFPP
|
SFPP
filed to increase East Line rates to reflect increased costs due to installation
of new pipe between El Paso, Texas and Tucson, Arizona. Various shippers
protested. This proceeding has been resolved by a settlement that has been
approved by the FERC. SFPP made the payments to the parties to the settlement on
April 8, 2008 and certified to the FERC that such payments were made on
April 9, 2008;
|
·
|
FERC
Docket No. IS06-296—Complainant/Protestant: ExxonMobil —Defendant:
Calnev
|
Calnev
increased its interstate rates pursuant to the FERC’s indexing methodology.
ExxonMobil protested the indexing adjustment. This proceeding has been resolved
by a settlement. On April 18, 2008, ExxonMobil filed a notice withdrawing its
protest in Docket No. IS06-296;
|
·
|
FERC
Docket No. IS06-356—Complainants/Protestants: Shippers—Defendant:
SFPP
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s indexing
methodology. Various shippers
protested.
The FERC generally found the tariff filings consistent with its regulations, but
rescinded the index increase for the East Line rates. SFPP requested rehearing
regarding the FERC’s decision as to the East Line rates, which the FERC denied.
In February 2008, the FERC accepted a joint offer of settlement which, among
other things, resolved all protests and complaints related to the East Line 2006
indexing adjustment. SFPP made the payments to the parties to the settlement on
April 8, 2008;
|
·
|
FERC
Docket No. IS07-137 (Ultra Low Sulfur Diesel (ULSD)
surcharge)—Complainants/Protestants: Shippers—Defendant:
SFPP
|
SFPP
filed tariffs reflecting a ULSD recovery fee on diesel products and a ULSD
litigation surcharge, and various shippers protested the tariffs. The FERC
accepted, subject to refund, the ULSD recovery fee, rejected the ULSD litigation
surcharge. Chevron and Tesoro filed requests for rehearing, which the FERC
denied by operation of law. BP WCP petitioned the D.C. Court for review of the
FERC’s denial, the FERC filed a motion to dismiss, and the D.C. Court granted
the FERC’s motion. In May 2008, the FERC set this proceeding for hearing and
initiated settlement proceedings, which have resulted in a settlement in
principle between the parties;
|
·
|
FERC
Docket No. IS07-229—Complainants/Protestants: BP WCP and ExxonMobil
—Defendant: SFPP
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s indexing
methodology. Two shippers filed protests. The FERC found the tariff filings
consistent with its regulations but suspended the increased rates subject to
refund pending challenges to SFPP’s underlying rates. In February 2008, the FERC
accepted a joint offer of settlement, which among other things, resolved all
protests and complaints related to the East Line 2007 indexing adjustment. In
April 2008, SFPP certified payments under the settlement agreement;
|
·
|
FERC
Docket No. IS07-234—Complainants/Protestants: BP WCP and ExxonMobil
—Defendant: Calnev
|
Calnev
filed to increase certain rates on its pipeline pursuant to FERC’s indexing
methodology. Two shippers protested. The FERC found the tariff filings
consistent with its regulations but suspended the increased rates subject to
refund pending challenges to SFPP’s underlying rates. Calnev and ExxonMobil
reached an agreement to settle this and other dockets. On April 18, 2008,
ExxonMobil filed a notice withdrawing its protest in Docket No.
IS07-234;
|
·
|
FERC
Docket No. IS08-28—Complainants/Protestants: ConocoPhillips; Chevron; BP
WCP; ExxonMobil ; Southwest Airlines; Western; and Valero—Defendant:
SFPP
|
SFPP
filed to increase its East Line rates based on costs incurred related to an
expansion. Various shippers filed protests. Docket No. IS08-389 has been
consolidated with this proceeding. A settlement has been filed with the FERC,
and FERC action on the settlement is pending;
|
·
|
FERC
Docket No. IS08-302—Complainants/Protestants: Chevron; BP WCP; ExxonMobil;
and Tesoro—Defendant: SFPP
|
SFPP
filed to increase certain rates on its pipelines pursuant to FERC’s indexing
methodology. Certain shippers protested. The FERC found the tariff filings
consistent with its regulations but suspended the increased rates subject to
refund (except for the Oregon Line rate) pending challenges to SFPP’s underlying
rates;
|
·
|
FERC
Docket No. IS08-389—Complainants/Protestants: ConocoPhillips, Valero,
Southwest Airlines Co., Navajo, Western—Defendant:
SFPP
|
SFPP
filed to decrease rates on its East Line. In July of 2008, various shippers
protested, claiming that the rates should have been further decreased. On July
29, 2008, the FERC accepted and suspended the tariff, subject to refund, to
become effective August 1, 2008, consolidated the proceeding with Docket No.
IS08-28, and held in abeyance further action pending the outcome of settlement
negotiations. A settlement has been filed with the FERC, and FERC action on the
settlement is pending;
|
·
|
FERC
Docket No. IS08-390—Complainants/Protestants: BP WCP, ExxonMobil,
ConocoPhillips, Valero, Chevron, the Airlines—Defendant:
SFPP
|
SFPP
filed to increase rates on its West Line. In July 2008, various shippers
protested, claiming that the rates are unjust and unreasonable. On July 29,
2008, the FERC suspended the tariffs, to become effective August 1, 2008,
subject to refund. A procedural schedule is in place and discovery is ongoing. A
hearing is scheduled for June 2009; and
|
·
|
Motions
to compel payment of interim damages (various
dockets)—Complainants/Protestants: Shippers—Defendants: SFPP; Kinder
Morgan G.P., Inc.; and Knight Inc.
|
Motions
seek payment of interim refunds or escrow of funds pending resolution of various
complaints and protests involving SFPP. The FERC denied shippers’ refund
requests in an order issued on December 26, 2007 in Docket Nos. OR92-8, et al. On March 19,
2008, ConocoPhillips and Tosco filed a Motion for Interim Refund and
Reparations
Order. SFPP filed a response on April 3, 2008. The FERC has yet to act on
the parties’ motion.
In
December 2005, SFPP received a FERC order in Docket Nos. OR92-8, et al. and OR96-2, et al. that directed it to
submit compliance filings and revised tariffs. In accordance with the FERC’s
December 2005 order and its February 2006 order on rehearing, SFPP submitted a
compliance filing to the FERC in March 2006, and rate reductions were
implemented on May 1, 2006.
In
December 2007, as a follow-up to the March 2006 compliance filing, SFPP received
a FERC order that directed it to submit revised compliance filings and revised
tariffs. In conjunction with this order, Kinder Morgan Energy Partners’ Pacific
operations’ other FERC and California Public Utilities Commission rate cases,
and other unrelated litigation matters, Kinder Morgan Energy Partners increased
its litigation reserves by $140.0 million in the fourth quarter of 2007. We
assume that, with respect to SFPP litigation reserves, any reparations and
accrued interest thereon will be paid no earlier than the first quarter of 2009.
In accordance with the FERC’s December 2007 order and its February 2008 order on
rehearing, SFPP submitted a compliance filing to the FERC in February 2008, and
further rate reductions were implemented on March 1, 2008. We estimate that
the impact of the new rates on Kinder Morgan Energy Partners’ 2008 budget will
be less than $3.0 million.
In
the second quarter of 2008, SFPP and Calnev made combined settlement payments to
various shippers totaling approximately $6.9 million and in
general, if the shippers are successful in proving their claims, they are
entitled to reparations or refunds of any excess tariffs or rates paid during
the two year period prior to the filing of their complaint, and Kinder Morgan
Energy Partners’ SFPP and Calnev operations may be required to reduce the amount
of their tariffs or rates for particular services. These proceedings tend to be
protracted, with decisions of the FERC often appealed to the federal courts.
Based on our review of these FERC proceedings, we estimate that as of September
30, 2008, shippers are seeking approximately $267 million in reparation and
refund payments and approximately $45 million in additional annual rate
reductions.
California
Public Utilities Commission Proceedings
On
April 7, 1997, ARCO, Mobil and Texaco filed a complaint against SFPP with the
California Public Utilities Commission, referred to in this note as the CPUC.
The complaint challenges rates charged by SFPP for intrastate transportation of
refined petroleum products through its pipeline system in the state of
California and requests prospective rate adjustments and refunds with respect to
previously untariffed charges for certain pipeline transportation and related
services.
In
October 2002, the CPUC issued a resolution, referred to in this note as the
Power Surcharge Resolution, approving a 2001 request by SFPP to raise its
California rates to reflect increased power costs. The resolution approving the
requested rate increase also required SFPP to submit cost data for 2001, 2002,
and 2003, and to assist the CPUC in determining whether SFPP’s overall rates for
California intrastate transportation services are reasonable. The resolution
reserves the right to require refunds, from the date of issuance of the
resolution, to the extent the CPUC’s analysis of cost data to be submitted by
SFPP demonstrates that SFPP’s California jurisdictional rates are unreasonable
in any fashion.
On
December 26, 2006, Tesoro filed a complaint challenging the reasonableness of
SFPP’s intrastate rates for the three-year period from December 2003 through
December 2006 and requesting approximately $8 million in reparations. As a
result of previous SFPP rate filings and related protests, the rates that are
the subject of the Tesoro complaint are being collected subject to
refund.
SFPP
also has various, pending ratemaking matters before the CPUC that are unrelated
to the above-referenced complaints and the Power Surcharge Resolution. Protests
to these rate increase applications have been filed by various shippers. As a
consequence of the protests, the related rate increases are being collected
subject to refund.
All
of the above matters have been consolidated and assigned to a single
administrative law judge. At the time of this report, it is unknown when a
decision from the CPUC regarding the CPUC complaints and the Power Surcharge
Resolution will be received. No schedule has been established for hearing and
resolution of the consolidated proceedings other than the 1997 CPUC complaint
and the Power Surcharge Resolution. Based on our review of these CPUC
proceedings, we estimate that shippers are seeking approximately $100 million in
reparation and refund payments and approximately $35 million in annual rate
reductions.
On
June 6, 2008, as required by CPUC order, SFPP and Calnev Pipe Line Company filed
separate general rate case applications, neither of which request a change in
existing pipeline rates and both of which assert that existing pipeline rates
are reasonable. On September 26, 2008, SFPP filed an amendment to its general
rate case application, requesting CPUC approval of a $5 million rate increase
for intrastate transportation services that became effective November 1, 2008.
No
Carbon
Dioxide Litigation
Shores
and First State Bank of Denton Lawsuits
Kinder
Morgan CO2 Company,
L.P. (referred to in this note as Kinder Morgan CO2), Kinder
Morgan G.P., Inc., and Cortez Pipeline Company were among the named defendants
in Shores, et al. v. Mobil Oil Corp., et al., No. GC-99-01184 (Statutory Probate
Court, Denton County, Texas filed December 22, 1999) and First State Bank of
Denton, et al. v. Mobil Oil Corp., et al., No. 8552-01 (Statutory Probate Court,
Denton County, Texas filed March 29, 2001). These cases were originally filed as
class actions on behalf of classes of overriding royalty interest owners
(Shores) and royalty interest owners (Bank of Denton) for damages relating to
alleged underpayment of royalties on carbon dioxide produced from the McElmo
Dome Unit. On February 22, 2005, the trial judge dismissed both cases for lack
of jurisdiction. Some of the individual plaintiffs in these cases re-filed their
claims in new lawsuits (discussed below).
Gerald
O. Bailey et al. v. Shell Oil Co. et al/Southern District of Texas
Lawsuit
Kinder
Morgan CO2, Kinder
Morgan Energy Partners, L.P. and Cortez Pipeline Company are among the
defendants in a proceeding in the federal courts for the southern district of
Texas. Gerald O. Bailey et al.
v. Shell Oil Company et al., (Civil Action Nos. 05-1029 and 05-1829 in
the U.S. District Court for the Southern District of Texas—consolidated by Order
dated July 18, 2005). The plaintiffs are asserting claims for the underpayment
of royalties on carbon dioxide produced from the McElmo Dome Unit. The
plaintiffs assert claims for fraud/fraudulent inducement, real estate fraud,
negligent misrepresentation, breach of fiduciary and agency duties, breach of
contract and covenants, violation of the Colorado Unfair Practices Act, civil
theft under Colorado law, conspiracy, unjust enrichment, and open account.
Plaintiffs Gerald O. Bailey, Harry Ptasynski, and W.L. Gray & Co. have also
asserted claims as private relators under the False Claims Act and for violation
of federal and Colorado antitrust laws. The plaintiffs seek actual damages,
treble damages, punitive damages, a constructive trust and accounting, and
declaratory relief. The defendants filed motions for summary judgment on all
claims.
Effective March 5, 2007, all
defendants and plaintiffs Bridwell Oil Company, the Alicia Bowdle Trust, and the
Estate of Margaret Bridwell Bowdle executed a final settlement agreement which
provides for the
dismissal of these plaintiffs’ claims with prejudice to being refiled.
On June 10, 2007, the
Houston federal district court entered an order of partial dismissal by which
the claims by and against the settling plaintiffs were dismissed with prejudice.
The claims asserted by
Bailey, Ptasynski, and
Gray are not included
within the settlement or the order of partial dismissal. Effective April 8, 2008, the
Shell and Kinder Morgan defendants and plaintiff Gray entered into an
indemnification agreement that provides for the dismissal of Gray’s claims with
prejudice.
On
April 22, 2008, the federal district court granted defendants’ motions for
summary judgment and ruled that plaintiffs Bailey, Ptasynski, and Gray take
nothing on their claims. The court entered final judgment in favor of defendants
on April 30, 2008. Defendants have filed a motion seeking sanctions against
plaintiff Bailey. The plaintiffs have appealed the final judgment to the United
States Fifth Circuit Court of Appeals.
CO2 Claims
Arbitration
Cortez
Pipeline Company and Kinder Morgan CO2, successor
to Shell CO2 Company,
Ltd., were among the named defendants in CO2 Committee,
Inc. v. Shell Oil Co., et al., an arbitration initiated on November 28, 2005.
The arbitration arose from a dispute over a class action settlement agreement,
which became final on July 7, 2003 and disposed of five lawsuits formerly
pending in the U.S. District Court, District of Colorado. The plaintiffs in such
lawsuits primarily included overriding royalty interest owners, royalty interest
owners, and small share working interest owners who alleged underpayment of
royalties and other payments on carbon dioxide produced from the McElmo Dome
Unit. The settlement imposed certain future obligations on the defendants in the
underlying litigation. The plaintiff in the arbitration is an entity that was
formed as part of the settlement for the purpose of monitoring compliance with
the obligations imposed by the settlement agreement. The plaintiff alleged that,
in calculating royalty and other payments, defendants used a transportation
expense in excess of what is allowed by the settlement agreement, thereby
causing alleged underpayments of approximately $12 million. The plaintiff also
alleged that Cortez Pipeline Company should have used certain funds to further
reduce its debt, which, in turn, would have allegedly increased the value of
royalty and other payments by approximately $0.5 million. Defendants denied that
there was any breach of the settlement agreement. On August 7, 2006, the
arbitration panel issued its opinion finding that defendants did not breach the
settlement agreement. On October 25, 2006, the defendants filed an application
to confirm the arbitration decision in New Mexico federal district court. On
June 21, 2007, the New Mexico federal district court entered final judgment
confirming the August 7, 2006 arbitration decision.
On
October 2, 2007, the plaintiff initiated a second arbitration (CO2 Committee,
Inc. v. Shell CO2 Company,
Ltd., aka Kinder Morgan CO2 Company,
L.P., et al.) against Cortez Pipeline Company, Kinder Morgan CO2 and an
ExxonMobil entity. The second arbitration asserts claims similar to those
asserted in the first arbitration. On October 11, 2007, the defendants filed a
Complaint for Declaratory Judgment and Injunctive Relief in federal district
court in New Mexico. The Complaint seeks dismissal of the second arbitration on
the basis of res judicata. In November 2007, the plaintiff in the arbitration
moved to dismiss the defendants’ Complaint on the grounds that the issues
presented should be decided by a panel in a second arbitration. In December
2007, the defendants in the arbitration filed a motion seeking summary judgment
on their Complaint and dismissal of the second arbitration. On May 16, 2008, the
federal district court in New Mexico granted the plaintiff’s motion to dismiss.
On June 2, 2008, the defendants in the arbitration filed a motion in the New
Mexico federal district court seeking an order confirming that the panel in the
first arbitration can preside over the second arbitration. On June 3, 2008, the
plaintiff filed a request with the American Arbitration Association seeking
administration of the arbitration.
MMS
Notice of Noncompliance and Civil Penalty
On
December 20, 2006, Kinder Morgan CO2 received a
“Notice of Noncompliance and Civil Penalty: Knowing or Willful Submission of
False, Inaccurate, or Misleading Information—Kinder Morgan CO2 Company,
L.P., Case No. CP07-001” from the U.S. Department of the Interior, Minerals
Management Service, referred to in this note as the MMS. This Notice, and the
MMS’s position that Kinder Morgan CO2 has
violated certain reporting obligations, relates to a disagreement between the
MMS and Kinder Morgan CO2 concerning
the approved transportation allowance to be used in valuing McElmo Dome carbon
dioxide for purposes of calculating federal royalties. The Notice of
Noncompliance and Civil Penalty assesses a civil penalty of approximately $2.2
million as of December 15, 2006 (based on a penalty of $500.00 per day for each
of 17 alleged violations) for Kinder Morgan CO2’s alleged
submission of false, inaccurate, or misleading information relating to the
transportation allowance, and federal royalties for CO2 produced
at McElmo Dome, during the period from June 2005 through October 2006. The MMS
contends that false, inaccurate, or misleading information was submitted in the
17 monthly Form 2014s containing remittance advice reflecting the royalty
payments for the referenced period because they reflected Kinder Morgan CO2’s use of
the Cortez Pipeline tariff as the transportation allowance. The MMS claims that
the Cortez Pipeline tariff is not the proper transportation allowance and that
Kinder Morgan CO2 should
have used its “reasonable actual costs” calculated in accordance with certain
federal product valuation regulations as amended effective June 1, 2005. The MMS
stated that civil penalties will continue to accrue at the same rate until the
alleged violations are corrected.
The
MMS set a due date of January 20, 2007 for Kinder Morgan CO2’s payment
of the approximately $2.2 million in civil penalties, with interest to accrue
daily on that amount in the event payment is not made by such date. Kinder
Morgan CO2 has not
paid the penalty. On January 2, 2007, Kinder Morgan CO2 submitted
a response to the Notice of Noncompliance and Civil Penalty challenging the
assessment in the Office of Hearings and Appeals of the Department of the
Interior. On February 1, 2007, Kinder Morgan CO2 filed a
petition to stay the accrual of penalties until the dispute is resolved. On
February 22, 2007, an administrative law judge of the U.S. Department of the
Interior issued an order denying Kinder Morgan CO2’s petition
to stay the accrual of penalties. A hearing on the Notice of Noncompliance and
Civil Penalty was originally set for December 10, 2007. In November 2007, the
MMS and Kinder Morgan CO2 filed a
joint motion to vacate the hearing date and stay the accrual of additional
penalties to allow the parties to discuss settlement. In November 2007, the
administrative law judge granted the joint motion, stayed accrual of additional
penalties for the period from November 6, 2007 to February 18, 2008, and reset
the hearing date to March 24, 2008. The parties conducted settlement conferences
on February 4, 2008 and February 12, 2008. On February 14, 2008, the parties
filed a joint motion seeking to vacate the March 24, 2008 hearing and to stay
the accrual of additional penalties to allow the parties to continue their
settlement discussions. On March 4, 2008, the administrative law judge granted
the joint motion. The parties reached a settlement of the Notice of
Noncompliance and Civil Penalty. The settlement agreement is subject to final
MMS approval.
Kinder
Morgan CO2 disputes
the Notice of Noncompliance and Civil Penalty and believes that it has
meritorious defenses. Kinder Morgan CO2 contends
that use of the Cortez Pipeline tariff as the transportation allowance for
purposes of calculating federal royalties was approved by the MMS in 1984. This
approval was later affirmed as open-ended by the Interior Board of Land Appeals
in the 1990s. Accordingly, Kinder Morgan CO2 has stated
to the MMS that its use of the Cortez Pipeline tariff as the approved federal
transportation allowance is authorized and proper. Kinder Morgan CO2 also
disputes the allegation that it has knowingly or willfully submitted false,
inaccurate, or misleading information to the MMS. Kinder Morgan CO2’s use of
the Cortez Pipeline tariff as the approved federal transportation allowance has
been the subject of extensive discussion between the parties. The MMS was, and
is, fully apprised of that fact and of the royalty valuation and payment process
followed by Kinder Morgan CO2
generally.
MMS
Order to Report and Pay
On
March 20, 2007, Kinder Morgan CO2 received
an “Order to Report and Pay” from the MMS. The MMS contends that Kinder Morgan
CO2
has over-reported transportation allowances and underpaid royalties in the
amount of approximately
$4.6
million for the period from January 1, 2005 through December 31, 2006 as a
result of its use of the Cortez Pipeline tariff as the transportation allowance
in calculating federal royalties. As noted in the discussion of the Notice of
Noncompliance and Civil Penalty proceeding, the MMS claims that the Cortez
Pipeline tariff is not the proper transportation allowance and that Kinder
Morgan CO2 must use
its “reasonable actual costs” calculated in accordance with certain federal
product valuation regulations. The MMS set a due date of April 13, 2007 for
Kinder Morgan CO2’s payment
of the $4.6 million in claimed additional royalties, with possible late payment
charges and civil penalties for failure to pay the assessed amount. Kinder
Morgan CO2 has not
paid the $4.6 million, and on April 19, 2007, it submitted a notice of appeal
and statement of reasons in response to the Order to Report and Pay, challenging
the Order and appealing it to the Director of the MMS in accordance with 30
C.F.R. Sec. 290.100, et seq. Also on April 19, 2007, Kinder Morgan CO2 submitted
a petition to suspend compliance with the Order to Report and Pay pending the
appeal. The MMS granted Kinder Morgan CO2’s petition
to suspend, and approved self-bonding on June 12, 2007. Kinder Morgan CO2 filed a
supplemental statement of reasons in support of its appeal of the Order to
Report and Pay on June 15, 2007.
In
addition to the March 2007 Order to Report and Pay, in April 2007, Kinder Morgan
CO2
received an “Audit Issue Letter” sent by the Colorado Department of Revenue on
behalf of the U.S. Department of the Interior. In the letter, the Department of
Revenue states that Kinder Morgan CO2 has
over-reported transportation allowances and underpaid royalties (due to the use
of the Cortez Pipeline tariff as the transportation allowance for purposes of
federal royalties) in the amount of $8.5 million for the period from April 2000
through December 2004. Kinder Morgan CO2 responded
to the letter in May 2007, outlining its position why use of the Cortez
tariff-based transportation allowance is proper. On August 8, 2007, Kinder
Morgan CO2 received
an “Order to Report and Pay Additional Royalties” from the MMS. As alleged in
the Colorado Audit Issue Letter, the MMS contends that Kinder Morgan CO2 has
over-reported transportation allowances and underpaid royalties in the amount of
approximately $8.5 million for the period from April 2000 through December 2004.
The MMS’s claims underlying the August 2007 Order to Report and Pay are similar
to those at issue in the March 2007 Order to Report and Pay. On September 7,
2007, Kinder Morgan CO2 submitted
a notice of appeal and statement of reasons in response to the August 2007 Order
to Report and Pay, challenging the Order and appealing it to the Director of the
MMS in accordance with 30 C.F.R. Sec. 290.100, et seq. Also on September 7,
2007, Kinder Morgan CO2 submitted a petition to suspend compliance with the
Order to Report and Pay pending the appeal. The MMS granted Kinder Morgan
CO2’s
petition to suspend, and approved self-bonding on September 11, 2007.
The
MMS and Kinder Morgan CO2 have
agreed to stay the March 2007 and August 2007 Order to Report and Pay
proceedings to allow the parties to discuss settlement. The parties conducted
settlement conferences on February 4, 2008 and February 12, 2008 and reached a
settlement of the March 2007 and August 2007 Orders to Report and Pay. The
settlement agreement is subject to final MMS approval.
Kinder
Morgan CO2 disputes
both the March and August 2007 Orders to Report and Pay and the Colorado
Department of Revenue Audit Issue Letter, and as noted above, it contends that
use of the Cortez Pipeline tariff as the transportation allowance for purposes
of calculating federal royalties was approved by the MMS in 1984 and was
affirmed as open-ended by the Interior Board of Land Appeals in the 1990s. The
appeals to the MMS Director of the Orders to Report and Pay do not provide for
an oral hearing. No further submission or briefing deadlines have been
set.
J.
Casper Heimann, Pecos Slope Royalty Trust and Rio Petro LTD, individually and on
behalf of all other private royalty and overriding royalty owners in the Bravo
Dome Carbon Dioxide Unit, New Mexico similarly situated v. Kinder Morgan CO2 Company,
L.P., No. 04-26-CL (8th
Judicial District Court, Union County New Mexico)
This
case involves a purported class action against Kinder Morgan CO2 alleging
that it has failed to pay the full royalty and overriding royalty (“royalty
interests”) on the true and proper settlement value of compressed carbon dioxide
produced from the Bravo Dome Unit during the period beginning January 1, 2000.
The complaint purports to assert claims for violation of the New Mexico Unfair
Practices Act, constructive fraud, breach of contract and of the covenant of
good faith and fair dealing, breach of the implied covenant to market, and
claims for an accounting, unjust enrichment, and injunctive relief. The
purported class is comprised of current and former owners, during the period
January 2000 to the present, who have private property royalty interests
burdening the oil and gas leases held by the defendant, excluding the
Commissioner of Public Lands, the United States of America, and those private
royalty interests that are not unitized as part of the Bravo Dome Unit. The
plaintiffs allege that they were members of a class previously certified as a
class action by the United States District Court for the District of New Mexico
in the matter Doris Feerer, et al. v. Amoco Production Company, et al., USDC
N.M. Civ. No. 95-0012 (the “Feerer Class Action”). Plaintiffs allege that Kinder
Morgan CO2’s method
of paying royalty interests is contrary to the settlement of the Feerer Class
Action. Kinder Morgan CO2 filed a
motion to compel arbitration of this matter pursuant to the arbitration
provisions contained in the Feerer Class Action settlement agreement, which
motion was denied. Kinder Morgan CO2 appealed
this decision to the New Mexico Court of Appeals, which affirmed the decision of
the trial court. The New Mexico Supreme Court granted further review in October
2006, and after hearing oral argument, the New Mexico Supreme Court quashed its
prior order granting review. In August 2007, Kinder Morgan CO2 filed a petition
for
writ of certiorari
with the United States Supreme Court seeking further review. The petition was
denied in December 2007. The case was tried in the trial court in September
2008. The plaintiffs sought $6.8 million in actual damages as well as
punitive damages. The jury returned a verdict finding that Kinder Morgan did not
breach the settlement agreement and did not breach the claimed duty to market
carbon dioxide. The jury also found that Kinder Morgan breached a duty of good
faith and fair dealing and found compensatory damages of $0.3 million and
punitive damages of $1.2 million. On October 16, 2008, the trial court entered
judgment on the verdict.
In
addition to the matters listed above, audits and administrative inquiries
concerning Kinder Morgan CO2’s payments
on carbon dioxide produced from the McElmo Dome and Bravo Dome Units are
currently ongoing. These audits and inquiries involve federal agencies and the
States of Colorado and New Mexico.
Commercial
Litigation Matters
Union Pacific Railroad Company
Easements
SFPP
and Union Pacific Railroad Company (the successor to Southern Pacific
Transportation Company and referred to in this note as UPRR) are engaged in a
proceeding to determine the extent, if any, to which the rent payable by SFPP
for the use of pipeline easements on rights-of-way held by UPRR should be
adjusted pursuant to existing contractual arrangements for the ten-year period
beginning January 1, 2004 (Union Pacific Railroad Company vs.
Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D”,
Kinder Morgan G.P., Inc., et al., Superior Court of the State of
California for the County of Los Angeles, filed July 28, 2004). In February
2007, a trial began to determine the amount payable for easements on UPRR
rights-of-way. The trial is ongoing and is expected to conclude in the first
quarter of 2009.
SFPP
and UPRR are also engaged in multiple disputes over the circumstances under
which SFPP must pay for a relocation of its pipeline within the UPRR
right-of-way and the safety standards that govern relocations. SFPP believes
that it must pay for relocation of the pipeline only when so required by the
railroad’s common carrier operations, and in doing so, it need only comply with
standards set forth in the federal Pipeline Safety Act in conducting
relocations. In July 2006, a trial before a judge regarding the circumstances
under which SFPP must pay for relocations concluded, and the judge determined
that SFPP must pay for any relocations resulting from any legitimate business
purpose of the UPRR. SFPP has appealed this decision. In addition, UPRR contends
that it has complete discretion to cause the pipeline to be relocated at SFPP’s
expense at any time and for any reason, and that SFPP must comply with the more
expensive American Railway Engineering and Maintenance-of-Way standards. Each
party is seeking declaratory relief with respect to its positions regarding
relocations.
It
is difficult to quantify the effects of the outcome of these cases on SFPP
because SFPP does not know UPRR’s plans for projects or other activities that
would cause pipeline relocations. Even if SFPP is successful in advancing its
positions, significant relocations for which SFPP must nonetheless bear the
expense (i.e. for railroad purposes, with the standards in the federal Pipeline
Safety Act applying) would have an adverse effect on our financial position and
results of operations. These effects would be even greater in the event SFPP is
unsuccessful in one or more of these litigations.
United
States of America, ex rel., Jack J. Grynberg v. K N Energy (Civil Action No.
97-D-1233, filed in the U.S. District Court, District of Colorado).
This
multi-district litigation proceeding involves four lawsuits filed in 1997
against numerous Kinder Morgan companies. These suits were filed pursuant to the
federal False Claims Act and allege underpayment of royalties due to
mismeasurement of natural gas produced from federal and Indian lands. The
complaints are part of a larger series of similar complaints filed by Mr.
Grynberg against 77 natural gas pipelines (approximately 330 other defendants)
in various courts throughout the country that were consolidated and transferred
to the District of Wyoming.
In
May 2005, a Special Master appointed in this litigation found that because there
was a prior public disclosure of the allegations and that Grynberg was not an
original source, the Court lacked subject matter jurisdiction. As a result, the
Special Master recommended that the Court dismiss all the Kinder Morgan
defendants. In October 2006, the United States District Court for the District
of Wyoming upheld the dismissal of each case against the Kinder Morgan
defendants on jurisdictional grounds. Grynberg has appealed this Order to the
Tenth Circuit Court of Appeals. Briefing was completed and oral argument was
held on September 25, 2008. No decision has yet been issued.
Prior
to the dismissal order on jurisdictional grounds, the Kinder Morgan defendants
filed Motions to Dismiss and for Sanctions alleging that Grynberg filed his
Complaint without evidentiary support and for an improper purpose. On January 8,
2007, after the dismissal order, the Kinder Morgan defendants also filed a
Motion for Attorney Fees under the False Claim Act. On April 24, 2007, the Court
held a hearing on the Motions to Dismiss and for Sanctions and the Requests for
Attorney Fees. A decision is still pending on the Motions to Dismiss and for
Sanctions and the Requests for Attorney Fees.
Weldon
Johnson and Guy Sparks, individually and as Representative of Others Similarly
Situated v. Centerpoint Energy, Inc. et. al., No. 04-327-2 (Circuit Court,
Miller County Arkansas).
On
October 8, 2004, plaintiffs filed the above-captioned matter against numerous
defendants including Kinder Morgan Texas Pipeline L.P.; Kinder Morgan Energy
Partners, L.P.; Kinder Morgan G.P., Inc.; KM Texas Pipeline, L.P.; Kinder Morgan
Texas Pipeline G.P., Inc.; Kinder Morgan Tejas Pipeline G.P., Inc.; Kinder
Morgan Tejas Pipeline, L.P.; Gulf Energy Marketing, LLC; Tejas Gas, LLC; and
MidCon Corp. (the “Kinder Morgan defendants”). The complaint purports to bring a
class action on behalf of those who purchased natural gas from the CenterPoint
defendants from October 1, 1994 to the date of class certification.
The
complaint alleges that CenterPoint Energy, Inc., by and through its affiliates,
has artificially inflated the price charged to residential consumers for natural
gas that it allegedly purchased from the non-CenterPoint defendants, including
the Kinder Morgan defendants. The complaint further alleges that in exchange for
CenterPoint’s purchase of such natural gas at above market prices, the
non-CenterPoint defendants, including the Kinder Morgan defendants, sell natural
gas to CenterPoint’s non-regulated affiliates at prices substantially below
market, which in turn sells such natural gas to commercial and industrial
consumers and gas marketers at market price. The complaint purports to assert
claims for fraud, unlawful enrichment and civil conspiracy against all of the
defendants, and seeks relief in the form of actual, exemplary and punitive
damages, interest, and attorneys’ fees. On June 8, 2007, the Arkansas Supreme
Court held that the Arkansas Public Service Commission (“APSC”) exclusive
jurisdiction over any Arkansas plaintiffs’ claims that consumers were
overcharged for gas in Arkansas and mandated that any such claims be dismissed
from this lawsuit. On February 14, 2008, the Arkansas Supreme Court clarified
its previously issued order and mandated that the trial court dismiss the
lawsuit in its entirety. On February 29, 2008, the trial court dismissed the
case in its entirety. The APSC has initiated an investigation into the
allegations set forth in the plaintiffs’ complaint.
Leukemia
Cluster Litigation
Richard
Jernee, et al. v. Kinder Morgan Energy Partners, et al., No. CV03-03482 (Second
Judicial District Court, State of Nevada, County of Washoe)
(“Jernee”).
Floyd
Sands, et al. v. Kinder Morgan Energy Partners, et al., No. CV03-05326 (Second
Judicial District Court, State of Nevada, County of Washoe)
(“Sands”).
On
May 30, 2003, plaintiffs, individually and on behalf of Adam Jernee, filed a
civil action in the Nevada State trial court against Kinder Morgan Energy
Partners and several Kinder Morgan related entities and individuals and
additional unrelated defendants. Plaintiffs in the Jernee matter claim that
defendants negligently and intentionally failed to inspect, repair and replace
unidentified segments of their pipeline and facilities, allowing “harmful
substances and emissions and gases” to damage “the environment and health of
human beings.” Plaintiffs claim that “Adam Jernee’s death was caused by leukemia
that, in turn, is believed to be due to exposure to industrial chemicals and
toxins.” Plaintiffs purport to assert claims for wrongful death, premises
liability, negligence, negligence per se, intentional infliction of emotional
distress, negligent infliction of emotional distress, assault and battery,
nuisance, fraud, strict liability (ultra hazardous acts), and aiding and
abetting, and seek unspecified special, general and punitive damages. On August
28, 2003, a separate group of plaintiffs, represented by the counsel for the
plaintiffs in the Jernee matter, individually and on behalf of Stephanie Suzanne
Sands, filed a civil action in the Nevada State trial court against the same
defendants and alleging the same claims as in the Jernee case with respect to
Stephanie Suzanne Sands. The Jernee case has been consolidated for pretrial
purposes with the Sands case. In May 2006, the court granted defendants’ motions
to dismiss as to the counts purporting to assert claims for fraud, but denied
defendants’ motions to dismiss as to the remaining counts, as well as
defendants’ motions to strike portions of the complaint. Defendant Kennametal,
Inc. has filed a third-party complaint naming the United States and the United
States Navy (the “United States”) as additional defendants. In response, the
United States removed the case to the United States District Court for the
District of Nevada and filed a motion to dismiss the third-party complaint.
Plaintiff has also filed a motion to dismiss the United States and/or to remand
the case back to state court. By order dated September 25, 2007, the United
States District Court granted the motion to dismiss the United States from the
case and remanded the Jernee and Sands cases back to the Second Judicial
District Court, State of Nevada, County of Washoe. The cases will now proceed in
the State Court. Based on the information available to date, our own preliminary
investigation, and the positive results of investigations conducted by State and
Federal agencies, we believe that the remaining claims against Kinder Morgan
Energy Partners in these matters are without merit and intend to defend against
them vigorously.
Pipeline
Integrity and Releases
From time to time, our pipelines experience leaks and
ruptures. These leaks and ruptures may cause explosions, fire, damage to the
environment, damage to property and/or personal injury or death. In connection
with these incidents, we may be sued
for
damages caused by an alleged failure to properly mark the locations of our
pipelines and/or to properly maintain our pipelines. Depending upon the facts
and circumstances of a particular incident, state and federal regulatory
authorities may seek civil and/or criminal fines and penalties.
We
believe that we conduct our operations in accordance with applicable law. We
seek to cooperate with state and federal regulatory authorities in connection
with the cleanup of the environment caused by such leaks and ruptures and with
any investigations as to the facts and circumstances surrounding the
incidents.
Pasadena
Terminal Fire
On
September 23, 2008, a fire occurred in the pit 3 manifold area of our Pasadena,
Texas terminal facility. One of our employees was injured and subsequently died.
In addition, the pit 3 manifold was severely damaged. The cause of the incident
is currently under investigation by the Railroad Commission of Texas and the
United States Occupational Safety and Health Administration. The remainder of
the facility returned to normal operations within twenty-four hours of the
incident.
Walnut
Creek, California Pipeline Rupture
On
November 9, 2004, excavation equipment operated by Mountain Cascade, Inc., a
third-party contractor on a water main installation project hired by East Bay
Municipal Utility District, struck and ruptured an underground petroleum
pipeline owned and operated by SFPP in Walnut Creek, California. An explosion
occurred immediately following the rupture that resulted in five fatalities and
several injuries to employees or contractors of Mountain Cascade, Inc. The
explosion and fire also caused property damage.
On
May 5, 2005, the California Division of Occupational Safety and Health
(“CalOSHA”) issued two civil citations against Kinder Morgan Energy
Partners relating to this incident assessing civil fines of approximately
$0.1 million based upon its alleged failure to mark the location of the
pipeline properly prior to the excavation of the site by the contractor. On
March 24, 2008, Kinder Morgan Energy Partners agreed to a settlement with
CalOSHA by which the two citations would be reduced to two “unclassified”
violations of the CalOSHA regulations and Kinder Morgan Energy Partners would
pay a fine of $140,000. The settlement is currently awaiting approval by the
CalOSHA Appeals Board.
On
June 27, 2005, the Office of the California State Fire Marshal, Pipeline Safety
Division, referred to in this report as the CSFM, issued a notice of violation
against Kinder Morgan Energy Partners, which also alleged that it did not
properly mark the location of the pipeline in violation of state and federal
regulations. The CSFM assessed a proposed civil penalty of $0.5 million. On
September 9, 2008, Kinder Morgan Energy Partners reached an agreement with the
CSFM to settle the proposed civil penalty for approximately $0.3 million with no
admission of liability.
As
a result of the accident, nineteen separate lawsuits were filed. The majority of
the cases were personal injury and wrongful death actions that alleged, among
other things, that SFPP/Kinder Morgan Energy Partners failed to properly field
mark the area where the accident occurred.
Following
court ordered mediation, the Kinder Morgan Energy Partners defendants have
settled with plaintiffs in all of the wrongful death cases and the personal
injury and property damages cases. The only remaining civil case is a claim for
equitable indemnity by an engineering company defendant against Kinder Morgan
G.P. Services Co., Inc. Kinder Morgan Energy Partners has filed a Motion for
Summary Judgment with respect to all of the claims in this matter, which motion
is currently pending.
Rockies
Express Pipeline LLC Wyoming Construction Incident
On
November 11, 2006, a bulldozer operated by an employee of Associated Pipeline
Contractors, Inc., (a third-party contractor to Rockies Express Pipeline LLC,
referred to in this note as REX), struck an existing subsurface natural gas
pipeline owned by Wyoming Interstate Company, a subsidiary of El Paso Pipeline
Group. The pipeline was ruptured, resulting in an explosion and fire. The
incident occurred in a rural area approximately nine miles southwest of
Cheyenne, Wyoming. The incident resulted in one fatality (the operator of the
bulldozer) and there were no other reported injuries. The cause of the incident
was investigated by the U.S. Department of Transportation Pipeline and Hazardous
Materials Safety Administration, referred to in this report as the PHMSA. In
March 2008, the PHMSA issued a Notice of Probable Violation, Proposed Civil
Penalty and Proposed Compliance Order (“NOPV”) to El Paso Corporation in which
it concluded that El Paso failed to comply with federal law and its internal
policies and procedures regarding protection of its pipeline, resulting in this
incident. To date, the PHMSA has not issued any NOPV’s to REX, and we do not
expect that it will do so. Immediately following
the incident, REX and El Paso Pipeline Group reached an agreement on a set of
additional enhanced safety protocols designed to prevent the reoccurrence of
such an incident.
In
September 2007, the family of the deceased bulldozer operator filed a wrongful
death action against Kinder Morgan Energy Partners, REX and several other
parties in the District Court of Harris County, Texas, 189 Judicial District, at
case number 2007-57916. The plaintiffs seek unspecified compensatory and
exemplary damages plus interest, attorney’s fees and costs of suit. Kinder
Morgan Energy Partners has asserted contractual claims for complete
indemnification for any and all costs arising from this incident, including any
costs related to this lawsuit, against third parties and their insurers. On
March 25, 2008, the defendants entered into a settlement agreement with one of
the plaintiffs, the decedent’s daughter, resolving any and all of her claims
against Kinder Morgan Energy Partners, REX and its contractors. Kinder Morgan
Energy Partners was indemnified for the full amount of this settlement by one of
REX’s contractors. On October 17, 2008, the remaining plaintiffs
filed a Notice of Nonsuit, which dismissed the remaining claims against all
defendants without prejudice to the plaintiffs’ ability to re-file their claims
at a later date.
Charlotte,
North Carolina
On
November 27, 2006, the Plantation Pipeline experienced a release of
approximately 4,000 gallons of gasoline from a Plantation Pipe Line Company
block valve on a delivery line into a terminal owned by a third party company.
Upon discovery of the release, Plantation immediately locked out the delivery of
gasoline through that pipe to prevent further releases. Product had flowed onto
the surface and into a nearby stream, which is a tributary of Paw Creek, and
resulted in loss of fish and other biota. Product recovery and remediation
efforts were implemented immediately, including removal of product from the
stream. The line was repaired and put back into service within a few days.
Remediation efforts are continuing under the direction of the North Carolina
Department of Environment and Natural Resources (the “NCDENR”), which issued a
Notice of Violation and Recommendation of Enforcement against Plantation on
January 8, 2007. Plantation continues to cooperate fully with the
NCDENR.
Although
Plantation does not believe that penalties are warranted, it is engaging in
settlement discussions with the EPA regarding a potential civil penalty for the
November 2006 release as part of broader settlement negotiations with the EPA
regarding this spill and three other historic releases from Plantation,
including a February 2003 release near Hull, Georgia. Plantation has entered
into a consent decree with the Department of Justice and the EPA for all four
releases for approximately $0.7 million, plus some additional work to be
performed to prevent future releases. Although it is not possible to predict the
ultimate outcome, we believe, based on our experiences to date, that the
ultimate resolution of such items will not have a material adverse impact on our
business, financial position, results of operations or cash flows.
In
addition, in April 2007, during pipeline maintenance activities near Charlotte,
North Carolina, Plantation discovered the presence of historical soil
contamination near the pipeline, and reported the presence of impacted soils to
the NCDENR. Subsequently, Plantation contacted the owner of the property to
request access to the property to investigate the potential contamination. The
results of that investigation indicate that there is soil and groundwater
contamination, which appears to be from an historical turbine fuel release.
The groundwater contamination is underneath at least two lots on which there is
current construction of single-family homes as part of a new residential
development. Further investigation and remediation are being conducted under the
oversight of the NCDENR. Plantation reached a settlement with the builder of the
residential subdivision. Plantation continues to negotiate with the owner of the
property to address any potential claims that it may bring.
Barstow,
California
The
United States Department of Navy has alleged that historic releases of methyl
tertiary-butyl ether, referred to in this report as MTBE, from Calnev’s Barstow
terminal has (i) migrated underneath the Navy’s Marine Corps Logistics Base (the
“MCLB”) in Barstow, (ii) impacted the Navy’s existing groundwater treatment
system for unrelated groundwater contamination not alleged to have been caused
by Calnev, and (iii) affected the MCLB’s water supply system. Although
Calnev believes that it has certain meritorious defenses to the Navy’s
claims, it is working with the Navy to agree upon an Administrative Settlement
Agreement and Order on Consent for CERCLA Removal Action to reimburse the Navy
for $0.5 million in past response actions, plus perform other work to ensure
protection of the Navy’s existing treatment system and water
supply.
Oil
Spill Near Westridge Terminal, Burnaby, British Columbia
On
July 24, 2007, a third-party contractor installing a sewer line for the City of
Burnaby struck a crude oil pipeline segment included within Kinder Morgan Energy
Partners’ Trans Mountain pipeline system near its Westridge terminal in Burnaby,
BC, resulting in a release of approximately 1,400 barrels of crude oil. The
release impacted the surrounding neighborhood, several homes and nearby Burrard
Inlet. No injuries were reported. To address the release, Kinder Morgan Energy
Partners
initiated
a comprehensive emergency response in collaboration with, among others, the City
of Burnaby, the BC Ministry of Environment, the National Energy Board, and the
National Transportation Safety Board. Cleanup and environmental
remediation is near
completion. The incident is currently under investigation by Federal and
Provincial agencies. We do not expect this matter to have a material adverse
impact on our financial position, results of operations or cash
flows.
On
December 20, 2007, Kinder Morgan Energy Partners initiated a lawsuit entitled
Trans Mountain Pipeline LP,
Trans Mountain Pipeline Inc. and Kinder Morgan Canada Inc. v. The City of
Burnaby, et al., Supreme Court of British Columbia, Vancouver Registry
No. S078716. The suit alleges that the City of Burnaby and its agents are liable
for damages including, but not limited to, all costs and expenses incurred by
Kinder Morgan Energy Partners as a result of the rupture of the pipeline and
subsequent release of crude oil. Defendants have denied liability and discovery
has begun.
Although
no assurance can be given, we believe that we have meritorious defenses to the
actions set forth in this note and, to the extent an assessment of the matter is
possible, if it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated, we believe that we have established an
adequate reserve to cover potential liability.
Additionally,
although it is not possible to predict the ultimate outcomes, we also believe,
based on our experiences to date, that the ultimate resolution of these matters
will not have a material adverse impact on our business, financial position,
results of operations or cash flows. As of September 30, 2008, and December 31,
2007, we have recorded a total reserve for legal fees, transportation rate cases
and other litigation liabilities in the amount of $232.5 million and $249.4
million, respectively. The reserve is primarily related to various claims from
lawsuits arising from Kinder Morgan Energy Partners’ Pacific operations’
pipeline transportation rates, and the contingent amount is based on both the
circumstances of probability and reasonability of dollar estimates. We regularly
assesses the likelihood of adverse outcomes resulting from these claims in order
to determine the adequacy of our liability provision.
Environmental
Matters
ExxonMobil
Corporation v. GATX Corporation, Kinder Morgan Liquids Terminals, Inc. and ST
Services, Inc.
On
April 23, 2003, ExxonMobil Corporation filed a complaint in the Superior Court
of New Jersey, Gloucester County. Kinder Morgan Energy Partners filed its answer
to the complaint on June 27, 2003, in which it denied ExxonMobil ’s claims and
allegations as well as included counterclaims against ExxonMobil. The lawsuit
relates to environmental remediation obligations at a Paulsboro, New Jersey
liquids terminal owned by ExxonMobil from the mid-1950s through November 1989,
by GATX Terminals Corp. from 1989 through September 2000 and later owned by ST
Services, Inc. Prior to selling the terminal to GATX Terminals, ExxonMobil
performed the environmental site assessment of the terminal required prior to
sale pursuant to state law. During the site assessment, ExxonMobil discovered
items that required remediation and the New Jersey Department of Environmental
Protection issued an order that required ExxonMobil to perform various
remediation activities to remove hydrocarbon contamination at the terminal.
ExxonMobil, we understand, is still remediating the site and has not been
removed as a responsible party from the state’s cleanup order; however,
ExxonMobil claims that the remediation continues because of GATX Terminals’
storage of a fuel additive, MTBE, at the terminal during GATX Terminals’
ownership of the terminal. When GATX Terminals sold the terminal to ST Services,
the parties indemnified one another for certain environmental matters. When GATX
Terminals was sold to Kinder Morgan Energy Partners, GATX Terminals’
indemnification obligations, if any, to ST Services may have passed to Kinder
Morgan Energy Partners.
Consequently,
at issue is any indemnification obligation Kinder Morgan Energy Partners may owe
to ST Services for environmental remediation of MTBE at the terminal. The
complaint seeks any and all damages related to remediating MTBE at the terminal,
and, according to the New Jersey Spill Compensation and Control Act, treble
damages may be available for actual dollars incorrectly spent by the successful
party in the lawsuit for remediating MTBE at the terminal. The parties are
currently involved in mandatory mediation met in June and October 2008. No
progress was made at any of the mediations. The parties continue to conduct
limited discovery. Currently, the mediation judge has ordered all parties’
technical consultants to meet to discuss and finalize a remediation program.
Following that meeting, it is anticipated that the parties will again convene
for another mediation.
On
June 25, 2007, the New Jersey Department of Environmental Protection, the
Commissioner of the New Jersey Department of Environmental Protection and the
Administrator of the New Jersey Spill Compensation Fund, referred to
collectively as the plaintiffs, filed a complaint against ExxonMobil Corporation
and GATX Terminals Corporation. The complaint was filed in Gloucester County,
New Jersey. Both ExxonMobil and Kinder Morgan Energy Partners filed third-party
complaints against ST Services seeking to bring ST Services into the case. ST
Services filed motions to dismiss the third-party complaints. Recently, the
court denied ST Services’ motions to dismiss and ST Services is now joined in
the case. Defendants will now file their answers in the case. The plaintiffs
seek the costs and damages that the plaintiffs allegedly have incurred or will
incur as a result of the discharge of pollutants and hazardous substances at
the Paulsboro, New Jersey facility. The costs and damages that the
plaintiffs seek include damages to natural resources. In addition, the
plaintiffs seek an order compelling the defendants to perform or fund the
assessment and restoration of those natural resource damages that are
the result
of the defendants’ alleged actions. As in the case brought by ExxonMobil
against GATX Terminals, the issue is whether the plaintiffs’ claims are within
the scope of the indemnity obligations between GATX Terminals (and
therefore, Kinder Morgan Liquids Terminals) and ST Services. ST Services is the
current owner and operator at the facility. The court may consolidate the two
cases.
Mission
Valley Terminal Lawsuit
In
August 2007, the City of San Diego, on its own behalf and purporting to act
on behalf of the People of the state of California, filed a lawsuit against
Kinder Morgan Energy Partners and several affiliates seeking injunctive relief
and unspecified damages allegedly resulting from hydrocarbon and MTBE impacted
soils and groundwater beneath the city’s stadium property in San Diego arising
from historic operations at the Mission Valley terminal facility. The case was
filed in the Superior Court of California, San Diego County, case number
37-2007-00073033-CU-OR-CTL. On September 26, 2007, Kinder Morgan Energy Partners
removed the case to the United States District Court, Southern District of
California, case number 07CV1883WCAB. On October 3, 2007, Kinder Morgan Energy
Partners filed a Motion to Dismiss all counts of the Complaint. The court denied
in part and granted in part the Motion to Dismiss and gave the City leave to
amend their complaint. The City submitted its Amended Complaint and we filed an
Answer. The parties have commenced with discovery. This site has been, and
currently is, under the regulatory oversight and order of the California
Regional Water Quality Control Board.
In
June 2008, we received an Administrative Civil Liability Complaint from the
California Regional Water Quality Control Board for violations and penalties
associated with permitted surface water discharge from the remediation system
operating at the Mission Valley terminal facility. Currently, we are negotiating
a settlement that should include a reduction of alleged violations and
associated penalties as well as resolve any past and future issues related to
permitted surface water discharge from the remediation system. We do not expect
the cost of the settlement to be material.
Portland
Harbor DOJ/EPA Investigation
In
April 2008, Kinder Morgan Energy Partners reached an agreement in principle with
the United States Attorney’s office for the District of Oregon and the United
States Department of Justice regarding a former employee’s involvement in the
improper disposal of potash (potassium chloride) into the Pacific Ocean in
August 2003 at Kinder Morgan Energy Partners’ Portland, Oregon bulk terminal
facility. The incident involved an employee making arrangements to have a
customer’s shipment of potash, which had become wet and no longer met
specifications for commercial use, improperly disposed of at sea without a
permit. On August 13, 2008, we completed the settlement.
Kinder
Morgan Energy Partners has fully cooperated with the government’s investigation
and promptly adopted measures at the terminal to avoid future incidents of this
nature. To settle the matter, Kinder Morgan Energy Partners entered a plea to a
criminal violation of the Ocean Dumping Act, pay a fine of approximately $0.2
million, and make a community service payment of approximately $0.1 million to
the Oregon Governor’s Fund for the Environment. As part of the settlement, the
government and Kinder Morgan Energy Partners acknowledge in a joint factual
statement of fact filed with the court that (i) no harm was done to the
environment, (ii) the former employee’s actions constituted a violation of
company policy, (iii) Kinder Morgan Energy Partners did not benefit financially
from the incident, and (iv) no personnel outside of the Portland terminal either
approved or had any knowledge of the former employee’s
arrangements.
Polychlorinated
Biphenyls (“PCBs”)-related Requests
In
August 2007 and October 2007, NGPL and Knight Inc. received information requests
from the Illinois Attorney General’s Office and the EPA, respectively, regarding
the presence of PCBs in natural gas transmission lines in Illinois and Missouri.
We have responded to these requests. No proceeding or enforcement actions have
been initiated.
In
December 2007, a customer requested that NGPL reimburse it for its costs and
related expenses incurred in connection with the clean up of PCBs in the
customer’s system. NGPL has evaluated the request and reached a settlement with
the customer on April 23, 2008 to reimburse it for certain costs. This
reimbursement did not have a material adverse effect on us.
Other
Environmental
We
are subject to environmental cleanup and enforcement actions from time to time.
In particular, the federal Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) generally imposes joint and several liability for
cleanup and enforcement costs on current or predecessor owners and operators of
a site, among others, without regard to fault or the legality of the original
conduct. Our operations are also subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe our
operations are in substantial compliance with applicable
environmental
law and regulations, risks of additional costs and liabilities are inherent in
pipeline, terminal and carbon dioxide field and oil field operations, and there
can be no assurance that we will not incur significant costs and liabilities.
Moreover, it is possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder, and claims
for damages to property or persons resulting from our operations, could result
in substantial costs and liabilities to us.
We
are currently involved in several governmental proceedings involving air, water
and waste violations issued by various governmental authorities related to
compliance with environmental regulations. As we receive notices of
non-compliance, we negotiate and settle these matters. We do not believe that
these violations will have a material adverse affect on our
business.
We
are also currently involved in several governmental proceedings involving
groundwater and soil remediation efforts under administrative orders or related
state remediation programs issued by various regulatory authorities related to
compliance with environmental regulations associated with our assets. We have
established a reserve to address the costs associated with the
cleanup.
In
addition, we are involved with and have been identified as a potentially
responsible party in several federal and state superfund sites. Environmental
reserves have been established for those sites where our contribution is
probable and reasonably estimable. In addition, we are from time to time
involved in civil proceedings relating to damages alleged to have occurred as a
result of accidental leaks or spills of refined petroleum products, natural gas
liquids, natural gas and carbon dioxide. See “Pipeline Integrity and Releases,”
above for additional information with respect to ruptures and leaks from our
pipelines.
Although
it is not possible to predict the ultimate outcomes, we believe that the
resolution of the environmental matters set forth in this note will not have a
material adverse effect on our business, financial position, results of
operations or cash flows. However, we are not able to reasonably estimate when
the eventual settlements of these claims will occur and changing circumstances
could cause these matters to have a material adverse impact. As of September 30,
2008, we have accrued an environmental reserve of $78.4 million, and we
believe the establishment of this environmental reserve is adequate such that
the resolution of pending environmental matters will not have a material adverse
impact on our business, cash flows, financial position or results of operation.
As of December 31, 2007, our environmental reserve totaled $102.6 million.
Additionally, many factors may change in the future affecting our reserve
estimates, such as (i) regulatory changes, (ii) groundwater and land use near
our sites, and (iii) changes in cleanup technology. Associated with the
environmental reserve, we have recorded a receivable of $24.7 million and $38.0
million as of September 30, 2008 and December 31, 2007, respectively, for
expected cost recoveries that have been deemed probable.
Litigation
Relating to the “Going Private” Transaction
Beginning
on May 29, 2006, the day after the proposal for the Going Private transaction
was announced, and in the days following, eight putative Class Action lawsuits
were filed in Harris County (Houston), Texas and seven putative Class Action
lawsuits were filed in Shawnee County (Topeka), Kansas against, among others,
Kinder Morgan, Inc., its Board of Directors, the Special Committee of the Board
of Directors, and several corporate officers.
By
order of the Harris County District Court dated June 26, 2006, each of the eight
Harris County cases were consolidated into the Crescente v. Kinder Morgan, Inc. et
al case, Cause No. 2006-33011, in the 164th
Judicial District Court, Harris County, Texas, which challenges the proposed
transaction as inadequate and unfair to Kinder Morgan, Inc.’s public
stockholders. On September 8, 2006, interim class counsel filed their
Consolidated Petition for Breach of Fiduciary Duty and Aiding and Abetting in
which they alleged that Kinder Morgan, Inc.’s board of directors and certain
members of senior management breached their fiduciary duties and the Sponsor
Investors aided and abetted the alleged breaches of fiduciary duty in entering
into the merger agreement. They sought, among other things, to enjoin the
merger, rescission of the merger agreement, disgorgement of any improper profits
received by the defendants, and attorneys’ fees. Defendants filed Answers to the
Consolidated Petition on October 9, 2006, denying the plaintiffs’ substantive
allegations and denying that the plaintiffs are entitled to relief.
By
order of the District Court of Shawnee County, Kansas dated June 26, 2006, each
of the seven Kansas cases were consolidated into the Consol. Case No. 06 C 801;
In Re Kinder Morgan, Inc.
Shareholder Litigation; in the District Court of Shawnee County, Kansas,
Division 12. On August 28, 2006, the plaintiffs filed their Consolidated
and Amended Class Action Petition in which they alleged that Kinder Morgan’s
board of directors and certain members of senior management breached their
fiduciary duties and the Sponsor Investors aided and abetted the alleged
breaches of fiduciary duty in entering into the merger agreement. They sought,
among other things, to enjoin the stockholder vote on the merger agreement and
any action taken to effect the acquisition of Kinder Morgan and its assets by
the buyout group, damages, disgorgement of any improper profits received by the
defendants, and attorney’s fees.
In
late 2006, the Kansas and Texas Courts appointed the Honorable Joseph T. Walsh
to serve as Special Master in both consolidated cases “to control all of the
pretrial proceedings in both the Kansas and Texas Class Actions arising out of
the proposed private offer to purchase the stock of the public shareholders of
Kinder Morgan, Inc.” On November 21, 2006, the plaintiffs in In Re Kinder Morgan, Inc.
Shareholder Litigation filed a Third Amended Class Action Petition with
Special Master Walsh. This Petition was later filed under seal with the Kansas
District Court on December 27, 2006.
Following
extensive expedited discovery, the Plaintiffs in both consolidated actions filed
an application for a preliminary injunction to prevent the holding of a special
meeting of shareholders for the purposes of voting on the proposed merger, which
was scheduled for December 19, 2006.
On
December 18, 2006, Special Master Walsh issued a Report and Recommendation
concluding, among other things, that “plaintiffs have failed to demonstrate the
probability of ultimate success on the merits of their claims in this joint
litigation.” Accordingly, the Special Master concluded that the plaintiffs were
“not entitled to injunctive relief to prevent the holding of the special meeting
of KMI shareholders scheduled for December 19, 2006.”
Plaintiffs
moved for class certification in January, 2008. Defendants opposed this motion,
which is currently pending.
In
August, September and October, 2008, the Plaintiffs in both consolidated cases
voluntarily dismissed without prejudice the claims against those Kinder Morgan,
Inc.’s directors who did not participate in the buyout (including the dismissal
of the members of the special committee of the board of directors), Kinder
Morgan, Inc. and Knight Acquisition, Inc.
The
parties are currently engaged in consolidated discovery in these
matters.
On
August 24, 2006, a civil action entitled City of Inkster Policeman and
Fireman Retirement System, Derivatively on Behalf of Kinder Morgan, Inc.,
Plaintiffs v. Richard D. Kinder, Michael C. Morgan, William v. Morgan, Fayez
Sarofim, Edward H. Austin, Jr., William J. Hybl, Ted A. Gardner, Charles W.
Battey, H.A. True, III, James M. Stanford, Stewart A. Bliss, Edward Randall,
III, Douglas W.G. Whitehead, Goldman Sachs Capital Partners, American
International Group, Inc., The Carlyle Group, Riverstone Holdings LLC, C. Park
Shaper, Steven J. Kean, Scott E. Parker and R. Tim Bradley, Defendants and
Kinder Morgan, Inc., Nominal Defendant; Case 2006-52653, was filed in the
270th
Judicial District Court, Harris County, Texas. This putative derivative lawsuit
was brought against certain of Kinder Morgan, Inc.’s senior officers and
directors, alleging that the proposal constituted a breach of fiduciary duties
owed to Kinder Morgan, Inc. Plaintiff also contends that the Sponsor Investors
aided and abetted the alleged breaches of fiduciary duty. Plaintiff seeks, among
other things, to enjoin the defendants from consummating the proposal, a
declaration that the proposal is unlawful and unenforceable, the imposition of a
constructive trust upon any benefits improperly received by the defendants, and
attorney’s fees. In November 2007, defendants filed a Joint Motion to
Dismiss for Lack of Jurisdiction, or in the Alternative, Motion for Final
Summary Judgment. Plaintiffs opposed the motion. In February 2008, the court
entered a Final Order granting defendants’ motion in full, ordering that
plaintiff, the City of Inkster Policeman and Fireman Retirement System, take
nothing on any and all of its claims against any and all defendants. In April
2008, Plaintiffs filed an appeal of the judgment in favor of all defendants in
the Texas Court of Appeal, First District. The appeal is currently
pending.
Defendants
believe that the claims asserted in the litigations regarding the Going Private
transaction are legally and factually without merit and intend to vigorously
defend against them.
Other
We
are a defendant in various lawsuits arising from the day-to-day operations of
our businesses. Although no assurance can be given, we believe, based on our
experiences to date, that the ultimate resolution of such items will not have a
material adverse impact on our business, financial position, results of
operations or cash flows.
Additionally,
although it is not possible to predict the ultimate outcomes, we believe, based
on our experiences to date, that the ultimate resolution of these matters will
not have a material adverse impact on our business, financial position, results
of operations or cash flows. As of September 30, 2008 and December 31, 2007, we
have recorded a total reserve for legal fees, transportation rate cases and
other litigation liabilities in the amount of $232.5 million and $249.4 million,
respectively. The reserve is primarily related to various claims from lawsuits
related to SFPP and the contingent amount is based on both probability of
realization and our ability to reasonably estimate liability dollar amounts. We
regularly assess the likelihood of adverse outcomes resulting from these claims
in order to determine the adequacy of our liability provision.
19.
|
Recent
Accounting Pronouncements
|
SFAS
No. 157 and FASB Staff Position No. FAS 157-3
For
information on SFAS No. 157 and FASB Staff Position No. FAS 157-3, see Note 15,
“Accounting for Derivative Instruments and Hedging Activities” under the heading
“SFAS No. 157.”
SFAS
No. 159
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This Statement provides companies with
an option to report selected financial assets and liabilities at fair value. The
Statement’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. The Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities.
SFAS
No. 159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the
effect of the company’s choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet.
The Statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157, discussed in Note 15, “SFAS No. 157”, and
SFAS No. 107 Disclosures about
Fair Value of Financial Instruments.
This
Statement was adopted by us effective January 1, 2008, at which time no
financial assets or liabilities, not previously required to be recorded at fair
value by other authoritative literature, were designated to be recorded at fair
value. As such, the adoption of this Statement did not have any impact on our
consolidated financial statements.
SFAS
141(R)
On
December 4, 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations.
Although this statement amends and replaces SFAS No. 141, it retains the
fundamental requirements in SFAS No. 141 that (i) the purchase method of
accounting be used for all business combinations; and (ii) an acquirer be
identified for each business combination. SFAS No. 141R defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. This Statement applies to all transactions or other events in
which an entity (the acquirer) obtains control of one or more businesses (the
acquiree), including combinations achieved without the transfer of
consideration; however, this Statement does not apply to a combination between
entities or businesses under common control.
Significant
provisions of SFAS No. 141R concern principles and requirements for how an
acquirer (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination.
This
Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (January 1, 2009 for us). Early
adoption is not permitted. We are currently reviewing the effects of this
Statement.
SFAS
No. 160
On
December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51. This
Statement changes the accounting and reporting for noncontrolling interests in
consolidated financial statements. A noncontrolling interest, sometimes referred
to as a minority interest, is the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent.
Specifically,
SFAS No. 160 establishes accounting and reporting standards that require (i) the
ownership interests in subsidiaries held by parties other than the parent to be
clearly identified, labeled, and presented in the consolidated balance sheet
within equity, but separate from the parent’s equity, (ii) the equity amount of
consolidated net income attributable to the parent and to the noncontrolling
interest to be clearly identified and presented on the face of the consolidated
income statement (consolidated net income and comprehensive income will be
determined without deducting minority interest, however, earnings-per-share
information will continue to be calculated on the basis of the net income
attributable to the
parent’s
shareholders); and (iii) changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary to be
accounted for consistently and similarly—as equity transactions.
This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008 (January 1, 2009 for us). Early
adoption is not permitted. SFAS No. 160 is to be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for its
presentation and disclosure requirements, which are to be applied
retrospectively for all periods presented. We do not anticipate that the
adoption of this Statement will have a material effect on our consolidated
financial statements.
SFAS
No. 161
On
March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. This Statement amends SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities and is intended to help investors
better understand how derivative instruments and hedging activities affect an
entity’s financial position, financial performance and cash flows through
enhanced disclosure requirements. The enhanced disclosures include, among other
things, (i) a tabular summary of the fair value of derivative instruments and
their gains and losses, (ii) disclosure of derivative features that are
credit-risk–related to provide more information regarding an entity’s liquidity,
and (iii) cross-referencing within footnotes to make it easier for financial
statement users to locate important information about derivative
instruments.
This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008 (January 1, 2009 for us).
Early application is encouraged. We do not anticipate that the adoption of this
Statement will have a material effect on our consolidated financial
statements.
EITF
07-4
In
March 2008, the Emerging Issues Task Force reached a consensus on Issue No.
07-4, or EITF 07-4, Application of the Two-Class Method
under FASB Statement No. 128, Earnings per Share, to Master Limited
Partnerships. EITF 07-4 provides guidance for how current period earnings
should be allocated between limited partners and a general partner when the
partnership agreement contains incentive distribution rights.
This
Issue is effective for fiscal years beginning after December 15, 2008 (January
1, 2009 for Kinder Morgan Energy Partners), and interim periods within those
fiscal years. Earlier application is not permitted, and the guidance in this
Issue is to be applied retrospectively for all financial statements presented.
We do not anticipate that the adoption of this Issue will have a material effect
on our consolidated financial statements.
FSP
No. FAS 142-3
SFAS
No. 162
On
May 9, 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities.
Statement
No. 162 establishes that the GAAP hierarchy should be directed to entities
because it is the entity (not its auditor) that is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. Statement No. 162 is effective 60 days following the U.S. Securities
and Exchange Commission’s approval of the Public Company Accounting Oversight
Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles, and is only
effective for nongovernmental entities. We expect the adoption of this Statement
will have no affect on our consolidated financial statements.
On
October 13, 2008, Standard & Poor’s Rating Services lowered Kinder Morgan
Energy Partners, Rockies Express LLC, and Cortez Capital Corporation’s
short-term credit rating to A-3 from A-2. As a result of these revisions and
current commercial paper market conditions, Kinder Morgan Energy Partners,
Rockies Express LLC and Cortez Capital Corporation are unable to access
commercial paper borrowings. However, Kinder Morgan Energy Partners, Rockies
Express LLC and Cortez Capital Corporation expect that short-term financing and
liquidity needs will continue to be met through borrowings made under their
respective long-term bank credit facilities.
Also
on October 13, 2008, Standard & Poor’s Rating Services revised its outlook
on Kinder Morgan Energy Partners’ long-term credit rating to negative from
stable (but affirmed Kinder Morgan Energy Partners’ long-term credit rating of
BBB), due to Kinder Morgan Energy Partners’ previously announced expected delay
and cost increases associated with the completion of the Rockies Express
Pipeline project.
In
October 2008, an additional principal amount of $0.6 million was tendered and
drawn against Kinder Morgan Energy Partners’ letter of credit issued by Wachovia
and Kinder Morgan Energy Partners paid this amount pursuant to the letter of
credit reimbursement provisions.
Kinder
Morgan Energy Partners’ available borrowing capacity increased $168.5 million
from September 30, 2008 to October 31, 2008, primarily related to reductions in
letters of credit outstanding in support of derivative
activities.
General
The
following discussion should be read in conjunction with the accompanying interim
Consolidated Financial Statements and related Notes and our Annual Report on
Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”).
In
this discussion and analysis, unless the context requires otherwise, references
to “we,” “us,” “our,” or the “Company” are intended to mean Knight Inc. and its
consolidated subsidiaries, including Kinder Morgan Energy Partners, L.P., both
before and after the Going Private transaction. Unless the context requires
otherwise, references to “Kinder Morgan Energy Partners” are intended to mean
Kinder Morgan Energy Partners, L.P, and its consolidated subsidiaries, a
publicly traded pipeline master limited partnership in which we own the general
partner interest and significant limited partner interests and whose
transactions and balances are consolidated with ours.
We
are an energy infrastructure owner and operator. Our principal business segments
are:
|
·
|
Natural
Gas Pipeline Company of America and certain affiliates, referred to as
Natural Gas Pipeline Company of America or NGPL, a major interstate
natural gas pipeline and storage system. In February 2008, we sold an 80%
ownership interest in NGPL PipeCo LLC for
approximately $5.9 billion; see Note 11 of the accompanying Notes to
Consolidated Financial Statements. Our remaining 20% interest is recorded
as an equity investment within the “Investments” caption of the
accompanying interim Consolidated Balance
Sheets;
|
|
·
|
Power,
a business that owns and operates a natural gas-fired electric generation
facility. On January 25, 2008, we sold our interests in three natural
gas-fired power plants in Colorado to Bear Stearns. The sale was effective
January 1, 2008, and we received net proceeds of $63.1
million;
|
|
·
|
Products
Pipelines – KMP, the ownership and operation of refined petroleum products
pipelines that deliver gasoline, diesel fuel, jet fuel and natural gas
liquids to various markets, plus the ownership and/or operation of
associated product terminals and petroleum pipeline transmix
facilities;
|
|
·
|
Natural
Gas Pipelines – KMP, the ownership and operation of major interstate and
intrastate natural gas pipeline and storage
systems;
|
|
·
|
CO2 –
KMP, (i) the production, transportation and marketing of carbon dioxide,
or “CO2,” to
oil fields that use CO2 to
increase production of oil, (ii) ownership interests in and/or operation
of oil fields in West Texas and (iii) the ownership and operation of a
crude oil pipeline system in West
Texas;
|
|
·
|
Terminals
– KMP, the ownership and/or operation of liquids and bulk terminal
facilities and rail transloading and materials handling facilities located
throughout the United States; and
|
|
·
|
Kinder
Morgan Canada – KMP, the ownership and operation of (i) Trans Mountain, a
pipeline system that transports crude oil and refined petroleum products
from Edmonton, Alberta, Canada to marketing terminals and refineries in
British Columbia, Canada and the state of Washington, (ii) Express, a
pipeline system in which we own a one-third interest that transports crude
oil from Hardisty, Alberta, Canada through Casper, Wyoming to the Wood
River, Illinois area and (iii) Jet Fuel, a 25-mile long pipeline
transporting jet fuel to Vancouver International Airport. In August 2008,
we sold the Express pipeline system and the Jet Fuel pipeline to Kinder
Morgan Energy Partners. In prior periods, Knight Inc. reported the results
of the Trans Mountain pipeline system in the Trans Mountain – KMP segment,
the Express pipeline system in the Express segment and the results of Jet
Fuel were included in the “Other” caption in the Consolidated Financial
Results table in the Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.
|
In
addition to the above 2008 sale transactions, during 2007 we sold certain
businesses and assets in which we no longer have any continuing interest,
including Terasen Gas, Corridor, the North System and our Kinder Morgan Retail
segment. Accordingly, the activities and assets related to these sales are
presented as discontinued items in the accompanying Consolidated Statements of
Operations. Notes 11, 12 and 14 of the accompanying Notes to Consolidated
Financial Statements contain additional information on asset sales, discontinued
operations and our business segments, respectively. As discussed following, many
of our operations are regulated by various federal and state regulatory
bodies.
As
an energy infrastructure owner and operator in multiple facets of the United
States’ and Canada’s various energy businesses and markets, we examine a number
of variables and factors on a routine basis to evaluate our current performance
and our prospects for the future. The profitability of our products pipeline
transportation business is generally driven by the utilization of our facilities
in relation to their capacity, as well as the prices we receive for our
services. Transportation volume levels are primarily driven by the demand for
the petroleum products being shipped or stored. The prices for shipping are
generally based on regulated tariffs that are adjusted annually based on changes
in the Producer Price Index. Because of the overall effect of utilization on our
products pipeline transportation business, we seek to own refined products
pipelines
located
in or that transport to stable or growing markets and population
centers.
With
respect to our interstate natural gas pipelines and related storage facilities,
the revenues from these assets tend to be received under contracts with terms
that are fixed for various periods of time. We monitor the contracts under which
we provide interstate natural gas transportation services and, to the extent
practicable and economically feasible in light of our strategic plans and other
factors, we generally attempt to mitigate risk of reduced volumes and prices by
negotiating contracts with longer terms, with higher per-unit pricing and for a
greater percentage of our available capacity. However, changes, either positive
or negative, in actual quantities transported on our interstate natural gas
pipelines may not accurately measure or predict associated changes in
profitability because many of the underlying transportation contracts, sometimes
referred to as take-or-pay contracts, specify that we receive the majority of
our fee for making the capacity available, whether or not the customer actually
chooses to utilize the capacity.
Our
CO2
sales and transportation business, like our natural gas pipelines business,
generally has take-or-pay contracts, although the contracts in our CO2 business
typically have minimum volume requirements. In the long term, our success in
this business is driven by the demand for CO2. However,
short-term changes in the demand for CO2 typically
do not have a significant impact on us due to the required minimum volumes under
many of our contracts. In the oil and gas producing activities within our
CO2
business segment, we monitor the amount of capital we expend in relation
to the amount of production that is added or the amount of declines in
production that are postponed. In that regard, our production during any period
and the reserves that we add during that period are important measures. In
addition, the revenues we receive from our crude oil, natural gas liquids and
CO2
sales are a function of, in addition to production quantity, the prices we
realize from the sale of these products. Over the long term, we will tend to
receive prices that are dictated by the demand and overall market price for
these products. In the shorter term, however, published market prices are likely
not indicative of the revenues we will receive due to our risk management, or
hedging, program in which the prices to be realized for certain of our future
sales quantities are fixed, capped or bracketed through the use of financial
derivatives, particularly for oil.
As
with our pipeline transportation businesses, the profitability of our terminals
businesses is generally driven by the utilization of our terminals facilities in
relation to their capacity, as well as the prices we receive for our services,
which in turn are driven by the demand for the products being shipped or stored.
The extent to which changes in these variables affect this business in the near
term is a function of the length of the underlying service contracts, the extent
to which revenues under the contracts are a function of the amount of product
stored or transported and the extent to which such contracts expire during any
given period of time. As with our pipeline transportation businesses, we monitor
the contracts under which we provide services and, to the extent practicable and
economically feasible in light of our strategic plans and other factors, we
generally attempt to mitigate the risk of reduced volumes and pricing by
negotiating contracts with longer terms, with higher per-unit pricing and for a
greater percentage of our available capacity. In addition, weather-related
factors such as hurricanes, floods and droughts may impact our facilities and
access to them and, thus, the profitability of certain terminals for limited
periods of time or, in relatively rare cases of severe damage to facilities, for
longer periods.
In
our discussions of the operating results of individual businesses that follow,
we generally identify the important fluctuations between periods that are
attributable to acquisitions and dispositions separately from those that are
attributable to businesses owned in both periods. Principally through Kinder
Morgan Energy Partners, we have a history of making accretive acquisitions and
economically advantageous expansions of existing businesses. Our ability to
increase earnings and Kinder Morgan Energy Partners’ ability to increase
distributions to us and other investors will, to some extent, be a function of
Kinder Morgan Energy Partners’ success in acquisitions and expansions. Kinder
Morgan Energy Partners continues to have opportunities for expansion of its
facilities in many markets and expects to continue to have such opportunities in
the future, although the level of such opportunities is difficult to predict.
Kinder Morgan Energy Partners’ ability to make accretive acquisitions is a
function of the availability of suitable acquisition candidates and, to some
extent, its ability to raise necessary capital to fund such acquisitions,
factors over which it has limited or no control. The availability of suitable
acquisition candidates has lessened in recent periods, largely due to prices
that are not attractive to Kinder Morgan Energy Partners, but it has no way to
determine the extent to which it will be able to identify accretive acquisition
candidates, or the number or size of such candidates, in the future, or whether
it will complete the acquisition of any such candidates.
In
addition to any uncertainties described in this discussion and analysis, we are
subject to a variety of risks that could have a material adverse effect on our
business, financial condition, cash flows and results of operations. See Part
II, Item 1A “Risk Factors.”
On
May 30, 2007, we completed our Going Private transaction whereby Kinder Morgan,
Inc. merged with a wholly owned subsidiary of Knight Holdco LLC, with Kinder
Morgan, Inc. continuing as the surviving legal entity and subsequently renamed
Knight Inc. Knight Holdco LLC is a private company owned by Richard D. Kinder,
our Chairman and Chief Executive Officer, our co-founder William V. Morgan;
former Kinder Morgan Inc. board members Fayez Sarofim and Michael C. Morgan;
members of our senior management most of whom are also senior officers of Kinder
Morgan G.P., Inc.
and
Kinder Morgan Management; and affiliates of (i) Goldman Sachs Capital Partners,
(ii) American International Group, Inc., (iii) the Carlyle Group, and (iv)
Riverstone Holdings LLC. As a result of the Going Private transaction, we are
now privately owned, our stock is no longer traded on the New York Stock
Exchange, and we have adopted a new basis of accounting for our assets and
liabilities. This acquisition was a “business combination” for accounting
purposes, requiring that these investors, pursuant to Statement of Financial
Accounting Standards (“SFAS”) No. 141, Business Combinations, record
the assets acquired and liabilities assumed at their fair market values as of
the acquisition date, resulting in a new basis of accounting as discussed
below.
Critical
Accounting Policies, Estimates and Annual Goodwill Impairment Test
Our
discussion and analysis of financial condition and results of operations are
based on our interim consolidated financial statements, prepared in accordance
with GAAP as applicable to interim financial statements to be filed with the
Securities and Exchange Commission and contained within this report. Certain
amounts included in or affecting our financial statements and related
disclosures must be estimated, requiring us to make certain assumptions with
respect to values or conditions that cannot be known with certainty at the time
the financial statements are prepared. The reported amounts of our assets and
liabilities, revenues and expenses and associated disclosures with respect to
contingent assets and obligations are necessarily affected by these estimates.
We evaluate these estimates on an ongoing basis, utilizing historical
experience, consultation with experts and other methods we consider reasonable
in the particular circumstances. Nevertheless, actual results may differ
significantly from our estimates.
In
preparing our financial statements and related disclosures, we must use
estimates in determining the economic useful lives of our assets, the fair
values used to determine possible impairment charges, the effective income tax
rate to apply to our pre-tax income, deferred income tax balances, obligations
under our employee benefit plans, provisions for uncollectible accounts
receivable, cost and timing of environmental remediation efforts, potential
exposure to adverse outcomes from judgments or litigation settlements, exposures
under contractual indemnifications and various other recorded or disclosed
amounts. Additional information regarding our critical accounting policies and
estimates can be found in our 2007 Form 10-K.
There have been no significant changes in these policies and estimates during
the first nine months of 2008.
In
conjunction with our annual impairment test of the carrying value of goodwill,
performed as of May 31, 2008, we determined that the fair value of certain
reporting units that are part of our investment in Kinder Morgan Energy Partners
were less than the carrying values. The fair value of each reporting unit was
determined from the present value of the expected future cash flows from the
applicable reporting unit (inclusive of a terminal value calculated using a
market multiple for the individual assets). The implied fair value of goodwill
within each reporting unit was then compared to the carrying value of goodwill
of each such unit, resulting in the following goodwill impairments by reporting
unit: Products Pipelines – KMP (excluding associated terminals) – $1.19 billion,
Products Pipelines Terminals – KMP (separate from Products Pipelines – KMP for
goodwill impairment purposes) - $70 million, Natural Gas Pipelines – KMP – $2.09
billion, and Terminals – KMP – $677 million, for a total impairment of $4.03
billion. We have finalized our goodwill impairment calculation initially
recorded in the second quarter of 2008. This resulted in an increase to the
goodwill impairment by our Products Pipelines – KMP (excluding associated
terminals) reporting unit of $152.6 million and a decrease to the goodwill
impairment by our Natural Gas Pipelines – KMP reporting unit of $152.6 million,
with no net impact to the total goodwill impairment charge. The goodwill
impairment is a non-cash charge and does not have any impact on our cash
flow.
While
the fair value of the CO2 – KMP
segment exceeded its carrying value as of the date of our goodwill impairment
test, decreases in the market value of crude oil led us to reconsider this
analysis as of September 30, 2008. This analysis again showed that the fair
value of the CO2 – KMP
segment exceeded its carrying value, however the amount by which the fair value
exceeded the carrying value decreased. If the market price of crude oil
continues to decline, we may need to record non-cash goodwill impairment charges
on this reporting unit in future periods.
New
Basis of Accounting
The
Going Private transaction was accounted for as a purchase business combination
and, as a result of the application of the Securities and Exchange Commission’s
“push-down” accounting requirements, this transaction has resulted in our
adoption of a new basis of accounting for our assets and liabilities.
Accordingly, our assets and liabilities have been recorded at their estimated
fair values as of the date of the completion of the Going Private transaction,
with the excess of the purchase price over these combined fair values recorded
as goodwill.
Therefore,
in the accompanying financial information, transactions and balances prior to
the closing of the Going Private transaction (the amounts labeled “Predecessor
Company”) reflect the historical basis of accounting for our assets and
liabilities, while the amounts subsequent to the closing (the amounts labeled
“Successor Company”) reflect the push-down of the investors’ new accounting
basis to our financial statements. While the Going Private transaction closed on
May 30, 2007,
for
convenience, the Predecessor Company is assumed to end on May 31, 2007 and the
Successor Company is assumed to begin on June 1, 2007. The results for the
two-day period, from May 30 to May 31, 2007, are not material to any of the
periods presented. Additional information concerning the impact of the Going
Private transaction on the accompanying financial information is contained under
“Consolidated Financial Results” following.
Our
adoption of a new basis of accounting for our assets and liabilities as a result
of the Going Private transaction, the sale of our retail natural gas
distribution and related operations, our Corridor operations, the North System
and our 80% interest in NGPL PipeCo LLC, the goodwill impairments described
above, and other acquisitions and divestitures, among other factors, affect
comparisons of our financial position and results of operations between certain
periods.
Consolidated
Financial Results
|
Three
Months Ended
September
30,
|
|
Increase/(Decrease)
Change
from 2007
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
(In
millions, except percentages)
|
Segment
Earnings before Depreciation, Depletion and Amortization Expense and
Amortization of Excess Cost of Equity Investments1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL2
|
$
|
11.5
|
|
|
$
|
158.1
|
|
|
$
|
(146.6
|
)
|
|
|
(93
|
)%
|
Power
|
|
1.6
|
|
|
|
5.0
|
|
|
|
(3.4
|
)
|
|
|
(68
|
)%
|
Products
Pipelines – KMP3
|
|
(22.4
|
)
|
|
|
127.0
|
|
|
|
(149.4
|
)
|
|
|
(118
|
)%
|
Natural
Gas Pipelines – KMP4
|
|
337.6
|
|
|
|
142.3
|
|
|
|
195.3
|
|
|
|
137
|
%
|
CO2 –
KMP
|
|
237.7
|
|
|
|
184.2
|
|
|
|
53.5
|
|
|
|
29
|
%
|
Terminals
– KMP
|
|
117.3
|
|
|
|
84.4
|
|
|
|
32.9
|
|
|
|
39
|
%
|
Kinder
Morgan Canada – KMP5
|
|
44.5
|
|
|
|
31.0
|
|
|
|
13.5
|
|
|
|
44
|
%
|
Segment
Earnings before DD&A
|
|
727.8
|
|
|
|
732.0
|
|
|
|
(4.2
|
)
|
|
|
(1
|
)%
|
Depreciation,
Depletion and Amortization Expense
|
|
(217.2
|
)
|
|
|
(204.1
|
)
|
|
|
(13.1
|
)
|
|
|
(6
|
)%
|
Amortization
of Excess Cost of Equity Investments
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
-
|
|
|
|
-
|
%
|
Other
Operating Income
|
|
11.1
|
|
|
|
0.2
|
|
|
|
10.9
|
|
|
|
5,450
|
%
|
General
and Administrative Expense
|
|
(85.9
|
)
|
|
|
(77.9
|
)
|
|
|
(8.0
|
)
|
|
|
(10
|
)%
|
Interest
and Other, Net
|
|
(246.4
|
)
|
|
|
(304.9
|
)
|
|
|
58.5
|
|
|
|
19
|
%
|
Income
from Continuing Operations before Income Taxes1
|
|
188.0
|
|
|
|
143.9
|
|
|
|
44.1
|
|
|
|
31
|
%
|
Income
Taxes1
|
|
(79.1
|
)
|
|
|
(53.8
|
)
|
|
|
(25.3
|
)
|
|
|
(47
|
)%
|
Income
from Continuing Operations
|
|
108.9
|
|
|
|
90.1
|
|
|
|
18.8
|
|
|
|
21
|
%
|
Loss
from Discontinued Operations, Net of Tax
|
|
(0.2
|
)
|
|
|
(4.4
|
)
|
|
|
4.2
|
|
|
|
95
|
%
|
Net
Income
|
$
|
108.7
|
|
|
$
|
85.7
|
|
|
$
|
23.0
|
|
|
|
27
|
%
|
_____________
1
|
Kinder
Morgan Energy Partners’ income taxes of $8.8 million and $20.8 million for
the three months ended September 30, 2008 and 2007, respectively, are
included in segment earnings.
|
2
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
|
3
|
Three
months ended September 30, 2008 includes a non-cash goodwill impairment
charge of $152.6 million.
|
4
|
Three
months ended September 30, 2008 includes a non-cash goodwill impairment
adjustment of $152.6 million.
|
5
|
Includes
earnings of the Trans Mountain pipeline system, our interest in the
Express pipeline system and the Jet Fuel pipeline system; see Note 14 of
the accompanying Notes to Consolidated Financial
Statements.
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Segment
Earnings (Loss) before Depreciation, Depletion and Amortization Expense
and Amortization of Excess Cost of Equity Investments1
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL2
|
$
|
116.2
|
|
|
$
|
217.5
|
|
|
|
$
|
267.4
|
|
Power
|
|
4.4
|
|
|
|
7.4
|
|
|
|
|
8.9
|
|
Products
Pipelines – KMP3
|
|
(859.3
|
)
|
|
|
174.4
|
|
|
|
|
224.4
|
|
Natural
Gas Pipelines – KMP4
|
|
(1,546.9
|
)
|
|
|
192.1
|
|
|
|
|
228.5
|
|
CO2 –
KMP
|
|
721.6
|
|
|
|
241.4
|
|
|
|
|
210.0
|
|
Terminals
– KMP5
|
|
(293.2
|
)
|
|
|
122.7
|
|
|
|
|
172.3
|
|
Kinder
Morgan Canada – KMP6
|
|
114.0
|
|
|
|
42.7
|
|
|
|
|
(332.0
|
)
|
Segment
Earnings (Loss) before DD&A
|
|
(1,743.2
|
)
|
|
|
998.2
|
|
|
|
|
779.5
|
|
Depreciation,
Depletion and Amortization Expense
|
|
(651.0
|
)
|
|
|
(276.3
|
)
|
|
|
|
(261.0
|
)
|
Amortization
of Excess Cost of Equity Investments
|
|
(4.3
|
)
|
|
|
(1.9
|
)
|
|
|
|
(2.4
|
)
|
Other
Operating Income
|
|
27.9
|
|
|
|
0.6
|
|
|
|
|
2.9
|
|
General
and Administrative Expense
|
|
(264.0
|
)
|
|
|
(107.9
|
)
|
|
|
|
(283.6
|
)
|
Interest
and Other, Net
|
|
(836.7
|
)
|
|
|
(419.6
|
)
|
|
|
|
(348.2
|
)
|
Income
(Loss) from Continuing Operations before Income Taxes1
|
|
(3,471.3
|
)
|
|
|
193.1
|
|
|
|
|
(112.8
|
)
|
Income
Taxes1
|
|
(174.3
|
)
|
|
|
(75.1
|
)
|
|
|
|
(119.9
|
)
|
Income
(Loss) from Continuing Operations
|
|
(3,645.6
|
)
|
|
|
118.0
|
|
|
|
|
(232.7
|
)
|
Income
(Loss) from Discontinued Operations, Net of Tax
|
|
(0.6
|
)
|
|
|
(2.1
|
)
|
|
|
|
298.6
|
|
Net
Income (Loss)
|
$
|
(3,646.2
|
)
|
|
$
|
115.9
|
|
|
|
$
|
65.9
|
|
_____________
1
|
Kinder
Morgan Energy Partners’ income taxes for the nine months ended September
30, 2008, the four months ended September 30, 2007, and the five months
ended May 31, 2007, were $20.1 million, $20.8 million, and $15.6 million
respectively, and are included in segment
earnings.
|
2
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment.
|
3
|
Nine
months ended September 30, 2008 includes a non-cash goodwill impairment
charge of $1.26 billion.
|
4
|
Nine
months ended September 30, 2008 includes a non-cash goodwill impairment
charge of $2.09 billion.
|
5
|
Nine
months ended September 30, 2008 includes a non-cash goodwill impairment
charge of $0.68 billion.
|
6
|
Includes
earnings of the Trans Mountain pipeline system, our interest in the
Express pipeline system and the Jet Fuel pipeline system and a non-cash
goodwill impairment charge for the five months ended May 31,
2007.
|
The
following management discussion and analysis is a comparison of the financial
results for the three months ended September 30, 2008 and 2007, both of which
are Successor Company periods.
The
following also provides management’s discussion and analysis of the nine months
ended September 30, 2008 and four months ended September 30, 2007, which are
periods after the Going Private transaction (Successor Company), and of the five
months ended May 31, 2007, which is prior to the Going Private transaction
(Predecessor Company).
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
The
increase in net income was principally due to (i) increases in our Natural Gas
Pipelines – KMP segment, primarily due to contributions from Rockies
Express-West, which was fully operational for the quarter ended September 30,
2008, along with earnings generated from the improved margins in the Texas
Intrastate operations, (ii) higher oil production at the SACROC Unit, which
increased CO2 – KMP
sales and transport volumes, along with higher hedge prices and higher oil and
CO2
prices, (iii) increased earnings in the Terminals – KMP segment due to increased
contributions from the completion of expansion projects at existing facilities
and acquisitions that have occurred over the last year, (iv) earning
contributions to the Kinder Morgan Canada – KMP segment from the April 2008
completion of the first portion of the Anchor Loop expansion of the Trans
Mountain Pipeline, which boosted capacity from 260,000 to 285,000 barrels per
day and resulted in a higher tariff and (v) lower interest costs due to the use
of proceeds from the sale of an 80% interest in NGPL PipeCo LLC to retire and
reduce debt.
The
above favorable variances were offset by (i) increased DD&A expense in 2008
due principally to increases in 2007 and 2008 capital expenditures, (ii) lower
earning contributions from NGPL and Power, as portions of these segments were
sold in the first quarter of 2008 and (iii) $15.4 million of incremental
expenses associated with hurricanes Gustav and Ike, and fires at three separate
terminal locations.
Kinder
Morgan Energy Partners also estimated that it lost $21.5 million in earnings
related to these hurricane casualties mentioned above due to loss of
business.
Nine
months ended September 30, 2008
The
net loss primarily resulted from a $4.03 billion non-cash goodwill impairment
charge that was recorded in the second quarter of 2008 (see Note 3 of the
accompanying Notes to Consolidated Financial Statements). Other items negatively
affecting results for the nine months ended September 30, 2008 include (i)
reduced earning contributions from NGPL and Power as portions of these segments
were sold in 2008, (ii) DD&A expense associated with expansion capital
expenditures, (iii) general and administrative costs that included labor costs
and associated costs for new hires during this period to support Kinder Morgan
Energy Partners’ growing operations and (iv) $15.4 million of incremental
expenses associated with hurricanes Gustav and Ike and fires at three separate
terminal locations.
Kinder
Morgan Energy Partners also estimated that it lost $21.5 million in earnings
related to these hurricane casualties mentioned above due to loss of
business.
The
net loss was partially offset by (i) contributions from Rockies Express-West,
which began service in January 2008 and reached full operations in May 2008 and
increasing margins in the Texas Intrastate pipelines, (ii) favorable interest
expense due to the February 2008 sale of an 80% ownership interest in NGPL
PipeCo LLC for approximately $5.9 billion, with the proceeds from the sale used
to pay down debt, (iii) strong CO2 sales and
transport volumes in the CO2 – KMP
segment, as well as increases of the average crude oil sale prices, (iv) the
completion of expansion projects at existing facilities and recent acquisitions
within the Terminals – KMP segment and (v) the completion of the Pump Station
and anchor loop expansion within Kinder Morgan Canada – KMP.
Four
months ended September 30, 2007
Net
Income for the period was driven by solid contributions from CO2 – KMP,
NGPL, Natural Gas Pipelines – KMP and Products Pipelines – KMP, which accounted
for 24%, 22%, 19% and 17%, respectively, or 82% collectively, of segment
earnings before DD&A. CO2 – KMP was
driven almost equally by our sales and transport and oil and gas producing
activities. The Texas Intrastate Pipelines accounted for over 50% of the Natural
Gas Pipelines – KMP performance and the Pacific Operations accounted for
approximately 50% of the Product Pipelines – KMP segment.
Net
income was adversely impacted by (i) expenses related to the $4.8 billion in
incremental debt resulting from the Going Private transaction (see discussion
below on impact of purchase method of accounting on segment earnings) and (ii)
DD&A expense associated with expansion capital expenditures.
Five
months ended May 31, 2007
Net
income was driven by solid performance from NGPL as well as all Kinder Morgan
Energy Partners segments except Kinder Morgan Canada – KMP, as discussed below.
NGPL contributed $267 million while Products Pipelines – KMP, Natural Gas
Pipelines – KMP and CO2 – KMP each
contributed over $200 million.
Offsetting
these positive factors were (i) a $377.1 million goodwill impairment charge
associated with the Trans Mountain Pipeline (see Note 3 of the accompanying
Notes to Consolidated Financial Statements) and (ii) $141.0 million in
additional general and administrative expense associated with the Going Private
transaction.
Impact
of the purchase method of accounting on segment earnings
Except
for the second quarter 2008 goodwill impairment charge described previously, the
impacts of the purchase method of accounting on segment earnings (loss) before
DD&A relate primarily to the revaluation of the accumulated other
comprehensive income related to derivatives accounted for as hedges in the
CO2 –
KMP and Natural Gas Pipelines – KMP segments. Where there is an impact to
segment earnings (loss) before DD&A from the Going Private transaction, the
impact is described in the individual business segment discussions, which
follow. The effects on DD&A expense result from changes in the carrying
values of certain tangible and intangible assets to their estimated fair values
as of May 30, 2007. This revaluation results in changes to DD&A expense in
periods subsequent to May 30, 2007. The purchase accounting effect on interest
expense, net result principally from the revaluation of certain debt instruments
to their estimated fair values as of
May
30, 2007, resulting in changes to interest expense in subsequent
periods.
Please
refer to the individual business segment discussions included elsewhere in this
management’s discussion and analysis for additional information regarding
individual business segment results. Refer to the headings “General and
Administrative Expense,” “Interest and Other, Net” and “Income Taxes –
Continuing Operations” also included elsewhere herein, for additional
information regarding these items.
Results
of Operations
The
following comparative discussion of our results of operations is by segment for
factors affecting segment earnings, and on a consolidated basis for other
factors.
We
manage our various businesses by, among other things, allocating capital and
monitoring operating performance. This management process includes dividing the
company into business segments so that performance can be effectively monitored
and reported for a limited number of discrete businesses. The business segments
are described in Note 14 of the accompanying Notes to Consolidated Financial
Statements.
The
accounting policies we apply in the generation of business segment earnings are
generally the same as those applied to the accompanying Consolidated Statements
of Operations and described in Note 1 of the Notes to Consolidated Financial
Statements included in our 2007 Form 10-K. Certain items included in earnings
from continuing operations are either not allocated to business segments or are
not considered by management in its evaluation of business segment performance.
In general, the items not included in segment results are interest expense,
general and administrative expenses and DD&A. In addition, for our business
segments that are not also business segments of Kinder Morgan Energy Partners
(currently the NGPL and Power business segments), certain items included in
“Other Income and (Expenses)” and income taxes are not included in segment
results. With adjustment for these items, we currently evaluate business segment
performance primarily based on segment earnings before DD&A in relation to
the level of capital employed. Beginning in 2007, the segment earnings measure
was changed from segment earnings to segment earnings before DD&A for
segments not also segments of Kinder Morgan Energy Partners. This change was
made to conform our disclosure to the internal reporting we use as a result of
the Going Private transaction. Because Kinder Morgan Energy Partners’
partnership agreement requires it to distribute 100% of its available cash to
its partners on a quarterly basis (Kinder Morgan Energy Partners’ available cash
consists primarily of all of its cash receipts, less cash disbursements and
changes in reserves), we consider each period’s earnings before all non-cash
depreciation, depletion and amortization expenses to be an important measure of
business segment performance for our segments that are also segments of Kinder
Morgan Energy Partners. In addition, for our business segments that are also
business segments of Kinder Morgan Energy Partners, we use segment earnings
before depreciation, depletion and amortization expenses (“EBDA”) internally as
a measure of profit and loss for evaluating business segment performance and for
deciding how to allocate resources to these business segments. We account for
intersegment sales at market prices, while we account for asset transfers
between entities at either market value or, in some instances, book
value.
Following
are operating results by individual business segment (before intersegment
eliminations), including explanations of significant variances between the three
months ended September 30, 2008 and 2007, both of which are Successor Company
periods.
The
following also provides management’s discussion and analysis of the nine months
ended September 30, 2008 and four months ended September 30, 2007, which are
periods after the Going Private transaction (Successor Company), and of the five
months ended May 31, 2007, which is prior to the Going Private transaction
(Predecessor Company).
Natural
Gas Pipeline Company of America
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Segment
Earnings Before DD&A
|
$
|
11.5
|
|
|
$
|
158.1
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Segment
Earnings Before DD&A
|
$
|
116.2
|
|
|
$
|
217.5
|
|
|
|
$
|
267.4
|
|
As
discussed in Note 11 of the accompanying Notes to Consolidated Financial
Statements, on February
15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC (formerly MidCon
Corp.), which owns Natural Gas Pipeline Company of America and certain
affiliates, collectively referred to as “NGPL,” to Myria Acquisition Inc. for
approximately $2.9 billion. We also received $3.0 billion of cash previously
held in escrow related to a notes offering by NGPL PipeCo LLC in December 2007,
the net proceeds of which were distributed to us as repayment of intercompany
indebtedness and as a dividend, immediately prior to the closing of the sale to
Myria. Pursuant to the purchase agreement, Myria acquired all 800 Class B shares
and we retained all 200 Class A shares of NGPL PipeCo LLC. We will continue to
operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is owned
by a syndicate of investors led by Babcock & Brown, an international
investment and specialized fund and asset management group. As a result of the
sale, beginning February 15, 2008, we account for NGPL’s earnings derived from
our 20% ownership interest of NGPL PipeCo LLC under the equity
method.
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
At
the 100% asset ownership level, NGPL’s earnings before depreciation, depletion
and amortization expenses for the three months ended September 30, 2008 were
$176.1 million. NGPL’s earnings before depreciation, depletion and amortization
increased by $18.0 million (11%) for the three months ended September 30, 2008
over the comparable period in 2007. This increase in earnings was due to (i)
$25.3 million of gross profit primarily earned on increased transport and
storage service capacity and (ii) a $5.7 million increase in other income
primarily related to a gain on sale of land recognized in September 2008. These
increases in earnings were offset by $13.0 million of incremental operating
expenses. The difference between the $176.1 million of segment earnings at the
100% asset ownership level described previously, and the $11.5 million of
segment earnings for the three months ended September 30, 2008 recorded on
Knight Inc.’s books results from the reduction in our ownership to 20% and our
accounting for NGPL under the equity method after February 14,
2008.
Nine months ended September 30,
2008
At
the 100% ownership level, NGPL’s earnings before depreciation, depletion and
amortization expenses for the nine months ended September 30, 2008 were $510.0
million. Earnings for this period reflect strong transportation and storage
revenues of $765.8 million, strong natural gas sales of $117.4 million, and a
$5.6 million gain related to a sale of land in September 2008. These positive
impacts were offset by gas purchase expenses of $236.4 million and other costs
of sales as well as other operating expenses of $147.4 million. The difference
between the $510.0 million segment earnings at the 100% asset ownership level
described previously, and the $116.2 million of segment earnings for the nine
months ended September 30, 2008 recorded on Knight Inc.’s books results from the
reduction in our ownership to 20% and our accounting for NGPL under the equity
method after February 14, 2008.
Four
months ended September 30, 2007
NGPL’s
earnings before DD&A for the four months ended September 30, 2007 were
$217.5 million, consisting of operating revenues of $413.2 million, gas
purchases and other cost of sales of $137.5 million, other operating expenses of
$58.9 million and equity in earnings of Horizon of $0.7 million. Gross margins
during this period were positively impacted by strong transportation and storage
system revenues associated with the re-contracting of services, partially offset
by pipeline rehabilitation, electric compression, and other system operational
and maintenance expenses.
Five
months ended May 31, 2007
NGPL’s
earnings before DD&A for the five months ended May 31, 2007 were $267.4
million, consisting of operating revenues of $426.5 million, gas purchases and
other cost of sales of $99.3 million, other operating expenses of $60.4 million
and equity in earnings of Horizon of $0.6 million. Transportation and storage
revenues reflected the positive impact of re-contracted services. Gross margins
were offset slightly by pipeline rehabilitation, electric compression, and other
system operational and maintenance expenses.
Please
refer to our 2007 Form 10-K for additional information regarding
NGPL.
Power
As
discussed in Note 11 of the accompanying Notes to Consolidated Financial
Statements, on January 25, 2008, we sold our interests in three natural
gas-fired power plants in Colorado to Bear Stearns. The closing of the sale was
effective January 1, 2008, and we received net proceeds of $63.1
million.
The
remaining operations for the Power segment are (i) Triton Power Michigan LLC’s
lease and operation of the Jackson, Michigan 550-megawatt natural gas fired
electric power plant and (ii) a 103-megawatt natural gas fired power plant in
Snyder, Texas whose only customer is the CO2 – KMP
segment that generates electricity for its SACROC operations.
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues
|
$
|
17.5
|
|
|
$
|
21.0
|
|
Operating
Expenses and Minority Interests
|
|
(15.9
|
)
|
|
|
(19.3
|
)
|
Equity
in Earnings of Thermo Cogeneration Partnership
|
|
-
|
|
|
|
3.3
|
|
Segment
Earnings Before DD&A
|
$
|
1.6
|
|
|
$
|
5.0
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues
|
$
|
38.2
|
|
|
$
|
29.9
|
|
|
|
$
|
19.9
|
|
Operating
Expenses and Minority Interests
|
|
(33.8
|
)
|
|
|
(27.1
|
)
|
|
|
|
(16.1
|
)
|
Equity
in Earnings of Thermo Cogeneration Partnership
|
|
-
|
|
|
|
4.6
|
|
|
|
|
5.1
|
|
Segment
Earnings Before DD&A
|
$
|
4.4
|
|
|
$
|
7.4
|
|
|
|
$
|
8.9
|
|
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
Power’s
segment earnings before DD&A decreased from $5.0 million in the third
quarter of 2007 to $1.6 million in the third quarter of 2008, a decrease of $3.4
million (68%). This decrease was principally the result of (i) a $4.1 million
decrease in earnings before DD&A related to the power assets sold in January
2008 and (ii) a $1.6 million increase in minority interest expense. These
negative impacts were partially offset by a $2.2 million decrease in operating
expenses.
Nine
months ended September 30, 2008
Earnings
before DD&A for the first nine months of 2008 reflect (i) the loss of $11.6
million and $9.7 million of 2007 operating revenues and equity earnings,
respectively, related to the power assets sold in January 2008 and (ii) $15.4
million in minority interest expense. These negative impacts were partially
offset by (i) $8.9 million in 2007 operating expenses associated with those sold
power assets and (ii) a $1.5 million property tax settlement received in
2008.
Four
months ended September 30, 2007
Earnings
before DD&A for the four months ended September 30, 2007 reflect (i) a loss
in operating revenues due to 2006 equipment sales, (ii) a negative impact to
operating revenues at the Thermo Greeley facility related to gas purchase and
sale agreements and (iii) $3.1 million in expenses for our Jackson, Michigan
power facility plant dispatch. These adverse impacts to earnings were partially
offset by (i) strong operating revenues of $4.3 million from our Jackson,
Michigan facility and (ii) our earnings from our investment in Thermo
Cogeneration Partnership.
Five
months ended May 31, 2007
Earnings
before DD&A for the five months ended May 31, 2007 reflect (i) an
unfavorable impact to operating revenues associated with 2006 equipment sales,
(ii) a loss in operating revenues at the Thermo Greeley facility associated with
gas purchase and sale agreements and (iii) $3.2 million in expenses for our
Jackson, Michigan power facility plant dispatch. These unfavorable impacts to
earnings were partially offset by (i) strong operating revenues of $4.5 million
from our Jackson, Michigan facility and (ii) our earnings from our investment in
Thermo Cogeneration Partnership.
Please
refer to our 2007 Form 10-K for additional information regarding
Power.
Products
Pipelines – KMP
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues1
|
$
|
205.6
|
|
|
$
|
202.7
|
|
Operating
Expenses2
|
|
(78.7
|
)
|
|
|
(80.1
|
)
|
Other
Income (Expense)3
|
|
(0.3
|
)
|
|
|
0.6
|
|
Goodwill
Impairment4
|
|
(152.6
|
)
|
|
|
-
|
|
Earnings
from Equity Investments5
|
|
3.3
|
|
|
|
7.3
|
|
Interest
Income and Other Income, Net6
|
|
0.4
|
|
|
|
2.9
|
|
Income
Tax Benefit (Expense)
|
|
(0.1
|
)
|
|
|
(6.4
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
(22.4
|
)
|
|
$
|
127.0
|
|
|
|
|
|
|
|
|
|
Operating Statistics
(MMBbl)
|
|
|
|
|
|
|
|
Gasoline
|
|
101.1
|
|
|
|
111.2
|
|
Diesel
Fuel
|
|
40.0
|
|
|
|
42.1
|
|
Jet
Fuel
|
|
29.6
|
|
|
|
31.9
|
|
Total
Refined Product Volumes
|
|
170.7
|
|
|
|
185.2
|
|
Natural
Gas Liquids
|
|
5.8
|
|
|
|
7.4
|
|
Total
Delivery Volumes7
|
|
176.5
|
|
|
|
192.6
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues1
|
$
|
602.5
|
|
|
$
|
269.4
|
|
|
|
$
|
331.8
|
|
Operating
Expenses2
|
|
(209.6
|
)
|
|
|
(103.1
|
)
|
|
|
|
(116.4
|
)
|
Other
Income (Expense)3
|
|
(0.6
|
)
|
|
|
1.7
|
|
|
|
|
(0.6
|
)
|
Goodwill
Impairment4
|
|
(1,266.5
|
)
|
|
|
-
|
|
|
|
|
-
|
|
Earnings
from Equity Investments5
|
|
13.6
|
|
|
|
10.2
|
|
|
|
|
12.4
|
|
Interest
Income and Other Income (Expense), Net6
|
|
2.2
|
|
|
|
3.5
|
|
|
|
|
4.7
|
|
Income
Tax Expense
|
|
(0.9
|
)
|
|
|
(7.3
|
)
|
|
|
|
(7.5
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
(859.3
|
)
|
|
$
|
174.4
|
|
|
|
$
|
224.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics
(MMBbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
299.5
|
|
|
|
149.2
|
|
|
|
|
182.8
|
|
Diesel
Fuel
|
|
120.2
|
|
|
|
55.6
|
|
|
|
|
66.6
|
|
Jet
Fuel
|
|
89.2
|
|
|
|
42.7
|
|
|
|
|
51.3
|
|
Total
Refined Product Volumes
|
|
508.9
|
|
|
|
247.5
|
|
|
|
|
300.7
|
|
Natural
Gas Liquids
|
|
18.7
|
|
|
|
9.1
|
|
|
|
|
13.7
|
|
Total
Delivery Volumes7
|
|
527.6
|
|
|
|
256.6
|
|
|
|
|
314.4
|
|
____________
1
|
Three
and nine months ended September 30, 2008 amounts include a $5.1 million
negative impact to revenues from the proposed settlement of certain
litigation matters related to Kinder Morgan Energy Partners’ Pacific
operations’ East Line
pipeline.
|
2
|
Three
and nine months ended September 30, 2008 amounts include $4.2 million in
expense from the proposed settlement of certain litigation matters related
to Kinder Morgan Energy Partners’ Pacific operations’ East Line pipeline,
and $0.1 million expense related to hurricane clean-up and
repair activities. Nine months ended September 30, 2008 amount includes a
$3.0 million positive impact to expense related to Kinder Morgan Energy
Partners’ Pacific operations and a $3.0 million negative impact to expense
related to Kinder Morgan Energy Partners’ Calnev Pipeline associated with
legal liability adjustments. Four months ended September 30, 2007 amount
includes a $15.0 million expense for a litigation settlement reached with
Contra Costa County, California, and a $3.2 million expense from the
settlement of certain litigation matters related to Kinder Morgan Energy
Partners’ West Coast refined products terminal operations. Five months
ended May 31, 2007 amount includes an expense of $2.2 million associated
with environmental liability
adjustments.
|
3
|
Three
and nine months ended September 30, 2008 amounts include a $0.3 million
negative impact to segment earnings resulting from valuation adjustments
related to assets sold in September 2008 and four months ended September
30, 2007 amount includes a $1.8 million charge to segment earnings
resulting from valuation adjustments related to assets sold in June 2007;
both were recorded in the application of the purchase method of accounting
to the Going Private transaction.
|
4
|
Three
and nine months ended September 30, 2008 include non-cash goodwill
impairment charges of $152.6 million and $1,266.5 million, respectively;
see Note 3 of the accompanying Notes to Consolidated Financial
Statements.
|
5
|
Three
and nine months ended September 30, 2008 amounts include an expense of
$0.1 million reflecting Kinder Morgan Energy Partners’ portion of
Plantation Pipe Line Company’s expenses related to hurricane clean-up and
repair activities.
|
6
|
Three
and nine month 2008 amounts include charges to income of $0.7 million and
$1.4 million, respectively, resulting from unrealized foreign currency
losses on long-term debt transactions. Three and four months ended
September 30, 2007 amounts include income of $0.9 million and $1.7
million, respectively, resulting from unrealized foreign currency gains on
long-term debt transactions.
|
7
|
Includes
Pacific, Plantation, Calnev, Central Florida, Cochin and Cypress pipeline
volumes.
|
Following
is information related to the increases and decreases, in the same comparable
periods of 2008 and 2007, of the segment’s remaining changes in earnings before
depreciation, depletion, and amortization expense and amortization of excess
cost of equity investment (“EBDA”), and changes in operating revenues after
certain items:
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Pacific
Operations
|
$
|
(9.2
|
)
|
|
(13
|
)%
|
|
$
|
(2.3
|
)
|
|
(2
|
)
|
Cochin
Pipeline System
|
|
(1.0
|
)
|
|
(10
|
)%
|
|
|
(3.5
|
)
|
|
(21
|
)%
|
Southeast
Terminals
|
|
3.9
|
|
|
34
|
%
|
|
|
8.8
|
|
|
55
|
%
|
West
Coast Terminals
|
|
2.3
|
|
|
20
|
%
|
|
|
2.7
|
|
|
15
|
%
|
Central
Florida Pipeline
|
|
1.1
|
|
|
11
|
%
|
|
|
1.6
|
|
|
14
|
%
|
All
Other (Including Eliminations)
|
|
(0.7
|
)
|
|
(2
|
)%
|
|
|
0.7
|
|
|
2
|
%
|
Total
Products Pipelines
|
$
|
(3.6
|
)
|
|
(3
|
)%
|
|
$
|
8.0
|
|
|
4
|
%
|
Combined,
the certain items described in the footnotes to the table above, including the
$152.6 million goodwill impairment charge, decreased the Products Pipelines’
segment earnings before depreciation, depletion and amortization expenses by
$145.8 million when compared to the three months ended September 30, 2007.
Following is a discussion of the segment’s earnings before DD&A, excluding
the effect of certain items described in the footnotes to the table
above.
The
decrease in EBDA from the Pacific operations was driven by a $6.8 million (47%)
increase in operating and maintenance expenses in the third quarter of 2008,
relative to the third quarter last year due to (i) increased major maintenance
and pipeline integrity expenses (resulting mainly from project timing), (ii)
lower capitalized overhead credits, (iii) incremental expenses resulting from
environmental liability adjustments and (iv) lower gross profit on reduced
revenues, which decreased $2.3 million (2%) compared to the third quarter last
year, mainly due to an 8% decrease in mainline delivery volumes (primarily
gasoline volumes) as a result of reduced demand (primarily in the state of
California and Arizona).
The
decrease in EBDA from the Cochin Pipeline was due to lost gross profit on
reduced revenues, linked heavily to lower pipeline delivery volumes in 2008
versus 2007. The decreases in volumes were largely due to a continued decrease
in demand for propane in Eastern Canadian and Midwestern U.S. petrochemical and
fuel markets since the end of the third quarter last year.
The
increase in EBDA and revenues from the Southeast Terminals, Central Florida
Pipeline and West Coast Terminals operations was principally from (i) higher
margins on increased liquids inventory sales, (ii) sales generated from
incremental terminal throughput and storage activity, (iii) increased demand for
ethanol, and (iv) incremental returns from the completion of a number of capital
expansion projects that modified and upgraded terminal infrastructure, enabling
Kinder Morgan Energy Partners to provide additional ethanol related services to
its customers. The Central Florida Pipeline also benefited from higher product
delivery revenues, driven by an increase in the average tariff per barrel moved
as a result of a mid-year 2007 tariff rate increase on product
deliveries.
For
all segment assets combined, revenues for the third quarter of 2008 from refined
petroleum products deliveries were flat, but total volumes delivered fell 7.9%,
when compared to the third quarter of 2007. Compared to the third quarter last
year, the segment’s volumes were negatively impacted by reductions in demand,
driven primarily by higher crude oil and refined product prices and weaker
economic conditions, and partly by lost business associated with two hurricanes
in the third quarter of 2008. The decrease in delivery volumes included a 9%
drop in gasoline volumes, a 5% drop in diesel fuel volumes, and a 7% decline in
total jet fuel volumes. Excluding deliveries by Plantation Pipeline, total
segment refined products delivery volumes decreased 7.3% in the comparable three
month period. Although Plantation sustained no hurricane damage in 2008, the
pipeline system pumped reduced volumes in the third quarter of 2008 due to
hurricane-induced refinery shutdowns and to extended delays in restarting
certain refineries impacted by the hurricanes. Delivery volumes on Plantation
returned to pre-hurricane levels in early October.
Following
is segment EBDA and operating revenues information related to the nine and four
month periods ended September 30, 2008 and 2007, respectively, and the five
month period ended May 31, 2007:
Earnings
Before DD&A by Segment Assets:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Pacific
Operation
|
$
|
182.4
|
|
|
$
|
90.2
|
|
|
|
$
|
105.1
|
|
Cochin
Pipeline System
|
|
24.7
|
|
|
|
15.4
|
|
|
|
|
15.3
|
|
Southeast
Terminals
|
|
38.8
|
|
|
|
14.9
|
|
|
|
|
16.6
|
|
West
Coast Terminals
|
|
36.9
|
|
|
|
(0.2
|
)
|
|
|
|
19.3
|
|
Central
Florida Pipeline
|
|
31.9
|
|
|
|
12.6
|
|
|
|
|
15.3
|
|
Goodwill
Impairment Charge
|
|
(1,266.5
|
)
|
|
|
-
|
|
|
|
|
-
|
|
All
Other (Including Eliminations)
|
|
92.5
|
|
|
|
41.5
|
|
|
|
|
52.8
|
|
Total
Segment Earnings Before DD&A
|
$
|
(859.3
|
)
|
|
$
|
174.4
|
|
|
|
$
|
224.4
|
|
Operating
Revenues by Segment Assets:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Pacific
Operation
|
$
|
281.5
|
|
|
$
|
130.2
|
|
|
|
$
|
156.0
|
|
Cochin
Pipeline System
|
|
38.7
|
|
|
|
22.4
|
|
|
|
|
32.3
|
|
Southeast
Terminals
|
|
63.0
|
|
|
|
22.3
|
|
|
|
|
29.9
|
|
West
Coast Terminals
|
|
57.0
|
|
|
|
24.1
|
|
|
|
|
29.1
|
|
Central
Florida Pipeline
|
|
38.8
|
|
|
|
15.5
|
|
|
|
|
19.3
|
|
All
Other (Including Eliminations)
|
|
123.5
|
|
|
|
55.0
|
|
|
|
|
65.1
|
|
Total
Segment Operating Revenues
|
$
|
602.5
|
|
|
$
|
269.5
|
|
|
|
$
|
331.7
|
|
Nine
months ended September 30, 2008
Earnings
before DD&A were positively affected by strong earnings for the Southeast
Terminals, Central Florida Pipeline and West Coast Terminals operations that
were principally from (i) favorable margins on liquids inventory sales, (ii)
incremental terminal throughput and storage activity, (iii) solid demand for
ethanol, and (iv) incremental returns from the completion of a number of capital
expansion projects that modified and upgraded terminal infrastructure, enabling
Kinder Morgan Energy Partners to provide additional ethanol related services to
its customers. The Central Florida Pipeline also benefited from strong product
delivery revenues, driven by an increase in the average tariff per barrel moved
as a result of a mid-year 2007 tariff rate increase on product
deliveries.
Earnings
before DD&A were adversely affected by (i) a $1,266.5 million goodwill
impairment charge (see Note 3 of the accompanying Notes to Consolidated
Financial Statements), (ii) Pacific operations expenses for: (a) major
maintenance and pipeline integrity expenses (resulting mainly from project
timing), (b) incremental expenses resulting from environmental liability
adjustments, and (iii) weak demand for propane in Eastern Canadian and
Midwestern U.S. petrochemical and fuel markets resulting in lower volumes on the
Cochin Pipeline.
Four
months ended September 30, 2007
Kinder
Morgan Energy Partners’ Pacific operations are the largest contributor to this
segment’s earnings before DD&A. Earnings before DD&A were also
positively affected by (i) higher oil loss allowance tariff rates in 2007 and
lower pipeline integrity expenses within the Plantation Pipeline, (ii) an
increase in average tariff rates and increased mainline delivery volumes from
the 2006 expansion of the East Line pipeline and demand from West Coast military
bases in the Pacific operations, (iii) terminal revenues for the West Coast
operations included higher throughput volumes from the combined Carson/Los
Angeles Harbor terminal system, and from the Linnton and Willbridge terminals
located in Portland, Oregon and (iv) the West Coast operation’s $3.6 million
gain on the sale of its interest in the Black Oil pipeline system in Los
Angeles, California in June 2007.
Five
months ended May 31, 2007
Kinder
Morgan Energy Partners’ Pacific operations are the largest contributor to this
segment’s earnings before DD&A. Earnings before DD&A were also
positively affected by (i) Kinder Morgan Energy Partners’ January 1, 2007
acquisition of the remaining ownership interest in Cochin (approximately 50.2%)
that it did not already own, at which time Kinder Morgan Energy Partners became
the pipeline operator, (ii) an increase in average tariff rates and mainline
delivery from the 2006 expansion of the East Line pipeline and demand from West
Coast military bases contributed to the Pacific operations revenues and
earnings, (iii) higher throughput volumes from the combined Carson/Los Angeles
Harbor terminal system, and from the Linnton and Willbridge terminals located in
Portland, Oregon, for the West Coast operations and (iv) in May 2006 Kinder
Morgan Energy Partners completed construction and placed into service the
Greensboro facility used for petroleum pipeline transmix operations for a
capitalized cost of approximately $11 million.
Please
refer to our 2007 Form 10-K for additional information regarding Product
Pipelines – KMP.
Natural
Gas Pipelines – KMP
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues
|
$
|
2,359.4
|
|
|
$
|
1,526.8
|
|
Operating
Expenses1
|
|
(2,203.3
|
)
|
|
|
(1,387.5
|
)
|
Other
Income
|
|
0.1
|
|
|
|
0.4
|
|
Goodwill
Impairment3
|
|
152.6
|
|
|
|
-
|
|
Earnings
from Equity Investments
|
|
25.5
|
|
|
|
4.0
|
|
Interest
Income and Other Income, Net
|
|
3.9
|
|
|
|
-
|
|
Income
Tax Benefit (Expense)
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
Segment
Earnings Before DD&A
|
$
|
337.6
|
|
|
$
|
142.3
|
|
|
|
|
|
|
|
|
|
Operating
Statistics (Trillion Btus)
|
|
|
|
|
|
|
|
Natural
Gas Transport Volumes 5
|
|
559.0
|
|
|
|
441.7
|
|
Natural
Gas Sales Volumes 6
|
|
220.0
|
|
|
|
224.4
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues
|
$
|
6,916.6
|
|
|
$
|
2,114.7
|
|
|
|
$
|
2,640.6
|
|
Operating
Expenses1
|
|
(6,463.5
|
)
|
|
|
(1,929.7
|
)
|
|
|
|
(2,418.5
|
)
|
Other
Income (Expense)2
|
|
2.8
|
|
|
|
1.8
|
|
|
|
|
(0.1
|
)
|
Goodwill
Impairment3
|
|
(2,090.2
|
)
|
|
|
-
|
|
|
|
|
-
|
|
Earnings
from Equity Investments4
|
|
80.4
|
|
|
|
5.3
|
|
|
|
|
8.9
|
|
Interest
Income and Other Income, Net
|
|
8.8
|
|
|
|
-
|
|
|
|
|
0.2
|
|
Income
Tax Benefit (Expense)
|
|
(1.8
|
)
|
|
|
-
|
|
|
|
|
(2.6
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
(1,546.9
|
)
|
|
$
|
192.1
|
|
|
|
$
|
228.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Statistics (Trillion Btus)
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Transport Volumes5
|
|
1,599.5
|
|
|
|
568.8
|
|
|
|
|
707.4
|
|
Natural
Gas Sales Volumes6
|
|
660.0
|
|
|
|
295.2
|
|
|
|
|
345.8
|
|
___________
1
|
Three
and nine month 2008 amounts include (i) a $12.2 million positive impact to
income and a $0.9 million negative impact to income, respectively,
resulting from unrealized mark to market gains and losses due to the
discontinuance of hedge accounting at Casper Douglas; and (ii) a $4.4
million expense related to hurricane clean-up and repair activities.
Beginning in the second quarter of 2008, the Casper and Douglas gas
processing operations discontinued hedge accounting. Amount also includes
positive impact to segment earnings of $0.5 million for the nine month
periods ended September 30, 2008, and of $0.3 million and $0.7 million for
the three and four month periods ended September 30, 2007, respectively,
resulting from valuation adjustments related to derivative contracts in
place at the time of the Going Private transaction and recorded in the
application of the purchase method of
accounting.
|
2
|
Four
months ended September 30, 2007 amounts include a $1.4 million expense
resulting from valuation adjustments, related to assets sold in June 2007,
recorded in the application of the purchase method of accounting to the
Going Private transaction.
|
3
|
Three
and nine months ended September 30, 2008 include non-cash goodwill
impairment adjustments of $152.6 million and $2,090.2 million,
respectively; see Note 3 of the accompanying Notes to Consolidated
Financial Statements.
|
4
|
Five
months ended May 31, 2007 amount includes an expense of $1.0 million
reflecting Kinder Morgan Energy Partners’ portion of a loss from the early
extinguishment of debt by Red Cedar Gathering
Company.
|
5
|
Includes
Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline
Company LLC, TransColorado Gas Transmission Company LLC, Rockies Express
Pipeline LLC, and Texas intrastate natural gas pipeline group pipeline
volumes.
|
6
|
Represents
Texas intrastate natural gas pipeline group
volumes.
|
Following
is information related to the increases and decreases, in the same comparable
periods of 2008 and 2007, of the segment’s remaining changes in earnings before
depreciation, depletion, and amortization expense and amortization of excess
cost of equity investment (“EBDA”), and changes in operating revenues after
certain items:
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Rockies
Express Pipeline
|
$
|
23.0
|
|
|
568
|
%
|
|
$
|
n/a
|
|
|
n/a
|
|
Texas
Intrastate Natural Gas Pipeline Group
|
|
13.6
|
|
|
18
|
%
|
|
|
834.7
|
|
|
59
|
%
|
TransColorado
Pipeline
|
|
3.1
|
|
|
28
|
%
|
|
|
2.9
|
|
|
23
|
%
|
Kinder
Morgan Louisiana Pipeline
|
|
3.0
|
|
|
n/a
|
|
|
|
-
|
|
|
-
|
|
Casper
and Douglas Gas Processing
|
|
(3.0
|
)
|
|
(48
|
)%
|
|
|
3.9
|
|
|
14
|
%
|
Trailblazer
Pipeline
|
|
(2.7
|
)
|
|
20
|
%
|
|
|
(1.1
|
)
|
|
(7
|
)
|
All
Others
|
|
(1.8
|
)
|
|
(5
|
)%
|
|
|
(7.9
|
)
|
|
(13
|
)%
|
Intrasegment
Eliminations
|
|
-
|
|
|
-
|
|
|
|
0.1
|
|
|
27
|
%
|
Total
Natural Gas Pipelines
|
$
|
35.2
|
|
|
25
|
%
|
|
$
|
832.6
|
|
|
55
|
%
|
For
the three months ended September 30, 2008, the certain items related to the
Natural Gas Pipelines – KMP business segment, described in the footnotes to the
table above, including the $152.6 million goodwill impairment adjustment,
increased earnings before depreciation, depletion and amortization expenses by
$160.1 million when compared to the same period last year.
One
of these certain items is an increase in earnings of $12.2 million in the
comparable three month periods due to an unrealized mark to market gain
resulting from the removal of hedge designation, effective April 1, 2008, on
certain derivative contracts used to mitigate the price risk associated with
future sales of natural gas liquids from the Casper and Douglas natural gas
processing operations. For more information on the gain from the discontinuance
of hedge accounting, see Note 15 of the accompanying Notes to Consolidated
Financial Statements.
The
overall increases in segment earnings before depreciation, depletion and
amortization expenses in the three months ended September 30, 2008, when
compared to the same period last year, were driven primarily by incremental
contributions from Kinder Morgan Energy Partners’ 51% equity ownership interest
in the Rockies Express Pipeline, higher earnings from its Texas intrastate
natural gas pipeline group, improved performance from its TransColorado Pipeline
and incremental earnings from its Kinder Morgan Louisiana Pipeline.
The
incremental earnings from Kinder Morgan Energy Partners’ investment in Rockies
Express relates to higher net income earned by Rockies Express Pipeline LLC,
primarily due to the start-up of service on the Rockies Express-West pipeline
segment in January and May 2008. Rockies Express-West began interim service for
up to 1.4 billion cubic feet per day of natural gas on the segment’s first 503
miles of pipe on January 12, 2008, and service on the remaining 210 miles (to
Audrain County, Missouri) began on May 20, 2008. Now fully operational, Rockies
Express-West has the capacity to transport up to 1.5 billion cubic feet per day
and can make deliveries to interconnects with the KMIGT Pipeline system,
Northern Natural Gas Company, Natural Gas Pipeline Company of America LLC, ANR
and Panhandle Eastern Pipeline Company.
Rockies
Express conducted further hydrostatic testing of portions of its system during
September 2008 to satisfy U.S. Department of Transportation testing requirements
to operate at its targeted higher operating pressure. This hydrostatic test
resulted in a temporary outage of pipeline delivery points and reduction of firm
capacity available to firm shippers. By the terms of the Rockies Express FERC
Gas Tariff, firm shippers are entitled to daily reservation revenue credits for
non-force majeure and planned maintenance outages, and the estimated impact from
any temporary outages were included in the third quarter results.
Kinder
Morgan Energy Partners’ Texas intrastate natural gas pipeline group includes the
operations of (i) Kinder Morgan Tejas (including Kinder Morgan Border Pipeline),
(ii) Kinder Morgan Texas Pipeline, (iii) Kinder Morgan North Texas Pipeline, and
(iv) Mier-Monterrey Mexico Pipeline. The group’s quarter-to-quarter increase in
earnings in 2008 versus 2007 was mainly attributable to higher natural gas sales
margins driven by higher average sales prices. This increase in earnings was
partially offset by a decrease in the Texas intrastate group’s natural gas
transportation and sales volumes, which were down 9% and 2%,
respectively.
Because
the Texas intrastate group buys and sells significant quantities of natural gas,
the variances from period to period in both segment revenues and segment
operating expenses (which include natural gas costs of sales) are partly due to
changes in the intrastate group’s average prices and volumes for natural gas
purchased and sold. To the extent possible, Kinder Morgan Energy Partners
balances the pricing and timing of its natural gas purchases to its natural gas
sales, and these contracts are frequently settled in terms of an index price for
both purchases and sales. In order to minimize commodity price risk, most sales
are balanced with purchases at the index price on the date of
settlement.
The
increases in the 2008 third quarter earnings from the TransColorado Pipeline
reflect contract improvements and expansions completed since the end of the
third quarter of 2007, caused by an increase in natural gas production in the
Piceance and San Juan basins of New Mexico and Colorado. In December 2007, an
approximately $50 million expansion project on the TransColorado Pipeline was
completed. The Blanco-Meeker project was placed into service January 1, 2008,
and boosted natural gas transportation capacity on the pipeline by approximately
250 million cubic feet per day from the Blanco Hub area in San Juan County, New
Mexico through TransColorado’s existing pipeline for deliveries to the Rockies
Express Pipeline at an existing point of interconnection located at the Meeker
Hub in Rio Blanco County, Colorado. All of the incremental capacity is
subscribed under a long-term contract with ConocoPhillips.
The
incremental earnings before DD&A from the Kinder Morgan Louisiana Pipeline
reflects other non-operating income realized in the third quarter of 2008
pursuant to FERC regulations governing allowances for capital funds that are
used for pipeline construction costs (an equity cost of capital allowance). The
equity cost of capital allowance provides for a reasonable return on
construction costs that are funded by equity contributions, similar to the
allowance for capital costs funded by borrowings.
The
decrease in quarter-to-quarter earnings before DD&A from the Casper Douglas
gas processing operations was primarily attributable to higher natural gas
purchase costs, due to increases in both prices and volumes, relative to last
year. The higher cost of sales expense more than offset period-to-period revenue
increases resulting from both higher average prices on natural gas liquids sales
and higher revenues from sales of excess natural gas.
The
decrease in earnings before DD&A from the Trailblazer Pipeline was mainly
due to lower revenues from natural gas transportation services and unfavorable
timing differences on the settlement of pipeline transportation imbalances in
the three months ended September 30, 2008, relative to 2007.
Following
is segment EBDA, and operating revenues information related to the nine months
ended September 30, 2008, four months ended September 30, 2007 and five months
ended May 31, 2007:
Earnings
Before DD&A by Segment Asset:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Rockies
Express Pipeline
|
$
|
58.7
|
|
|
$
|
(5.4
|
)
|
|
|
$
|
(4.3
|
)
|
Texas
Intrastate Natural Gas Pipeline Group
|
|
288.0
|
|
|
|
106.0
|
|
|
|
|
133.0
|
|
TransColorado
Pipeline
|
|
41.6
|
|
|
|
14.5
|
|
|
|
|
17.9
|
|
Kinder
Morgan Louisiana Pipeline
|
|
6.0
|
|
|
|
-
|
|
|
|
|
-
|
|
Casper
and Douglas Gas Processing
|
|
8.9
|
|
|
|
10.2
|
|
|
|
|
7.3
|
|
Trailblazer
Pipeline
|
|
34.5
|
|
|
|
18.0
|
|
|
|
|
18.1
|
|
Goodwill
Impairment Charge
|
|
(2,090.2
|
)
|
|
|
-
|
|
|
|
|
-
|
|
All
Others
|
|
105.6
|
|
|
|
48.8
|
|
|
|
|
56.5
|
|
Total
Segment Earnings Before DD&A
|
$
|
(1,546.9
|
)
|
|
$
|
192.1
|
|
|
|
$
|
228.5
|
|
Operating
Revenues by Major Segment Asset:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Texas
Intrastate Natural Gas Pipeline Group
|
$
|
6,575.5
|
|
|
$
|
1,964.2
|
|
|
|
$
|
2,492.4
|
|
TransColorado
Pipeline
|
|
47.5
|
|
|
|
17.1
|
|
|
|
|
20.7
|
|
Casper
and Douglas Gas Processing
|
|
111.4
|
|
|
|
35.9
|
|
|
|
|
34.7
|
|
Trailblazer
Pipeline
|
|
42.5
|
|
|
|
21.5
|
|
|
|
|
22.6
|
|
All
Others
|
|
143.0
|
|
|
|
76.5
|
|
|
|
|
70.7
|
|
Eliminations
|
|
(3.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
(0.5
|
)
|
Total
Segment Operating Revenues
|
$
|
6,916.6
|
|
|
$
|
2,114.7
|
|
|
|
$
|
2,640.6
|
|
Nine
months ended September 30, 2008
The
Natural Gas Pipelines-KMP segment’s earnings before DD&A in the nine months
ended September 30, 2008 were driven by (i) a strong performance by the Texas
intrastate natural gas pipeline group due to higher natural gas sales margins
and volumes partially due to incremental sales on a long-term contract with one
if its largest customers that became effective April 1, 2007 and greater natural
gas processing volumes and margins, (ii) contributions from Kinder Morgan Energy
Partners’ 51% ownership interest in the Rockies Express Pipeline as described
previously, (iii) a strong performance from the TransColorado Pipeline primarily
due to contract improvements and expansions completed since the end of the third
quarter of 2007 as described previously and (iv) earnings from the Kinder Morgan
Louisiana Pipeline that benefited from FERC regulations governing allowances for
capital funds that are used for pipeline construction costs (an equity cost of
capital allowance).
Offsetting
the above positive impacts to the segment’s earnings before DD&A were the
following: (i) a $2,090.2 million goodwill impairment charge (see Note 3 of the
accompanying Notes to Consolidated Financial Statements), (ii) the Casper and
Douglas gas processing operations were adversely affected by higher natural gas
purchase costs, due to increases in both prices and volumes, which more than
offset revenue increases resulting from both higher average prices on natural
gas liquids sales and higher revenues from sales of excess natural gas and (iii)
the Trailblazer Pipeline’s earnings were affected by lower revenues from natural
gas transportation services and unfavorable timing differences on the settlement
of pipeline transportation imbalances.
Four
months ended September 30, 2007 and five months ended May 31, 2007
Earnings
before DD&A in the four months ended September 30, 2007 and five months
ended May 31, 2007 were positively affected by (i) strong performances by the
Texas intrastate natural gas pipeline group due to higher natural gas sales
margins and volumes partially due to incremental sales on a long-term contract
with one if its largest customers that became effective April 1, 2007 and
greater natural gas processing volumes and margins and (ii) earnings from Casper
and Douglas gas processing operations that had solid natural gas liquids sales
revenues driven by higher prices and volumes.
Adversely
affecting the earnings before DD&A in the four months ended September 30,
2007 and five months ended May 31, 2007 was a loss from Kinder Morgan Energy
Partners’ investment in Rockies Express due to depreciation and interest
expenses allocable to a segment of this project that generated only limited
natural gas reservation revenues and volumes since it was placed in service in
February 2007, as described previously.
Please
refer to our 2007 Form 10-K for additional information regarding Natural Gas
Pipelines – KMP.
CO2 – KMP
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues1
|
$
|
339.6
|
|
|
$
|
256.8
|
|
Operating
Expenses
|
|
(105.4
|
)
|
|
|
(75.8
|
)
|
Earnings
from Equity Investments
|
|
4.2
|
|
|
|
4.1
|
|
Other
Income, Net
|
|
-
|
|
|
|
-
|
|
Income
Tax Benefit (Expense)
|
|
(0.7
|
)
|
|
|
(0.9
|
)
|
Segment
Earnings Before DD&A
|
$
|
237.7
|
|
|
$
|
184.2
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Carbon
Dioxide Delivery Volumes(Bcf)2
|
|
171.3
|
|
|
|
150.4
|
|
SACROC
Oil Production (Gross)(MBbl/d)3
|
|
27.9
|
|
|
|
27.3
|
|
SACROC
Oil Production (Net)(MBbl/d)4
|
|
23.3
|
|
|
|
22.8
|
|
Yates
Oil Production (Gross)(MBbl/d)5
|
|
27.1
|
|
|
|
27.1
|
|
Yates
Oil Production (Net)(MBbl/d)4
|
|
12.0
|
|
|
|
12.0
|
|
Natural
Gas Liquids Sales Volumes (Net)(MBbl/d)4
|
|
7.6
|
|
|
|
10.0
|
|
Realized
Weighted Average Oil Price per Bbl5,
6
|
$
|
51.45
|
|
|
$
|
36.77
|
|
Realized
Weighted Average Natural Gas Liquids Price per Bbl6,
7
|
$
|
77.97
|
|
|
$
|
53.68
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues1
|
$
|
1,002.1
|
|
|
$
|
336.6
|
|
|
|
$
|
324.2
|
|
Operating
Expenses
|
|
(292.7
|
)
|
|
|
(101.1
|
)
|
|
|
|
(121.5
|
)
|
Earnings
from Equity Investments
|
|
15.3
|
|
|
|
5.6
|
|
|
|
|
8.7
|
|
Other
Income (Expense), Net
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
|
(0.1
|
)
|
Income
Tax Benefit (Expense)
|
|
(2.9
|
)
|
|
|
0.2
|
|
|
|
|
(1.3
|
)
|
Segment
Earnings Before DD&A
|
$
|
721.6
|
|
|
$
|
241.4
|
|
|
|
$
|
210.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon
Dioxide Delivery Volumes(Bcf)2
|
|
530.1
|
|
|
|
200.3
|
|
|
|
|
272.3
|
|
SACROC
Oil Production (Gross)(MBbl/d)3
|
|
27.6
|
|
|
|
27.5
|
|
|
|
|
29.1
|
|
SACROC
Oil Production (Net)(MBbl/d)4
|
|
23.0
|
|
|
|
22.9
|
|
|
|
|
24.2
|
|
Yates
Oil Production (Gross)(MBbl/d)3
|
|
27.9
|
|
|
|
27.4
|
|
|
|
|
26.4
|
|
Yates
Oil Production (Net)(MBbl/d)4
|
|
12.4
|
|
|
|
12.0
|
|
|
|
|
11.7
|
|
Natural
Gas Liquids Sales Volumes (Net)(MBbl/d)4
|
|
8.7
|
|
|
|
10.0
|
|
|
|
|
9.7
|
|
Realized
Weighted Average Oil Price per Bbl5,
6
|
$
|
51.50
|
|
|
$
|
36.25
|
|
|
|
$
|
35.03
|
|
Realized
Weighted Average Natural Gas Liquids Price per Bbl6,
7
|
$
|
73.37
|
|
|
$
|
53.02
|
|
|
|
$
|
45.04
|
|
_____________
1
|
Amounts
include increases in segment earnings resulting from valuation adjustments
of $34.5 million and $102.0 million for the three and nine month periods
ended September 30, 2008, respectively, and $46.2 million and $59.1
million (net of a $0.6 million loss on sale of assets) for the three and
four month periods ended September 30, 2007, respectively, primarily
related to derivative contracts in place at the time of the Going Private
transaction and recorded in the application of the purchase method of
accounting.
|
2
|
Includes
Cortez, Central Basin, Canyon Reef Carriers, Centerline and Pecos pipeline
volumes.
|
3
|
Represents
100% of the production from the field. Kinder Morgan Energy Partners owns
an approximately 97% working interest in the SACROC unit and an
approximately 50% working interest in the Yates
unit.
|
4
|
Net
to Kinder Morgan Energy Partners, after royalties and outside working
interests.
|
5
|
Includes
all of Kinder Morgan Energy Partners’ crude oil production
properties.
|
6
|
Hedge
gains/losses for crude oil and natural gas liquids are included with crude
oil.
|
7
|
Includes
production attributable to leasehold ownership and production attributable
to Kinder Morgan Energy Partners’ ownership in processing plants and third
party processing agreements.
|
The
CO2 –
KMP segment’s primary businesses involve the production, marketing and
transportation of both carbon dioxide (commonly called CO2) and crude
oil, and the production and marketing of natural gas and natural gas
liquids. For each
of the segment’s two primary businesses, following is information related to the
increases and decreases, in the comparable three month period of 2008 and 2007,
of the segment’s EBDA, and changes in operating revenues after certain
items:
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Sales
and Transportation Activities
|
$
|
39.6
|
|
|
94
|
%
|
|
$
|
47.8
|
|
|
105
|
%
|
Oil
and Gas Producing Activities
|
|
25.7
|
|
|
27
|
%
|
|
|
56.9
|
|
|
32
|
%
|
Intrasegment
Eliminations
|
|
-
|
|
|
-
|
|
|
|
(10.1
|
)
|
|
(88
|
)%
|
Total
|
$
|
65.3
|
|
|
47
|
%
|
|
$
|
94.6
|
|
|
45
|
%
|
Combined,
the certain items described in the footnotes to the table above decreased the
CO2
segment’s EBDA by $11.7 million, when compared to the same period last year.
Following is a discussion of the segment’s earnings before DD&A, excluding
the effect of the certain items described in the footnotes to the table
above.
The
quarter-to-quarter increase in earnings before DD&A from the segment’s sales
and transportation activities was largely related to (i) a $32.3 million (214%)
increase in carbon dioxide sales revenues related to (a) a 104%
quarter-to-quarter increase in average sales price and (b) a 27%
quarter-to-quarter increase in sales volume, and (ii) a $4.2 million (23%)
increase in carbon dioxide and crude oil pipeline transportation revenues due to
(a) a 14% increase in carbon dioxide delivery volumes and (b) higher
volumes.
The
increase in average sales prices reflects continued customer demand for carbon
dioxide for use in oil recovery projects throughout the Permian Basin area. In
addition, a portion of the carbon dioxide contracts is tied to crude oil prices,
which, as discussed above, have increased since the third quarter of 2007.
Profits are not recognized on carbon dioxide sales within Kinder Morgan Energy
Partners. The increase in sales and delivery volumes was largely due to the
January 17, 2008 start-up of the Doe Canyon carbon dioxide source field located
in Dolores County, Colorado. The new carbon dioxide source field is named the
Doe Canyon Deep unit and we hold an approximately 87% working interest in the
field. Since January 2007, Kinder Morgan Energy Partners has invested
approximately $90 million to develop this source field. In addition, investments
were also made to drill additional carbon dioxide wells at the McElmo Dome unit,
increase transportation capacity on the Cortez Pipeline, and extend the Cortez
Pipeline to the Doe Canyon Deep unit.
The
quarter-to-quarter increase in earnings before DD&A from the oil and gas
producing activities was largely related to (i) a $50.2 million (42%) increase
in sales from ownership interests in oil-producing fields, which benefited from
a 40% increase in the realized weighted average price per barrel, (ii) a $5.0
million (10%) increase in sales from natural gas processing plant operations
where sales volume decreases of 24%, primarily related to effects from Hurricane
Ike that shut-down third-party fractionation facilities, were more than offset
by increases in the realized weighted average price per barrel.
Because
prices of crude oil and natural gas liquids are subject to external factors over
which Kinder Morgan Energy Partners has no control, and because future price
changes may be volatile, the CO2 – KMP
segment is exposed to commodity price risk related to the price volatility of
crude oil and natural gas liquids. To some extent, Kinder Morgan Energy Partners
is able to mitigate this risk through a long-term hedging strategy that is
intended to generate more stable realized prices by using derivative contracts
as hedges to the exposure of fluctuating expected future cash flows produced by
changes in commodity sales prices. Nonetheless, decrease in the prices of crude
oil and natural gas liquids will have a negative impact on the results of the
CO2 –
KMP business segment. All of the hedge gains and losses for crude oil and
natural gas liquids are included in the realized average price for oil. Had
Kinder Morgan Energy Partners not used energy derivative contracts to transfer
commodity price risk, crude oil sales prices would have averaged $116.08 per
barrel in the third quarter of 2008, and $73.12 per barrel in the third quarter
of 2007. For more information on hedging activities, see Note 15 to the
accompanying Notes to Consolidated Financial Statements.
Average
gross oil production for the third quarter of 2008 was 27.9 thousand
barrels per day at the SACROC field unit, 2% higher when compared to the third
quarter of 2007. At the Yates unit, average gross oil production in the third
quarter of 2008 was identical to the production in the same quarter last
year.
Compared
to the third quarter of 2007, the segment’s $29.6 million (39%) increase in
combined operating expenses in the three months ended September 30, 2008 was
largely due to higher severance and property tax expenses, field operating
expenses, and fuel and power expenses. The increase in severance tax expenses
was related to the period-to-period increase in crude oil revenues. The increase
in property tax expenses was largely due to higher oil prices leading to higher
tax assessment, and increased asset infrastructure resulting from the capital
investments Kinder Morgan Energy Partners has made since the end of the third
quarter of 2007. The increase in operating expenses was driven by both higher
well workover and repair expenses in 2008 and rising price levels since the end
of the third quarter of 2007, which impacted rig costs and other materials and
services. The increase in workover expenses was largely related to
infrastructure expansion projects at the SACROC and Yates oil field units and at
the McElmo Dome carbon dioxide unit. The increase in operating expenses from
price level changes was largely due to increased demand driving up the prices
charged by the industry’s material and service providers.
Following
is segment EBDA and operating revenues information related to the nine and four
month periods ended September 31, 2008 and 2007, respectively, and five month
period ended May 31, 2007:
Earnings
Before DD&A by Segment Asset:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Sales
and Transportation Activities
|
$
|
323.8
|
|
|
$
|
117.1
|
|
|
|
$
|
67.2
|
|
Oil
and Gas Producing Activities
|
|
397.8
|
|
|
|
124.3
|
|
|
|
|
142.8
|
|
Total
Segment Earnings Before DD&A
|
$
|
721.6
|
|
|
$
|
241.4
|
|
|
|
$
|
210.0
|
|
Operating
Revenues by Segment Asset:
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
|
(In
millions)
|
|
|
(In
millions)
|
Sales
and Transportation Activities
|
$
|
347.4
|
|
|
$
|
120.0
|
|
|
|
$
|
71.3
|
|
Oil
and Gas Producing Activities
|
|
714.3
|
|
|
|
231.4
|
|
|
|
|
271.7
|
|
Intersegment
Eliminations
|
|
(59.6
|
)
|
|
|
(14.8
|
)
|
|
|
|
(18.8
|
)
|
Total
Segment Operating Revenues
|
$
|
1,002.1
|
|
|
$
|
336.6
|
|
|
|
$
|
324.2
|
|
Nine
months ended September 30, 2008
The
CO2 –
KMP segment’s earnings before DD&A in the nine months ended September 30,
2008 were positively affected by strong average crude oil prices (which also
impact the price of carbon dioxide under some contracts) and natural gas plant
product prices. Generally, earnings for the segment’s oil and gas producing
activities, which include the operations associated with its ownership interests
in oil-producing fields and natural gas processing plants, are impacted by its
average hedge price and market price for a large percent of its volumes. Both
have increased over last year.
Earnings
for the segment’s sales and transportation activities were positively impacted
by factors affecting carbon dioxide sales revenues (both price and volume
related) and carbon dioxide and crude oil pipeline transportation revenues.
Transportation revenues were impacted by increased carbon dioxide delivery
volume due to rising customer demand for carbon dioxide for use in oil recovery
projects throughout the Permian Basin, as described previously.
With
respect to crude oil, overall sales volumes were essentially flat, but the
segment benefited from an increase in its realized weighted average price per
barrel. With respect to natural gas liquids, a decrease in sales volumes was
more than offset by increases in its realized weighted average price per barrel.
Sales volumes were affected by the effects from Hurricane Ike, which resulted in
pro-rationing (production allocation), as described previously.
Four
months ended September 30, 2007
The
CO2 –
KMP segment’s earnings before DD&A in the four months ended September 30,
2007 were positively affected by strong average crude oil and natural gas plant
product prices. Highlights for the oil and gas producing activities in the four
months ended September 30, 2007 included strong oil production at the Yates
field unit and improved earnings due to an increased realized weighted average
price per barrel in the SACROC field unit gas processing
operations.
The
average carbon dioxide sales price realized in the segment’s sales and
transportation activities during the four months ended September 30, 2007 was
negatively affected by the December 2006 expiration of significantly high-priced
sales contracts. In addition, carbon dioxide delivery volumes during this period
were negatively impacted by oil production at the SACROC unit.
With
respect to crude oil, overall sales volumes were stable, but the segment
benefited from a strong realized weighted average price per barrel. With respect
to natural gas liquids, unfavorable sales volumes were more than offset by a
favorable realized weighted average price per barrel.
Five
months ended May 31, 2007
The
segment’s sales and transportation activities were adversely affected by a
decrease in average carbon dioxide prices. A significant portion of the decrease
in average carbon dioxide prices is timing related, as some of the segment’s
carbon dioxide contracts are tied to crude oil prices in prior periods, and the
2007 contracts had been tied to lower crude oil prices, relative to 2006. These
decreases in carbon dioxide prices were only partially offset by slightly higher
carbon dioxide sales volumes related to increased carbon dioxide production from
the McElmo Dome source field.
Highlights
surrounding oil and gas producing activities for the five months ended May 31,
2007 include (i) increases in oil production at the Yates field unit, (ii)
higher weighted average price per barrel, (iii) solid earnings from natural gas
liquids sales volumes and prices, largely due to increased recoveries at the
SACROC gas processing operations.
Terminals
– KMP
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues
|
$
|
306.2
|
|
|
$
|
247.2
|
|
Operating
Expenses1
|
|
(175.0
|
)
|
|
|
(158.0
|
)
|
Other
Income (Expense)2
|
|
(6.9
|
)
|
|
|
1.5
|
|
Earnings
from Equity Investments
|
|
0.7
|
|
|
|
0.3
|
|
Interest
Income and Other Income (Expense), Net
|
|
(1.3
|
)
|
|
|
0.3
|
|
Income
Tax Expense4
|
|
(6.4
|
)
|
|
|
(6.9
|
)
|
Segment
Earnings Before DD&A
|
$
|
117.3
|
|
|
$
|
84.4
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Bulk
Transload Tonnage (MMtons)5
|
|
26.8
|
|
|
|
24.5
|
|
Liquids
Leaseable Capacity (MMBbl)
|
|
54.2
|
|
|
|
46.3
|
|
Liquids
Utilization
|
|
98.2
|
%
|
|
|
96.5
|
%
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues
|
$
|
887.1
|
|
|
|
$
|
326.8
|
|
|
|
$
|
364.5
|
|
Operating
Expenses1
|
|
(483.9
|
)
|
|
|
|
(198.7
|
)
|
|
|
|
(192.2
|
)
|
Other
Income (Expense)2
|
|
(6.5
|
)
|
|
|
|
2.9
|
|
|
|
|
3.0
|
|
Goodwill
Impairment3
|
|
(676.6
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
Earnings
from Equity Investments
|
|
2.4
|
|
|
|
|
0.3
|
|
|
|
|
-
|
|
Interest
Income and Other Income (Expense), Net
|
|
1.4
|
|
|
|
|
-
|
|
|
|
|
0.3
|
|
Income
Tax Expense4
|
|
(17.1
|
)
|
|
|
|
(8.6
|
)
|
|
|
|
(3.3
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
(293.2
|
)
|
|
|
$
|
122.7
|
|
|
|
$
|
172.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk
Transload Tonnage (MMtons)5
|
|
76.5
|
|
|
|
|
31.3
|
|
|
|
|
41.4
|
|
Liquids
Leaseable Capacity (MMBbl)
|
|
54.2
|
|
|
|
|
46.3
|
|
|
|
|
43.6
|
|
Liquids
Utilization
|
|
98.2
|
%
|
|
|
|
96.5
|
%
|
|
|
|
97.5
|
%
|
______________
1
|
Three
and nine month 2008 amounts include $3.6 million of expense related to
hurricane clean-up and repair activities, a $1.5 million expense related
to fire damage and repair activities, and a combined $1.5 million expense
from the settlement
|
|
of
certain litigation matters related to Kinder Morgan Energy Partners’
Elizabeth River bulk terminal and its Staten Island liquids terminal.
Three and four month 2007 amounts include $25.0 million in expense from
the settlement of certain litigation matters related to the Cora coal
terminal.
|
2
|
Three
and nine month 2008 amounts include losses of $5.3 million from asset
write-offs related to fire damage, and losses of $0.8 million from asset
write-offs related to hurricane damage. Both the three and nine months
ended September 30, 2008 amounts include expenses of $2.9 million
resulting from valuation adjustments related to assets sold, recorded in
the application of the purchase method of accounting. The five months
ended May 31, 2007 amount includes income of $1.8 million from property
casualty gains associated with the 2005 hurricane
season.
|
3
|
2008
amounts include a non-cash goodwill impairment charge; see Note 3 of the
accompanying Notes to Consolidated Financial
Statements.
|
4
|
Three
and nine month 2008 amounts include a decrease of $0.4 million of expenses
related to hurricane clean-up and repair
activities.
|
5
|
Volumes
for acquired terminals are included for all
periods.
|
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
For
the three months ended September 30, 2008, the certain items related to the
Terminals – KMP business segment, described in the footnotes to the table above,
increased earnings before DD&A expenses by $9.8 million when compared to the
same period last year. Following is a discussion of the segment’s earnings
before DD&A, excluding the effect of certain items described in the
footnotes to the table above.
The
segment’s remaining $23.1 million (27%) increase in earnings before DD&A in
the third quarter of 2008 versus the third quarter of 2007, was due to a combination of
internal expansions and strategic business acquisitions as follows: (i)
incremental amounts of earnings before depreciation, depletion and amortization
of $5.6 million, revenues of $19.1 million, and operating expenses of $13.5
million, respectively, in the third quarter of 2008 for the Vancouver Wharves
bulk marine terminal and other acquired operations, (ii) $5.9 million (22%) from
Kinder Morgan Energy Partners’ Gulf Coast terminals, primarily the two large
liquids terminal facilities located along the Houston Ship Channel in Pasadena
and Galena Park, Texas, primarily due to higher liquids throughput volumes and
increased liquids storage capacity as a result of expansions completed since the
third quarter of 2007, (iii) the $5.7 million (59%) from Kinder Morgan Energy
Partners’ Mid-Atlantic terminals, primarily from the Pier IX bulk terminal
located in Newport News, Virginia, due to higher period-over-period coal
transfer volumes, and the Fairless Hills, Pennsylvania bulk terminal, largely
due to incremental earnings from a new import fertilizer facility that began
operations in the second quarter of 2008, (iv) $5.2 million (70%) from Kinder
Morgan Energy Partners’ Western terminals, primarily from the North 40 terminal,
which began operations in the second quarter of 2008 and (v) $3.2 million (23%)
from Kinder Morgan Energy Partners’ Northeast terminals, primarily from the
Perth Amboy, New Jersey liquids terminal, located in the New York Harbor area,
driven by higher liquids throughput volumes as a result of an expansion
completed at the end of the first quarter of 2008. Offsetting the above
increases to earnings before depreciation, depletion and amortization was a
decrease of $2.5 million (17%) from Kinder Morgan Energy Partners’ Texas Petcoke
terminals, primarily due to lost petroleum coke business, a portion of which was
sidelined because of refinery shut-downs following Hurricane Ike.
For
the Terminals – KMP segment combined, expansion projects completed since the end
of the third quarter of 2007 have increased Kinder Morgan Energy Partners’
liquids terminals’ leasable capacity to 54.2 million barrels, up 17% from a
capacity of 46.3 million barrels in the third quarter of 2007. At the same time,
Kinder Morgan Energy Partners increased its overall liquids utilization capacity
rate (the ratio of actual leased capacity to estimated potential capacity) to
98.2%, up almost 2% since the third quarter last year.
Nine
months ended September 30, 2008
Segment
earnings before DD&A were positively
affected by assets acquired or expanded in the last eighteen months including
(i) $8.3 million from the Vancouver Wharves bulk marine terminal, (ii) $22.2
million from Kinder Morgan Energy Partners’ Marine Terminals, Inc. and other
acquired operations, (iii) $100.0 million from Kinder Morgan Energy Partners’
Gulf Coast terminals, primarily from its two expanded large liquids terminal
facilities located along the Houston Ship Channel in Pasadena and Galena Park,
Texas, (iv) $42.6 million from the Mid-Atlantic terminals, strong coal transfer
volumes primarily from its Pier IX bulk terminal (including earnings from the
first quarter 2008 completion of a $70 million construction of a new ship dock
and installation of added terminal equipment) located in Newport News, Virginia,
and its Fairless Hills, Pennsylvania bulk terminal that began operations in the
second quarter of 2008 with a new $11.2 million import fertilizer facility that
included construction of two storage domes, conveying equipment, and outbound
loading facilities for both rail and truck, (v) $21.3 million from the Western
terminals, primarily from its North 40 terminal, (vi) $53.3 million from the
Northeast terminals, primarily from its Perth Amboy, New Jersey liquids
terminal, located in the New York Harbor area, driven by liquids throughput
volumes as a result of an expansion completed at the end of the first quarter
of
2008 and (vii) $42.9 million in Texas Petcoke terminal’s earnings before
DD&A, which is net of lost petroleum coke business that was sidelined
because of refinery shut-downs following Hurricane Ike.
Segment
earnings before DD&A for this period were adversely impacted by (i) a $676.6
million goodwill impairment charge and (ii) $10.8 million in hurricane and fire
damage clean-up, repair and write-offs, net of income tax benefit.
Four
months ended September 30, 2007
Since
the end of the first quarter of 2006, Kinder Morgan Energy Partners has invested
approximately $191.1 million in cash and $1.7 million in common units to acquire
terminal assets and, combined, these operations accounted for $10.7 million of
incremental earnings before DD&A during the four months ended September 30,
2007. The significant terminal acquisitions since the end of the second quarter
of 2006 and their contributions included the following (i) $0.7 million from
Transload Services, LLC, which provides material handling and steel processing
services at 14 steel-related terminal facilities located in the Chicago
metropolitan area and various cities in the United States, acquired November 20,
2006, (ii) $1.7 million from Devco USA L.L.C., which includes a proprietary
technology that transforms molten sulfur into solid pellets that are
environmentally friendly and easier to transport, acquired December 1, 2006,
(iii) $6.8 million from Vancouver Wharves bulk marine terminal, which includes
five deep-sea vessel berths and terminal assets located on the north shore of
the Port of Vancouver’s main harbor, acquired May 30, 2007 and (iv) $1.5 million
from Marine Terminals, Inc. acquired on September 1, 2007, which are primarily
involved in the handling and storage of steel and alloys and consist of two
separate facilities located in Blytheville, Arkansas, and individual terminal
facilities located in Decatur, Alabama, Hertford, North Carolina, and Berkley,
South Carolina.
Segment
earnings before DD&A were also affected by
strong earnings contributions consisting of (i) $18.3 million from Kinder Morgan
Energy Partners’ Texas Petcoke operations, largely due to petroleum coke
throughput volumes at its Port of Houston facility; (ii) $7.5 million from the
combined operations of the Kinder Morgan Energy Partners’ Argo and Chicago,
Illinois liquids terminals, including impacts of increased ethanol throughput
and incremental liquids storage and handling business; (iii) $9.4 million from
Kinder Morgan Energy Partners’ Lower Mississippi (Louisiana) terminals, which
include its 66 2/3% ownership interest in the International Marine Terminals
partnership and its Port of New Orleans liquids facility located in Harvey,
Louisiana and (iv) $2.9 million from Kinder Morgan Energy Partners’ Pier IX
terminal, located in Newport News, Virginia, largely due to coal transfer
volumes.
Five
months ended May 31, 2007
Acquisitions
in 2006 and 2007 as described above contributed $2.8 million in earnings before
DD&A during the five months ended May 31, 2007 include the following (i)
$2.0 million from Transload Services, LLC and (ii) $0.8 million from Devco USA
L.L.C.
Segment
earnings before DD&A included strong earnings contributions consisting of
(i) $5.9 million from Kinder Morgan Energy Partners’ Shipyard River terminal
located in Charleston, South Carolina; (ii) $17.3 million from the Lower
Mississippi (Louisiana) terminals (which include its 66 2/3% ownership interest
in the International Marine Terminals partnership and the Port of New Orleans
liquids facility located in Harvey, Louisiana) and (iii) $7.8 million from the
combined operations of its Argo and Chicago, Illinois liquids terminals. The
increases from the Shipyard River terminal related to completed expansion
projects since the middle of 2006 that increased handling capacity for imported
coal volumes and the earnings increases from the Chicago liquids facilities were
driven by higher revenues, due to increased ethanol throughput and incremental
liquids storage and handling business.
Please
refer to our 2007 Form 10-K for additional information regarding Terminals –
KMP.
Kinder
Morgan Canada – KMP
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Operating
Revenues
|
$
|
57.2
|
|
|
$
|
44.6
|
|
Operating
Expenses
|
|
(18.6
|
)
|
|
|
(19.9
|
)
|
Earnings
from Equity Investment
|
|
3.4
|
|
|
|
8.6
|
|
Interest
Income and Other Income, Net
|
|
3.5
|
|
|
|
2.9
|
|
Income
Tax Benefit (Expense)
|
|
(1.0
|
)
|
|
|
(5.2
|
)
|
Segment
Earnings Before DD&A
|
$
|
44.5
|
|
|
$
|
31.0
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Transport
Volumes (MMBbl)
|
|
22.6
|
|
|
|
25.3
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Operating
Revenues
|
$
|
145.4
|
|
|
|
$
|
59.1
|
|
|
|
$
|
62.0
|
|
Operating
Expenses
|
|
(51.3
|
)
|
|
|
|
(24.9
|
)
|
|
|
|
(23.1
|
)
|
Other
Income (Expense)
1
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(377.1
|
)
|
Earnings
from Equity Investments
|
|
7.7
|
|
|
|
|
11.3
|
|
|
|
|
5.4
|
|
Interest
Income and Other Income, Net
|
|
9.6
|
|
|
|
|
2.3
|
|
|
|
|
1.7
|
|
Income
Tax Benefit (Expense)
|
|
2.6
|
|
|
|
|
(5.1
|
)
|
|
|
|
(0.9
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
114.0
|
|
|
|
$
|
42.7
|
|
|
|
$
|
(332.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transport
Volumes (MMBbl)
|
|
63.5
|
|
|
|
|
33.7
|
|
|
|
|
36.4
|
|
______________
1
|
Five
month period 2007 amount represents a goodwill impairment expense, see
Note 3 of the accompanying Notes to Consolidated Financial
Statements.
|
The
Kinder Morgan Canada – KMP segment includes operations Knight Inc. sold to
Kinder Morgan Energy Partners: (i) Trans Mountain pipeline system (transferred
effective April 30, 2007), (ii) one-third interest in the Express pipeline
system (transferred effective August 28, 2008) and (iii) Jet Fuel pipeline
system (transferred effective August 28, 2008). These operations had been
reported separately in previous reports. The information in the table above
reflects the results of operations for Trans Mountain, the one-third interest in
Express and Jet Fuel for all periods presented. See Note 14 in the accompanying
Notes to Consolidated Financial Statements.
Three
months ended September 30, 2008 compared to three months ended September 30,
2007
Segment
earnings before DD&A increased by $13.8 million (45%) for the three months
ended September 30, 2008 over the comparable period in 2007. This increase is
primarily due to (i) higher earnings of $17.2 million (78%) from the Trans
Mountain pipeline system and (ii) lower earnings of $3.4 million from the
Express and Jet Fuel pipeline systems. The increase in earnings from Trans
Mountain was driven primarily by higher operating revenues, largely due to the
April 2007 completion of an expansion project that included the commissioning of
ten new pump stations that boosted capacity on Trans Mountain from 225,000 to
approximately 260,000 barrels per day, and to the April 28, 2008 completion of
the first portion of the Anchor Loop expansion that boosted pipeline capacity
from 260,000 to 285,000 barrels per day and resulted in higher period-to-period
average toll rates. The higher tariffs more than offset declines in mainline
throughput volumes of 11% for the comparable three month periods. The decreases
in volumes were primarily due to lower demand for water-borne exports out of
Vancouver, British Columbia.
Nine
months ended September 30, 2008
Earnings
before DD&A for the nine months ended September 30, 2008 include strong
operating revenues resulting from the April 2007 completion of an expansion
project that included the commissioning of ten new pump stations that boosted
capacity on Trans Mountain from 225,000 to approximately 260,000 barrels per
day, and to the April 28, 2008 partial completion of the first portion of the
Anchor Loop expansion that boosted pipeline capacity from 260,000 to 285,000
barrels per day and resulted in higher period-to-period average toll rates.
Kinder Morgan Energy Partners completed construction on a final 15,000 barrels
per day expansion on October 30, 2008 and total pipeline capacity is now
approximately 300,000 barrels per day.
Four
months ended September 30, 2007
Earnings
before DD&A for the four months ended September 30, 2007 include $5.1
million of Canadian income taxes principally due to taxes payable on dock
premiums collected.
Five
months ended May 31, 2007
During
the five months ended May 31, 2007, earnings before DD&A were adversely
affected by a $377.1 million goodwill impairment charge recorded against the
Trans Mountain asset, see Note 3 of the accompanying Consolidated Financial
Statements. Slightly offsetting this negative impact to earnings was the
completion of a Pump Station expansion on April 30, 2007 and its associated
positive impact to revenue for the period.
Please
refer to our 2007 Form 10-K for additional information regarding the Kinder
Morgan Canada segment (formerly referred to as the Trans Mountain – KMP and
Express segments).
General
and Administrative Expense
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Knight
Inc. General and Administrative Expense
|
$
|
11.5
|
|
|
$
|
16.0
|
|
Kinder
Morgan Energy Partners General and Administrative Expense
|
|
74.4
|
|
|
|
61.9
|
|
Consolidated
General and Administrative Expense
|
$
|
85.9
|
|
|
$
|
77.9
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30, 2008
|
|
Four
Months
Ended
September
30, 2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Knight
Inc. General and Administrative Expense
|
$
|
40.1
|
|
|
$
|
21.3
|
|
|
|
|
138.6
|
|
Kinder
Morgan Energy Partners General and Administrative Expense
|
|
223.9
|
|
|
|
86.6
|
|
|
|
|
136.2
|
|
Terasen
General and Administrative Expense
|
|
-
|
|
|
|
-
|
|
|
|
|
8.8
|
|
Consolidated
General and Administrative Expense
|
$
|
264.0
|
|
|
$
|
107.9
|
|
|
|
|
283.6
|
|
The
$8.0 million increase in general and administrative expense in the third quarter
of 2008, relative to 2007, was due to (i) a $12.5 million increase in general
and administrative expense of Kinder Morgan Energy Partners, primarily driven by
increased costs of supporting continued customer and business growth, including
higher compensation-related expenses—comprising salary and benefit expenses,
payroll taxes and other employee and contractor related expenses, (ii)
incremental expenses associated with the assets and businesses Kinder Morgan
Energy Partners acquired since the third quarter of 2007—including the Express
and Jet Fuel pipeline systems acquired from Knight Inc. effective August 28,
2008, and Kinder Morgan Energy Partners’ recently acquired bulk terminal
operations and (iii) a $6.6 million increase in Knight Inc. general and
administrative expenses as a result of higher compensation expense, partially
offset by a $11.1 million decrease in Knight Inc. general and administrative
expenses related to NGPL, which became an equity investment on February 15, 2008
when an 80% interest in NGPL PipeCo LLC was sold.
General
and administrative expense for the nine months ended September 30, 2008 includes
$ 33.9 million of Knight Inc. general and administrative expense, $223.9 million
of Kinder Morgan Energy Partners general and administrative expense, primarily
associated with compensation expense ($158.2 million) and outside services
($43.3 million), and $6.2 million of general and administrative expense related
to NGPL PipeCo LLC during the period January 1, 2008 through February 14, 2008,
the period prior to the sale of an 80% interest in NGPL PipeCo LLC.
General
and administrative expense for the four months ended September 30, 2007 includes
$21.3 million of Knight Inc. general and administrative expense and $86.6
million of Kinder Morgan Energy Partners general and administrative expense,
primarily associated with compensation expense ($64.1 million) and outside
services ($14.4 million).
General
and administrative expense for the five months ended May 31, 2007 includes a
total of $141.0 million related to the Going Private transaction, consisting of
$114.8 million expensed by Knight Inc. and $26.2 million allocated to Kinder
Morgan Energy Partners. In addition, during the five months ended May 31, 2007
we incurred $4.3 million in selling expenses associated with the sale of our (i)
U.S. based retail natural gas distribution and related operations, (ii) Terasen
Inc., and (iii) Terasen Pipelines (Corridor) Inc.
Kinder
Morgan Energy Partners’ general and administrative expenses tend to increase
over time in large part because the expansion of their businesses through
acquisitions and internal growth requires the hiring of additional employees,
resulting in increased payroll and other employee-related expense. Knight Inc.’s
general and administrative expenses have decreased over time as it has sold
assets such as an 80% interest in NGPL PipeCo LLC in 2008 and Terasen Inc.,
Terasen Pipelines (Corridor) Inc. and the U.S.-based retail natural gas
distribution and related operations in 2007.
Interest
and Other, Net
|
Successor
Company
|
|
Three
Months Ended
September
30,
|
|
2008
|
|
2007
|
|
(In
millions)
|
Interest
Expense and Other, Net
|
|
|
|
|
|
|
|
Interest
Expense, Net
|
$
|
(141.5
|
)
|
|
$
|
(252.6
|
)
|
Interest
Expense – Deferrable Interest Debentures
|
|
(0.5
|
)
|
|
|
(5.4
|
)
|
Other,
Net
|
|
2.4
|
|
|
|
5.5
|
|
Consolidated
Interest Expense and Other, Net
|
|
(139.6
|
)
|
|
|
(252.5
|
)
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
|
|
|
|
|
Kinder
Morgan Management
|
|
(19.5
|
)
|
|
|
(10.0
|
)
|
Kinder
Morgan Energy Partners
|
|
(78.5
|
)
|
|
|
(34.5
|
)
|
Triton
|
|
(9.3
|
)
|
|
|
(7.7
|
)
|
Other
|
|
0.5
|
|
|
|
(0.2
|
)
|
Consolidated
Minority Interests Expense
|
|
(106.8
|
)
|
|
|
(52.4
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(246.4
|
)
|
|
$
|
(304.9
|
)
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30, 2008
|
|
Four
Months
Ended
September
30, 2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, Net
|
$
|
(493.8
|
)
|
|
$
|
(336.1
|
)
|
|
|
$
|
(241.1
|
)
|
Interest
Expense – Deferrable Interest Debentures
|
|
5.6
|
|
|
|
(7.3
|
)
|
|
|
|
(9.1
|
)
|
Other,
Net
|
|
10.9
|
|
|
|
10.7
|
|
|
|
|
(7.3
|
)
|
Consolidated
Interest Expense
|
|
(477.3
|
)
|
|
|
(332.7
|
)
|
|
|
|
(257.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Kinder
Morgan Management
|
|
(72.2
|
)
|
|
|
(16.3
|
)
|
|
|
|
(17.1
|
)
|
Kinder
Morgan Energy Partners
|
|
(271.8
|
)
|
|
|
(58.0
|
)
|
|
|
|
(75.1
|
)
|
Triton
|
|
(15.0
|
)
|
|
|
(12.0
|
)
|
|
|
|
2.3
|
|
Other
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
|
|
(0.8
|
)
|
Consolidated
Minority Interests Expense
|
|
(359.4
|
)
|
|
|
(86.9
|
)
|
|
|
|
(90.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(836.7
|
)
|
|
$
|
(419.6
|
)
|
|
|
$
|
(348.2
|
)
|
The
$111.1 million decrease in interest expense, net in the third quarter of 2008,
relative to 2007, was primarily due to a reduction in Knight Inc.’s debt that
was paid down with proceeds from asset sales undertaken during the last year and
a decrease in interest rates partially offset by a 20% increase in debt balances
at Kinder Morgan Energy Partners required to support capital expansion programs,
net of Kinder Morgan Energy Partners 18% decrease in the weighted average
interest rate on all of its borrowings.
Interest
expense, net for the nine months ended September 30, 2008 includes: $207.7
million of Knight Inc. interest expense and $286.1 million of Kinder Morgan
Energy Partners interest expense. Approximately $5.9 billion of the proceeds
from the sale of an 80% interest in NGPL were used to pay down Knight Inc.’s
interest bearing debt in February 2008. Kinder Morgan Energy Partners’ interest
expense includes: $50.8 million of interest expense related to $1.6 billion of
additional debt incurred in Kinder Morgan Energy Partners’ senior notes public
offerings as follows: (i) on February 12, 2008 Kinder Morgan Energy Partners
issued (a) $600 million of 5.95% notes and (b) $300 million of 6.95% notes and
(ii) on June 6, 2008 Kinder Morgan Energy Partners issued: (a) $375 million of
5.95% notes and (b) $325 million of 6.95% notes.
Interest
expense, net for the four months ended September 30, 2007 includes: $200.8
million of Knight Inc. interest expense and $135.3 million of Kinder Morgan
Energy Partners interest expense. The Knight Inc. interest expense included
$108.0 million of interest expense related to $4.5 billion of additional debt
incurred in the Going Private Transaction.
Interest
expense, net for the five months ended May 31, 2007 includes (i)
$155.0 million of Kinder Morgan Energy Partners interest expense and (ii)
$86.1 million of Knight Inc. interest expense. Kinder Morgan Energy
Partners interest expense tends to increase over time as it incurs additional
debt to fund its capital spending and its acquisition of new assets and
businesses.
Our
minority interest expense associated with our ownership interests in Kinder
Morgan Management increased $9.5 million from $10.0 million for the third
quarter of 2007 to $19.5 million for the third quarter of 2008. This increase
was principally due to Kinder Morgan Management’s share of Kinder Morgan Energy
Partner’s increase in earnings over this period.
The
$44.0 million increase in minority interest expense associated with Kinder
Morgan Energy Partners from $34.5 million for the third quarter of 2007 as
compared to $78.5 million for the third quarter of 2008 was principally due to
the public’s share in the increased earnings of Kinder Morgan Energy Partners
over this period.
During
the nine months ended September 30, 2008, four months ended September 30, 2007
and five months ended May 31, 2007, our minority interest expense associated
with our ownership interests in Kinder Morgan Management was $72.2 million,
$16.3 million and $17.1 million, respectively. Minority interest expense
reflects the earnings recorded by Kinder Morgan Management that are attributed
to its shares held by the public. Kinder Morgan Management’s earnings are solely
dependent on its ownership of Kinder Morgan Energy Partnership i-units.
Therefore, our minority interest expense associated with Kinder Morgan
Management for these two periods is a function of Kinder Morgan Energy Partners’
earnings offset by
our
ownership of Kinder Morgan Management shares, of which we owned approximately
14% as of September 30, 2008 and September 30, 2007.
During
the nine months ended September 30, 2008, the four months ended September 30,
2007 and the five months ended May 31, 2007, our minority interest expense
associated with our ownership interests in Kinder Morgan Energy Partners was
$271.8 million, $58.0 million and $75.1 million, respectively. Minority interest
expense reflects the earnings from continuing operations recorded by Kinder
Morgan Energy Partners that are attributed to its units held by the
public.
Income
Taxes
Income
taxes from continuing operations increased from $74.6 million in the third
quarter of 2007 to $87.9 million in the third quarter of 2008, an increase of
$13.3 million (18%) primarily due to a $32.1 million increase in income from
continuing operations.
During
the nine months ended September 30, 2008 income taxes included (i) a reduction
of approximately $53 million in deferred income tax liabilities, and income tax
expense, related to the termination of certain of our subsidiaries’ presence in
Canada resulting in the elimination of future taxable gains and (ii) the tax
deduction permitted for dividends received from domestic corporations. These
decreases to income tax expense were partially offset by (i) state income taxes
and (ii) the impact of consolidating the Kinder Morgan Management income tax
provision.
During
the four months ended September 30, 2007 and the five months ended May 31, 2007,
our income tax expense included (i) state income taxes, (ii) the impact of
consolidating the Kinder Morgan Management income tax provision, (iii) foreign
earnings subject to different tax rates and (iv) the impact of consolidating
Kinder Morgan Energy Partners’ income tax provision. The five months ended May
31, 2007 income tax expense also included non-deductible fees associated with
the Going Private transaction.
Fair
Value Measurements
On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 established a hierarchal
disclosure framework associated with the level of pricing observability utilized
in measuring fair value. This framework defined three levels of inputs to the
fair value measurement process, and requires that each fair value measurement be
assigned to a level corresponding to the lowest level input that is significant
to the fair value measurement in its entirety. We utilize energy commodity
derivative contracts for the purpose of mitigating our risk resulting from
fluctuations in the market price of natural gas, natural gas liquids and crude
oil, and utilize interest rate swaps to mitigate our risk from fluctuations in
interest rates. See Note 15 of the accompanying Notes to Consolidated Financial
Statements for additional information regarding SFAS No. 157.
At
September 30, 2008, the fair value of our derivative instruments classified as
Level 3 under the fair value hierarchy consisted primarily of West Texas Sour
(“WTS”) oil swaps and West Texas Intermediate (“WTI”) options (costless
collars). Costless collars are designed to establish floor and ceiling prices on
anticipated future oil production from the assets we own in the SACROC oil
field. While the use of these derivative instruments limits the downside risk of
adverse price movements, they may also limit future revenues from favorable
price movements. In addition to these oil-commodity derivatives, Level 3
derivative instruments consist of Natural Gas Basis swaps. Basis swaps are used
in connection with another derivative contract to reduce hedge ineffectiveness
by reducing a basis difference between a hedged exposure and a derivative
contract. The following tables summarize the total fair value asset and
liability measurements of our Level 3 energy commodity derivative contracts in
accordance with SFAS No. 157.
|
Significant
Unobservable Inputs (Level 3)
|
|
Assets
|
|
Liabilities
|
|
September
30,
2008
|
|
December
31,
2007
|
|
Change
|
|
September
30,
2008
|
|
December
31,
2007
|
|
Change
|
|
(In
millions)
|
|
(In
millions)
|
Natural
Gas Basis Swaps
|
$
|
4.9
|
|
|
$
|
2.8
|
|
|
$
|
2.1
|
|
|
$
|
(7.0
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(2.3
|
)
|
WTS
Oil Swaps
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(90.1
|
)
|
|
|
(94.5
|
)
|
|
|
4.4
|
|
WTI
Options
|
|
46.7
|
|
|
|
0.0
|
|
|
|
46.7
|
|
|
|
(28.7
|
)
|
|
|
0.0
|
|
|
|
(28.7
|
)
|
Other
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.0
|
|
|
|
(7.4
|
)
|
|
|
(4.9
|
)
|
|
|
(2.5
|
)
|
Total
|
$
|
52.6
|
|
|
$
|
3.8
|
|
|
$
|
48.8
|
|
|
$
|
(133.2
|
)
|
|
$
|
(104.1
|
)
|
|
$
|
(29.1
|
)
|
The
largest change in fair value of Level 3 assets and liabilities between December
31, 2007 and September 30, 2008 is related to WTI options, which amount to an
increase of $46.7 and $28.7 million in assets and liabilities, respectively. The
majority of these contracts were entered into during 2008, which accounts for
the change. There were no transfers into or out
of
Level 3 during the period.
The
valuation techniques used for the above Level 3 input derivatives are as
follows:
|
·
|
Natural
gas basis swaps’ fair market values are obtained through a pricing service
and derived by combining raw inputs from NYMEX with proprietary
quantitative models and processes. Although the prices are originating
from a liquid market (NYMEX), we believe the effort to validate these
prices would not be worth the benefit received. As a result, we have
classified the valuation of these derivatives as Level
3.
|
|
·
|
Oil
swaps’ fair market values are obtained from a broker using their
proprietary model for similar assets and liabilities; quotes are
non-binding.
|
|
·
|
Oil
future options’ fair market values are established using an internal
model. Internal models incorporate the use of options pricing and
estimates of the present value of cash flows based upon underlying
contractual terms. The models reflect management’s estimates, taking into
account observable market prices, estimated market prices in the absence
of quoted market prices, the risk-free market discount rate, volatility
factors, estimated correlations of commodity prices and contractual
volumes.
|
Commodity
derivative contracts are recorded at their estimated fair values as of each
reporting date. For commodity derivatives, the most observable inputs available
are used to determine the fair value of each contract. In the absence of a
quoted price for an identical contract in an active market, we use broker quotes
for identical or similar contracts, or internally prepared valuation models as
primary inputs to determine fair value. Valuation methods have not changed
during the quarter ended September 30, 2008.
When
appropriate, valuations are adjusted for various factors including credit
considerations. Such adjustments are generally based on available market
evidence, including but not limited to Kinder Morgan Energy Partners credit
default swap quotes as of September 30, 2008. Collateral agreements with our
counterparties serve to reduce our credit exposure and are considered in the
adjustment. Our fair value measurements of derivative contracts are adjusted for
credit risk in accordance with SFAS No. 157, and the “Accumulated Other
Comprehensive Loss” balance in the accompanying interim Consolidated Balance
Sheet as of September 30, 2008 includes a gain of $14.1 million related to
discounting the value of our energy commodity derivative liabilities for the
effect of credit risk.
With
the exception of the Casper and Douglas hedges and the ineffective portion of
our derivative contracts, our energy commodity derivative contracts are
accounted for as cash flow hedges. In accordance with SFAS No. 133, gains and
losses associated with cash flow hedges are included in the caption “Accumulated
Other Comprehensive Loss” in the accompanying interim Consolidated Balance
Sheets.
Liquidity
and Capital Resources
Liquidity
We
believe that we and our other subsidiaries and investments, including Kinder
Morgan Energy Partners, have liquidity and access to financial resources as
discussed below sufficient to meet future requirements for working capital, debt
repayment and capital expenditures associated with existing and future expansion
projects as follows:
|
·
|
Cash flow from
operations
|
Our
diverse set of energy infrastructure assets generated $583.8 million of cash
flows from continuing operations for the nine months ended September 30, 2008.
Additionally, Kinder Morgan Energy Partners expansion projects in aggregate are
expected to generate positive returns on our investment, based on long-term
contracted customer commitments and our current estimated expansion project
costs.
|
·
|
Credit facility
availability
|
As
of September 30, 2008, Knight Inc. had available credit capacity of $668.0
million and Kinder Morgan Energy Partners had available credit capacity of
$810.3 million under existing credit facilities, both of which are net of Lehman
Brothers’ commitments (see Customer and Capital Market Liquidity). Kinder Morgan
Energy Partners’ joint venture projects, Rockies Express Pipeline LLC and
Midcontinent Express Pipeline LLC, have undrawn capacity of $1.1 billion and
$741.7 million, respectively, under their separate credit facilities, net of
Lehman Brothers’ commitments (see Customer and Capital Market
Liquidity).
|
·
|
Long-term debt and equity
markets
|
During
the last 15 months, Kinder Morgan Energy Partners, for itself and for its equity
investment, Rockies Express Pipeline LLC, collectively has raised $3.4 billion
of long-term debt and $843.2 million of equity through the sale of
Kinder
Morgan Energy Partners units. Including the quarterly share distributions by
Kinder Morgan Management, which essentially constitute an automatic distribution
re-investment program, a total of approximately $1.2 billion in equity was
raised during this timeframe.
|
·
|
Kinder Morgan Energy Partners
equity infusion
|
Additionally,
in October 2008, our board of directors indicated its willingness to purchase up
to $750 million of Kinder Morgan Energy Partners equity over the next 18 months,
if necessary, to support its capital raising efforts.
On
October 13, 2008, S&P revised its outlook on Kinder Morgan Energy Partners’
long-term credit rating to negative from stable (but affirmed Kinder Morgan
Energy Partners’ long-term credit rating at BBB), due to Kinder Morgan Energy
Partners’ previously announced expected delay and cost increases associated with
the completion of the Rockies Express Pipeline project. At the same time,
S&P lowered Kinder Morgan Energy Partners, Rockies Express LLC, and Cortez
Capital Corporation’s short-term credit rating to A-3 from A-2. As a result of
this revision and current commercial paper market conditions, Kinder Morgan
Energy Partners, Rockies Express Pipeline LLC and Cortez Capital Corporation are
unable to access commercial paper borrowings. However, Kinder Morgan Energy
Partners, Rockies Express Pipeline LLC and Cortez Capital Corporation expect
that short-term financing and liquidity needs will continue to be met through
borrowings made under their respective bank credit facilities. Knight Inc.’s
S&P credit rating has not changed in the nine months ended September 30,
2008 and remains BB on its secured senior debt.
Customer
and Capital Market Liquidity
Some
of Kinder Morgan Energy Partners’ customers are experiencing, or may experience
in the future, severe financial problems that have had or may have a significant
impact on their creditworthiness. These financial problems may arise from the
current credit markets crisis, changes in commodity prices or otherwise. Kinder
Morgan Energy Partners is working to implement, to the extent allowable under
applicable contracts, tariffs and regulations, prepayments and other security
requirements, such as letters of credit, to enhance their credit position
relating to amounts owed from these customers. Kinder Morgan Energy Partners
cannot provide assurance that one or more of their financially distressed
customers will not default on their obligations to them or that such a default
or defaults will not have a material adverse effect on Kinder Morgan Energy
Partners’ business, financial position, future results of operations, or future
cash flows; however, Kinder Morgan Energy Partners believes it has provided
adequate allowance for such customers.
On
September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy
protection under the provisions of Chapter 11 of the U.S. Bankruptcy Code. No
Lehman Brothers affiliate is an administrative agent for us or any of our
subsidiaries; however, one of the Lehman entities is a lending bank providing
less than 5% of the commitments in Kinder Morgan Energy Partners’ $1.85 billion
five-year credit facility. It also provides less than 5% of the
commitments in Rockies Express Pipeline LLC’s $2.0 billion credit facility
(Kinder Morgan Energy Partners is a 51% owner in Rockies Express Pipeline LLC)
and less than 10% of the commitments in Midcontinent Express Pipeline LLC’s $1.4
billion credit facility (Kinder Morgan Energy Partners is a 50% owner in
Midcontinent Express Pipeline LLC). Since Lehman Brothers declared bankruptcy,
its affiliate, which is a party to the Rockies Express Pipeline LLC and
Midcontinent Express Pipeline LLC credit facilities, has not met its obligations
to lend under those agreements. Thus, Kinder Morgan Energy Partners’ available
capacity on each of the three facilities (Kinder Morgan Energy Partners, Rockies
Express Pipeline LLC and Midcontinent Express Pipeline LLC) will be reduced by
the Lehman commitment. The commitments of the other banks remain unchanged and
the facilities are not defaulted.
Also,
on October 12, 2008, the U.S. Federal Reserve approved the application of Wells
Fargo & Company to acquire Wachovia Corporation and its subsidiary
banks. Wells Fargo will acquire all of Wachovia Corporation and all its
businesses and obligations, including its preferred equity and indebtedness, and
all its banking deposits. Wachovia Bank, National Association is the
administrative agent of Kinder Morgan Energy Partners’ five-year unsecured
credit facility. In addition, Wachovia is a 6% lending bank participant in
Knight Inc.’s $1.0 billion six-year senior secured credit facility. We do not
expect that this merger will adversely impact our or Kinder Morgan Energy
Partners’ access to capital.
Invested
Capital
The
following table illustrates the sources of our invested capital. Our net debt to
total capital increased in the first nine months of 2008, principally the result
of a $4.03 billion goodwill impairment charge associated with the Going Private
transaction (see Note 3 of the accompanying Notes to Consolidated Financial
Statements) as well as $1.6 billion in additional borrowings by Kinder Morgan
Energy Partners during the first nine months of 2008. This increase was
partially offset by debt reductions made possible by $5.9 billion in total
proceeds related to the sale of an 80% ownership interest in NGPL
PipeCo
LLC, which proceeds were used to pay off the entire outstanding balances of our
senior secured credit facility’s Tranche A and Tranche B term loans, to
repurchase $1.6 billion of our outstanding debt securities and to reduce
balances outstanding under our $1.0 billion revolving credit
facility.
In
addition to the direct sources of debt and equity financing shown in the
following table, we obtain financing indirectly through our ownership interests
in unconsolidated entities. See Note 13 of the accompanying Notes to
Consolidated Financial Statements. Changes in our long-term and short-term debt
are discussed under “Net Cash Flows from Financing Activities” following and in
Note 13 of the accompanying Notes to Consolidated Financial Statements.
|
Successor
Company
|
|
|
Predecessor
Company
|
|
September
30,
2008
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
December
31,
2005
|
|
(Dollars
in millions)
|
|
|
(Dollars
in millions)
|
Long-term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Notes and Debentures
|
$
|
10,800.6
|
|
|
$
|
14,714.6
|
|
|
|
$
|
10,623.9
|
|
|
$
|
6,286.8
|
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
|
35.7
|
|
|
|
283.1
|
|
|
|
|
283.6
|
|
|
|
283.6
|
|
Preferred
Interest in General Partner of KMP
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
-
|
|
|
|
-
|
|
Capital
Securities
|
|
-
|
|
|
|
-
|
|
|
|
|
106.9
|
|
|
|
107.2
|
|
Value
of Interest Rate Swaps
|
|
233.8
|
|
|
|
199.7
|
|
|
|
|
46.4
|
|
|
|
51.8
|
|
|
|
11,170.1
|
|
|
|
15,297.4
|
|
|
|
|
11,060.8
|
|
|
|
6,729.4
|
|
Minority
Interests
|
|
3,474.3
|
|
|
|
3,314.0
|
|
|
|
|
3,095.5
|
|
|
|
1,247.3
|
|
Common
Equity, Excluding Accumulated Other Comprehensive Loss
|
|
4,412.7
|
|
|
|
8,069.2
|
|
|
|
|
3,657.5
|
|
|
|
4,051.4
|
|
|
|
19,057.1
|
|
|
|
26,680.6
|
|
|
|
|
17,813.8
|
|
|
|
12,028.1
|
|
Value
of Interest Rate Swaps
|
|
(233.8
|
)
|
|
|
(199.7
|
)
|
|
|
|
(46.4
|
)
|
|
|
(51.8
|
)
|
Capitalization
|
|
18,823.3
|
|
|
|
26,480.9
|
|
|
|
|
17,767.4
|
|
|
|
11,976.3
|
|
Short-term
Debt, Less Cash and Cash Equivalents1
|
|
433.1
|
|
|
|
819.3
|
|
|
|
|
2,046.7
|
|
|
|
841.4
|
|
Invested
Capital
|
$
|
19,256.4
|
|
|
$
|
27,300.2
|
|
|
|
$
|
19,814.1
|
|
|
$
|
12,817.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Notes and Debentures
|
|
57.4%
|
|
|
|
55.5%
|
|
|
|
|
59.8%
|
|
|
|
52.5%
|
|
Minority
Interests
|
|
18.5%
|
|
|
|
12.5%
|
|
|
|
|
17.4%
|
|
|
|
10.4%
|
|
Common
Equity
|
|
23.4%
|
|
|
|
30.5%
|
|
|
|
|
20.6%
|
|
|
|
33.8%
|
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
|
0.2%
|
|
|
|
1.1%
|
|
|
|
|
1.6%
|
|
|
|
2.4%
|
|
Preferred
Interest in General Partner of KMP
|
|
0.5%
|
|
|
|
0.4%
|
|
|
|
|
-%
|
|
|
|
-%
|
|
Capital
Securities
|
|
-%
|
|
|
|
-%
|
|
|
|
|
0.6%
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Debt2,
3
|
|
58.3%
|
|
|
|
56.9%
|
|
|
|
|
63.9%
|
|
|
|
55.6%
|
|
Common
Equity, Excluding Accumulated Other Comprehensive Loss and Including
Deferrable Interest Debentures Issued to Subsidiary Trusts, Preferred
Interest in General Partner of KMP, Capital Securities and Minority
Interests
|
|
41.7%
|
|
|
|
43.1%
|
|
|
|
|
36.1%
|
|
|
|
44.4%
|
|
____________
1
|
Cash
and cash equivalents were $126.6 million, $148.6 million, $129.8 million
and $116.6 million at September 30, 2008 and December 31, 2007, 2006 and
2005, respectively.
|
2
|
Outstanding
notes and debentures plus short-term debt, less cash and cash
equivalents.
|
3
|
Our
ratio of net debt to invested capital, not including the effects of
consolidating Kinder Morgan Energy Partners, was 40.3%, 45.6% and 56.2% at
September 30, 2008 and December 31, 2007 and 2006,
respectively.
|
Short-term
Liquidity
Our
principal sources of short-term liquidity are our revolving bank facility,
Kinder Morgan Energy Partners’ revolving bank facility and cash provided by
operations. The following represents the revolving credit facilities that were
available to Knight Inc. and its respective subsidiaries, short-term debt
outstanding under the credit facilities or an associated commercial paper
program, and available borrowing capacity under the facilities after deducting
outstanding letters of credit.
|
At
September 30, 2008
|
|
At
October 31, 2008
|
|
Short-term
Debt
Outstanding
|
|
Available
Borrowing
Capacity
|
|
Short-term
Debt
Outstanding
|
|
Available
Borrowing
Capacity
|
|
(In
millions)
|
Credit
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Knight
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
$1.0
billion, six-year secured revolver, due May 2013
|
$
|
270.0
|
|
$
|
668.0
|
|
$
|
277.9
|
|
$
|
660.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Kinder
Morgan Energy Partners
|
|
|
|
|
|
|
|
|
|
|
|
$1.85
billion, five-year unsecured revolver, due August 2010
|
$
|
295.0
|
|
$
|
810.3
|
|
$
|
279.7
|
|
$
|
978.8
|
These
facilities can be used for the respective entity’s general corporate or
partnership purposes. Kinder Morgan Energy Partners’ facility is also used as
backup for its commercial paper program, and is shown net of Lehman Brothers’
commitments.
Our
current maturities of long-term debt of $289.7 million at September 30, 2008
represent (i) $5.0 million of our 6.50% Series Debentures due September 1, 2009,
(ii) $18.5 million in principal amount of tax-exempt bonds due April 1, 2024
(Kinder Morgan Energy Partners’ subsidiary Kinder Morgan Operating L.P. “B” is
the obligor on the bonds and the bonds are due on demand pursuant to call
provisions), (iii) Kinder Morgan Energy Partners’ $250.0 million in principal
amount of 6.30% senior notes due February 1, 2009, (iv) $9.7 million of a 5.40%
long-term note of Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada
Company and (v) $6.5 million of Kinder Morgan Texas Pipeline, L.P.’s 5.23%
series notes. Apart from our notes payable, current maturities of long-term
debt, and the fair value of derivative instruments, our current liabilities, net
of our current assets, represent an additional short-term obligation of $329.5
million at September 30, 2008. Given our expected cash flows from operations,
our unused debt capacity as discussed above, including our credit facilities,
and based on our projected cash needs in the near term, we do not expect any
liquidity issues to arise.
In
October 2008, Standard & Poor’s Rating Services lowered Kinder Morgan Energy
Partners, Rockies Express Pipeline LLC and Cortez Capital Corporation’s
short-term credit rating to A-3 from A-2. As a result of this revision and
current commercial paper market conditions, Kinder Morgan Energy Partners,
Rockies Express Pipeline LLC and Cortez Capital Corporation are unable to access
commercial paper borrowings. However, Kinder Morgan Energy Partners, Rockies
Express Pipeline LLC and Cortez Capital Corporation expect that short-term
financing and liquidity needs will continue to be met through borrowings made
under their respective bank credit facilities.
Significant
Financing Transactions
On
February 12, 2008, Kinder Morgan Energy Partners completed an offering of
1,080,000 of its common units at a price of $55.65 per unit in a privately
negotiated transaction. Kinder Morgan Energy Partners received net proceeds of
$60.1 million for the issuance of these 1,080,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
In
March 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units at a price of $57.70 per unit, including common
units sold pursuant to the underwriters’ over-allotment option, less commissions
and underwriting expenses. Kinder Morgan Energy Partners received net proceeds
of $324.2 million for the issuance of these common units, and used the proceeds
to reduce the borrowings under its commercial paper program.
The
combined effect of the public offerings of common units had the associated
effects of increasing our (i) minority interests associated with Kinder Morgan
Energy Partners by $368.9 million and (ii) associated accumulated deferred
income taxes by $5.6 million and reducing our (i) goodwill by $25.8 million and
(ii) paid-in capital by $16.0 million.
On
September 19, 2008, Kinder Morgan Energy Partners filed a registration statement
on Form S-3 with the Securities and Exchange Commission (“SEC”) under the
Securities Act of 1933. This registration statement, commonly referred to as a
shelf registration statement, will allow Kinder Morgan Energy Partners to sell
up to $5 billion of additional common units or debt securities. The shelf
registration statement is intended to provide Kinder Morgan Energy Partners with
flexibility to raise funds from the offering of its securities in one or more
offerings, in amounts, and at prices to be set forth in subsequent filings made
with the SEC at the time of each separate offering. Kinder Morgan Energy
Partners’ offerings would be subject to market conditions and its capital
needs, and unless
Kinder Morgan Energy Partners specifies otherwise in a prospectus supplement,
Kinder Morgan Energy Partners intends to use the net proceeds from the sale of
offered securities for general
partnership
purposes. This may include, among other things, additions to working capital,
repayment or refinancing of existing indebtedness or other partnership
obligations, financing of capital expenditures and acquisitions, investment in
existing and future projects, and repurchases and redemptions of securities.
Pending any specific application, Kinder Morgan Energy Partners may initially
invest funds in short-term marketable securities or apply them to the reduction
of other indebtedness. As of the filing of this report, the Form S-3 had not yet
been declared effective by the SEC.
On
June 6, 2008, Kinder Morgan Energy Partners completed an additional public
offering of senior notes. Kinder Morgan Energy Partners issued a total of $700
million in principal amount of senior notes, consisting of $375 million of 5.95%
notes due February 15, 2018, and $325 million of 6.95% notes due January 15,
2038. Kinder Morgan Energy Partners received proceeds from the issuance of the
notes, after underwriting discounts and commissions, of approximately $687.7
million, and used the proceeds to reduce the borrowings under its commercial
paper program.
In
March 2008, we paid $1.6 billion in cash to repurchase $1.67 billion par value
of debt securities. See Note 13 of the accompanying Notes to Consolidated
Financial Statements for additional information regarding this debt security
purchase.
On
February 15, 2008, the entire outstanding balances of our senior secured credit
facility’s Tranche A and Tranche B term loans, and amounts outstanding at that
time under our $1.0 billion revolving credit facility, on a combined basis
totaling approximately $4.6 billion, were paid off with proceeds from the
closing of the sale of an 80% ownership interest in NGPL PipeCo
LLC.
On
February 12, 2008, Kinder Morgan Energy Partners completed an additional public
offering of senior notes. Kinder Morgan Energy Partners issued a total of $900
million in principal amount of senior notes, consisting of $600 million of 5.95%
notes due February 15, 2018 and $300 million of 6.95% notes due January 15,
2038. Kinder Morgan Energy Partners received proceeds from the issuance of the
notes, after underwriting discounts and commissions, of approximately $894.1
million, and used the proceeds to reduce the borrowings under its commercial
paper program.
Contingent
Debt
In
October 2008, pursuant to the standby purchase agreement provisions contained in
the bond indenture—which require the sellers of those guarantees to buy the debt
back—certain investors elected to put (sell) back their bonds at par plus
accrued interest. A total principal and interest amount of $11.8 million was
tendered and drawn against Kinder Morgan Energy Partners’ letter of credit and
accordingly, Kinder Morgan Energy Partners paid this amount pursuant to the
letter of credit reimbursement provisions. This payment reduced the face amount
of Kinder Morgan Energy Partners’ letter of credit from $22.5 million to $10.7
million. The remarketing agent is attempting to re-sell the bonds that were put
back. If any of these bonds are re-sold, we will receive the proceeds and Kinder
Morgan Energy Partners’ letter of credit obligation will increase by the same
amount.
As
of September 30, 2008, Kinder Morgan Energy Partners’ contingent share of
Rockies Express Pipeline LLC’s and Midcontinent Express Pipeline LLC’s debt was
$741.6 million and $262.5 million, respectively. In addition, Kinder Morgan
Energy Partners’ contingent share of Rockies Express Pipeline LLC’s and
Midcontinent Express Pipeline LLC’s outstanding letters of credit as of
September 30, 2008 was $16.0 million and $16.7 million, respectively. See Note
13 of the accompanying Notes to Consolidated Financial Statements.
Kinder
Morgan Energy Partners has posted a letter of credit as security for borrowings
under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean
Highway and Port Authority. The bonds were issued for the purpose of
constructing certain port improvements located in Fernandino Beach, Nassau
County, Florida. Kinder Morgan Energy Partners’ subsidiary, Nassau Terminals LLC
is the operator of the marine port facilities. The bond indenture is for 30
years and allows the bonds to remain outstanding until December 1, 2020.
Principal payments on the bonds are made on the first of December each year and
corresponding reductions are made to the letter of credit. As of September 30,
2008, this letter of credit had a face amount of $22.5 million.
Capital
Expenditures
Our
sustaining capital expenditures for the nine months ended September 30, 2008
were $119.7 million, and we expect to spend another $85.3 million during
the final quarter of 2008, including $11.3 million for hurricane and fire repair
and replacement costs. Our sustaining capital expenditures are funded with cash
flows from operations.
Our
expansion capital expenditures for the nine months ended September 30, 2008 were
$1,803.1 million primarily with Kinder Morgan Energy Partners. Kinder
Morgan Energy Partners expects to spend another $545 million during the final
quarter of 2008. In addition, Kinder Morgan Energy Partners expects to spend
approximately $1.4 billion for its share of the
2008
expansion capital expenditures for both the Rockies Express and Midcontinent
Express natural gas pipeline projects in the final quarter of 2008. Kinder
Morgan Energy Partners’ share of the capital expenditures for these projects is
being funded by borrowings under Rockies Express Pipeline LLC’s and Midcontinent
Express Pipeline LLC’s own revolving credit facilities or by those entities
issuing short-term commercial paper or long-term notes and a $306 million equity
infusion by Kinder Morgan Energy Partners. Kinder Morgan Energy Partners has
funded its expansion capital expenditures and its $306 million equity infusion
noted above through borrowings under its $1.85 billion revolving credit facility
and by issuing short-term commercial paper. To the extent these sources are not
sufficient, Kinder Morgan Energy Partners could fund additional amounts through
the issuance of long-term notes or its common units for cash. During 2008,
Kinder Morgan Energy Partners has used sales of long-term notes and common units
to refinance portions of its short-term borrowings.
Interest
in Kinder Morgan Energy Partners
At
September 30, 2008, we owned, directly, and indirectly in the form of i-units
corresponding to the number of shares of Kinder Morgan Management we owned,
approximately 32.6 million limited partner units of Kinder Morgan Energy
Partners. These units, which consist of 16.4 million common units, 5.3 million
Class B units and 10.9 million i-units, represent approximately 12.5% of the
total outstanding limited partner interests of Kinder Morgan Energy Partners. In
addition, we indirectly own all the common equity of the general partner of
Kinder Morgan Energy Partners, which holds an effective 2% combined interest in
Kinder Morgan Energy Partners and its operating partnerships. Together, our
limited partner and general partner interests represented approximately 14.2% of
Kinder Morgan Energy Partners’ total equity interests at September 30, 2008. As
of the close of the Going Private transaction, our limited partner interests and
our general partner interest represented an approximately 50% economic interest
in Kinder Morgan Energy Partners. This difference results from the existence of
incentive distribution rights held by the general partner of Kinder Morgan
Energy Partners. The approximately 50% economic interest was used in applying a
new accounting basis to this less than wholly owned subsidiary. See Note 2 of
the accompanying Notes to Consolidated Financial Statements.
In
conjunction with Kinder Morgan Energy Partners’ acquisition of certain natural
gas pipelines from us at December 31, 1999, December 31, 2000 and November 1,
2004, we agreed to indemnify Kinder Morgan Energy Partners with respect to
approximately $733.5 million of its debt. We would be obligated to perform under
this indemnity only if Kinder Morgan Energy Partners’ assets were unable to
satisfy its obligations.
Additional
information on Kinder Morgan Energy Partners is contained in its Annual Report
on Form 10-K for the year ended December 31, 2007 and in its Form 10-Q for the
quarterly period ended September 30, 2008.
Cash
Flows
The
following table summarizes our net cash flows from operating, investing and
financing activities for each period presented.
|
Successor
Company
|
|
|
Predecessor
Company
|
|
Nine
Months
Ended
September
30,
2008
|
|
Four
Months
Ended
September
30,
2007
|
|
|
Five
Months
Ended
May
31, 2007
|
|
(In
millions)
|
|
|
(In
millions)
|
Net
Cash Provided by (Used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
$
|
583.1
|
|
|
$
|
509.6
|
|
|
|
$
|
603.0
|
|
Investing
Activities
|
|
3,968.0
|
|
|
|
(12,142.7
|
)
|
|
|
|
723.7
|
|
Financing
Activities
|
|
(4,569.6
|
)
|
|
|
9,872.5
|
|
|
|
|
440.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(3.5
|
)
|
|
|
(2.4
|
)
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Balance Included in Assets Held for Sale
|
|
-
|
|
|
|
-
|
|
|
|
|
(2.7
|
)
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
$
|
(22.0
|
)
|
|
$
|
(1,763.0
|
)
|
|
|
$
|
1,772.5
|
|
Nine
months ended September 30, 2008
Net
cash flows from operating activities during the period were positively affected
by (i) net income of $1,311.0 million, net of non-cash items including, among
other things, a $4.0 billion goodwill impairment charge in the second quarter of
2008 and (ii) distributions received from equity investments of $185.0 million,
comprised mainly of (a) $54.6 million of initial
distributions
received from West2East Pipeline LLC, (b) $43.0 million from our investment in
the Express Pipeline System and (c) $26.7 million from NGPL PipeCo
LLC.
Partially
offsetting these cash inflows were (i) an $851.7 million use of cash for working
capital items, primarily resulting from income tax payments made during the
period related to our ongoing operations and the sale of an 80% ownership
interest in NGPL PipeCo LLC, (ii) $23.3 million of FERC-mandated reparation
payments to certain Kinder Morgan Energy Partners’ Pacific operations’
pipelines, net of $12.6 million incremental legal reserves for settlements
reached with certain shippers on Kinder Morgan Energy Partner’s Pacific
operations’ East Line pipeline and (iii) a $28.0 million increase of gas in
underground storage. Significant period-to period variations in cash used or
generated from gas in storage transactions are generally due to changes in
injection and withdrawal volumes as well as fluctuations in natural gas
prices.
Net
cash flows from investing activities during the period were positively affected
by (i) net proceeds of $2,899.3 million from the sale of an 80% ownership
interest in NGPL PipeCo LLC, (ii) $3,106.4 million of proceeds from NGPL PipeCo
LLC restricted cash, (iii) return of capital from equity investments of $92.5
million consisting primarily of $89.1 million and $3.4 million from Midcontinent
Express Pipeline LLC and NGPL PipeCo LLC, respectively, (iv) net proceeds
received of $113.3 million for the sale of other assets and (v) a $40.3 million
decrease in margin deposits.
These
positive impacts were partially offset by (i) capital expenditures of $1,922.8
million, primarily from Kinder Morgan Energy Partners’ natural gas pipeline
projects, including the construction of Kinder Morgan Louisiana Pipeline, the
expansion of the Trans Mountain crude oil and refined petroleum products
pipeline system, and additional infrastructure to Kinder Morgan Energy Partners’
carbon dioxide producing and delivery operations, (ii) incremental contributions
to equity investments of $342.1 million, consisting primarily of (a) a $306.0
million contribution to West2East Pipeline LLC made in February 2008 and (b)
contributions of $27.5 million for our share of Midcontinent Express Pipeline
constructions costs and (iii) other acquisitions of $16.4 million.
Net
cash flows used in financing activities during the period were affected by (i) a
use of cash of $5,809.1 million for the retirement of long-term debt, primarily
for (a) $1.6 billion for a cash tender offer to purchase a portion of our
outstanding long-term debt, (b) a $997.5 million use of cash for the retirement
of our Tranche A term loan facilities and (c) a $3,191.8 million use of cash for
the retirement of our Tranche B term loan facilities, (ii) a net $323.1 million
decrease in short-term borrowings relating to Kinder Morgan Energy Partners’
credit facility and (iii) minority interest distributions of $463.3 million,
primarily resulting from Kinder Morgan Energy Partners’ distributions to common
unit holders.
The
impact of these factors were partially offset by (i) net proceeds of $1,585.8
million from Kinder Morgan Energy Partnership debt issuances, (ii) minority
interest contributions of $385.0 million, primarily from Kinder Morgan Energy
Partners’ issuance of common units from its first quarter 2008 public offerings,
(iii) an increase in cash book overdrafts of $43.5 million and (iv) a $2.7
million increase in short-term advances from unconsolidated
affiliates.
Four
months ended September 30, 2007
Net
cash flows from operating activities during the period were positively impacted
by (i) net income of $504.4 million, net of non-cash items, (ii) $45.1 million
of distributions received from equity investments and (iii) a $34.5 million
decrease of gas in underground storage.
Partially
offsetting these factors were (i) a $13.6 million use of cash for working
capital items, (ii) a $2.5 million use of cash attributable to discontinued
operations during the period and (iii) a $2.2 million payment for the
termination of interest rate swap agreements.
Net
cash flows used in investing activities during the period were affected by (i)
$11,534.3 million of cash used to purchase Kinder Morgan, Inc. stock in the
Going Private transaction, (ii) $656.1 million in capital expenditures, (iii)
$119.7 million of other acquisitions, (iv) incremental margin deposits of $22.9
million and (v) contributions of $17.5 million to equity
investments.
These
negative impacts were partially offset by (i) $190.9 million of cash provided by
discontinued investing activities, primarily from the sale of Corridor, (ii)
$10.6 million of net proceeds from the sale of other assets and (iii) $6.3
million of proceeds received from the sale of underground natural gas storage
volumes during the period.
Net
cash flows provided by financing activities during the period were principally
due to (i) $5,112.0 million of equity contributions from investors in the Going
Private transaction, (ii) $4,696.2 million of proceeds, net of issuance costs,
received from the issuance of senior secured credit facilities to partially
finance the Going Private transaction, (iii) $1,041.7 million of net proceeds
from Kinder Morgan Energy Partners’ public debt offerings, (iv) $98.6 million of
net proceeds from Kinder
Morgan
G.P., Inc.’s Series A Fixed-to-Floating Rate Term Cumulative Preferred Stock and
(v) net incremental short-term debt of $62.7 million.
The
impact of these factors was partially offset by (i) a $455 million use of cash
for the retirement of our senior secured Tranche C term loan facility, (ii) a
$250 million use of cash for a required payment on senior notes of Kinder Morgan
Energy Partners, (iii) a $110.75 million use of cash for (a) quarterly payments
of $2.5 million on our Tranche A and $8.25 million on our Tranche B term loan
facilities and (b) a $100 million voluntary payment on our Tranche B term loan
facility, (iv) $181.1 million of cash paid to share-based award holders due to
the Going Private transaction and (v) minority interest distributions of $127.6
million, primarily resulting from Kinder Morgan Energy Partners’ distributions
to common unit holders.
Five
months ended May 31, 2007
Net
cash flows from operating activities during the period were positively affected
by (i) net income of $625.8 million, net of non-cash items, (ii) $109.8 of cash
provided by discontinued operations, (iii) net proceeds of $51.9 million from
the termination of interest rate swaps and (iv) $48.2 million of distributions
from equity investments.
These
positive factors were partially offset by (i) a use of cash of $202.9 million
for working capital items and (ii) an $84.2 million increase in gas in
underground storage.
Net
cash flows from investing activities during the period were positively impacted
by (i) $1,488.2 million of cash from discontinued investing activities,
primarily from the sales of our discontinued Terasen and U.S.-based retail
operations, (ii) $8.4 million of proceeds received from the sale of underground
natural gas storage volumes during the period and (iii) $8.0 million of cash
received for property casualty indemnifications.
Partially
offsetting these factors were (i) $652.8 million of capital expenditures, (ii) a
$54.8 million use of cash for margin deposits, (iii) incremental acquisitions of
$42.1 million and (iv) $29.7 million of contributions to equity
investments.
Net
cash flows from financing activities during the period were positively impacted
by (i) $992.8 million of net proceeds from Kinder Morgan Energy Partners’ 2007
public debt offerings, (ii) $297.9 million of proceeds from the issuance of
Kinder Morgan Management shares, (iii) $140.1 million of cash provided from
discontinued financing activities, (iii) $56.7 million of cash received for
excess tax benefits from share-based payment arrangements and (iv) $9.9 million
of proceeds received from the issuance of our predecessor’s common
stock.
The
impact of these positive factors was partially offset by (i) a $304.2 million
use of cash for the early retirement of a portion of our senior notes, (ii)
$248.9 million of minority interest distributions, primarily resulting from
Kinder Morgan Energy Partners’ distributions to common unit holders, (iii) a net
decrease of $247.5 million in short-term debt, (iii) $234.9 million paid for
dividends on our predecessor’s common stock and (iv) a decrease of $14.9 million
in cash book overdrafts.
Distributions
to Kinder Morgan Energy Partners’ Common Unit Holders
Kinder
Morgan Energy Partners’ partnership agreement requires that it distribute 100%
of its available cash to its partners within 45 days following the end of each
quarter. Available cash is initially distributed 98% to Kinder Morgan Energy
Partners’ limited partners with 2% retained by Kinder Morgan G.P., Inc. as
Kinder Morgan Energy Partners’ general partner. These distribution percentages
are modified to provide for incentive distributions to Kinder Morgan G.P., Inc.
as general partner of Kinder Morgan Energy Partners in the event that quarterly
distributions to unitholders exceed certain specified thresholds. Our 2007 Form
10-K contains additional information concerning Kinder Morgan Energy Partners’
partnership distributions.
On
October 14, 2008, Kinder Morgan Energy Partners declared a cash distribution of
$1.02 per common unit for the third quarter of 2008, which will be paid on
November 14, 2008 to unitholders of record as of October 31, 2008. On August 14,
2008, Kinder Morgan Energy Partners paid a quarterly distribution of $0.99 per
common unit for the quarterly period ended June 30, 2008, of which $161.1
million was paid to the public holders (included in minority interests) of
Kinder Morgan Energy Partners common units.
Litigation
and Environmental
As
of September 30, 2008 and December 31, 2007, we have recorded a total reserve
for environmental claims, without discounting and without regard to anticipated
insurance recoveries, in the amount of $78.4 million and $102.6 million,
respectively. In addition, as of September 30, 2008 and December 31, 2007, we
have recorded a receivable of $24.7 million and $38.0 million, respectively, for
expected cost recoveries that have been deemed probable. The reserve is
primarily established to address and clean up soil and ground water impacts from
former releases to the environment at facilities we
have
acquired or accidental spills or releases at facilities that we own. Reserves
for each project are generally established by reviewing existing documents,
conducting interviews and performing site inspections to determine the overall
size and impact to the environment. Reviews are made on a quarterly basis to
determine the status of the cleanup and the costs associated with the effort. In
assessing environmental risks in conjunction with proposed acquisitions, we
review records relating to environmental issues, conduct site inspections,
interview employees, and, if appropriate, collect soil and groundwater
samples.
Additionally,
as of September 30, 2008 and December 31, 2007, we have recorded a total reserve
for legal fees, transportation rate cases and other litigation liabilities in
the amount of $232.5 million and $249.4 million, respectively. The reserve is
primarily related to various claims from lawsuits arising from SFPP L.P.’s
pipeline transportation rates, and the contingent amount is based on both the
probability of realization and our ability to reasonably estimate liability
dollar amounts. We regularly assess the likelihood of adverse outcomes resulting
from these claims in order to determine the adequacy of our liability
provision.
We
believe we have established adequate environmental and legal reserves such that
the resolution of pending environmental matters and litigation will not have a
material adverse impact on our business, cash flows, financial position or
results of operations. However, changing circumstances could cause these matters
to have a material adverse impact.
Pursuant
to our continuing commitment to operational excellence and our focus on safe,
reliable operations, we have implemented, and intend to implement in the future,
enhancements to certain of our operational practices in order to strengthen our
environmental and asset integrity performance. These enhancements have resulted
and may result in higher operating costs and sustaining capital expenditures;
however, we believe these enhancements will provide us the greater long-term
benefits of improved environmental and asset integrity performance.
Please
refer to Note 18 of the accompanying Notes to Consolidated Financial Statements
for additional information regarding pending litigation and environmental
matters.
Recent
Accounting Pronouncements
Refer
to Note 19 of the accompanying Notes to Consolidated Financial Statements for
information regarding recent accounting pronouncements.
Information
Regarding Forward-looking Statements
This
filing includes forward-looking statements. These forward-looking statements are
identified as any statement that does not relate strictly to historical or
current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,”
“projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,”
“expect,” “may,” or the negative of those terms or other variations of them or
comparable terminology. In particular, statements, express or implied,
concerning future actions, conditions or events, future operating results or the
ability to generate sales, income or cash flow or to service debt or to pay
dividends or make distributions are forward-looking statements. Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties
and assumptions. Future actions, conditions or events and future results of
operations may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results are beyond our
ability to control or predict. Specific factors that could cause actual results
to differ from those in the forward-looking statements include:
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price
trends and overall demand for natural gas liquids, refined petroleum
products, oil, carbon dioxide, natural gas, electricity, coal and other
bulk materials and chemicals in North
America;
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economic
activity, weather, alternative energy sources, conservation and
technological advances that may affect price trends and
demand;
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changes
in tariff rates charged by our pipeline subsidiaries implemented by the
FERC, Canada National Energy Board or other regulatory agency and, with
respect to Kinder Morgan Energy Partners, the California Public Utilities
Commission;
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our
ability to acquire new businesses and assets and integrate those
operations into existing operations, as well as the ability to expand our
facilities;
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difficulties
or delays experienced by railroads, barges, trucks, ships or pipelines in
delivering products to or from our terminals or
pipelines;
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our
ability to successfully identify and close acquisitions and make
cost-saving changes in operations;
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shut-downs
or cutbacks at major refineries, petrochemical or chemical plants, ports,
utilities, military bases or other businesses that use our services or
provide services or products to us;
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crude
oil and natural gas production from exploration and production areas that
we serve, such as the Permian Basin area of West Texas, the U.S. Rocky
Mountains and the Alberta oil
sands;
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changes
in laws or regulations, third-party relations and approvals and decisions
of courts, regulators and governmental bodies that may adversely affect
our business or our ability to
compete;
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changes
in accounting pronouncements that impact the measurement of our results of
operations, the timing of when such measurements are to be made and
recorded, and the disclosures surrounding these
activities;
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our
ability to offer and sell equity securities and our ability to sell debt
securities or obtain debt financing in sufficient amounts to implement
that portion of our business plan that contemplates growth through
acquisitions of operating businesses and assets and expansions of our
facilities;
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our
indebtedness, which could make us vulnerable to general adverse economic
and industry conditions, limit our ability to borrow additional funds,
and/or place us at competitive disadvantages compared to our competitors
that have less debt or have other adverse
consequences;
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interruptions
of electric power supply to our facilities due to natural disasters, power
shortages, strikes, riots, terrorism, war or other
causes;
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our
ability to obtain insurance coverage without significant levels of
self-retention of risk;
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acts
of nature, sabotage, terrorism or other similar acts causing damage
greater than our insurance coverage
limits;
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capital
and credit markets conditions, inflation and interest
rates;
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the
political and economic stability of the oil producing nations of the
world;
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national,
international, regional and local economic, competitive and regulatory
conditions and developments;
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our
ability to achieve cost savings and revenue
growth;
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foreign
exchange fluctuations;
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the
timing and extent of changes in commodity prices for oil, natural gas,
electricity and certain agricultural
products;
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the
extent of our success in discovering, developing and producing oil and gas
reserves, including the risks inherent in exploration and development
drilling, well completion and other development
activities;
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engineering
and mechanical or technological difficulties that we may experience with
operational equipment, in well completions and workovers, and in drilling
new wells;
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the
uncertainty inherent in estimating future oil and natural gas production
or reserves that Kinder Morgan Energy Partners may
experience;
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the
ability to complete expansion projects on time and on
budget;
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the
timing and success of our business development efforts;
and
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unfavorable
results of litigation and the fruition of contingencies referred to in the
accompanying Notes to Consolidated Financial
Statements.
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There
is no assurance that any of the actions, events or results of the
forward-looking statements will occur, or if any of them do, what impact they
will have on our results of operations or financial condition. Because of these
uncertainties, you should not put undue reliance on any forward-looking
statements.
See
Item 1A “Risk Factors” of our 2007 Form 10-K, and Part II, Item 1A “Risk
Factors” of this report for a more detailed description of these and other
factors that may affect the forward-looking statements. When considering
forward-looking statements, one should keep in mind the risk factors described
in both our 2007 Form 10-K and this report. The risk factors could cause our
actual results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation, other than required by applicable law, to
update the above list or to announce publicly the result of any revisions to any
of the forward-looking statements to reflect future events or
developments.
There
have been no material changes in market risk exposures that would affect the
quantitative and qualitative disclosures presented as of December 31, 2007, in
Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained
in our 2007 Form 10-K. However, the capital and credit markets have been
experiencing extreme volatility and disruption for more than twelve months, and
in recent weeks, the volatility and disruption have reached unprecedented
levels. See Part II, Item 1A “Risk Factors” of this report for a more detailed
description of this and other factors that may affect our overall business
growth. For more information on our risk management activities, see Note 15 of
the accompanying Notes to Consolidated Financial Statements.
As
of September 30, 2008, our management, including our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
under the Securities Exchange Act of 1934. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon and as of the date of the evaluation, our Chief Executive Officer and
our Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required, and is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, to allow timely decisions regarding required
disclosure. There has been no change in our internal control over financial
reporting during the quarter ended September 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
See
Note 18 of the accompanying Notes to Consolidated Financial Statements in Part
I, Item 1, which is incorporated herein by reference.
Except
as set forth below, there have been no material changes in or additions to the
risk factors disclosed in Item 1A “Risk Factors” in our 2007 Form
10-K.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the markets have
exerted downward pressure on stock prices and credit capacity for certain
issuers. Our plans for growth require regular access to the capital and credit
markets. If current levels of market disruption and volatility continue or
worsen, access to capital and credit markets could be disrupted making growth
through acquisitions and development projects difficult or impractical to pursue
until such time as markets stabilize.
Economic
conditions worldwide have from time to time contributed to slowdowns in the oil
and gas industry, as well as in the specific segments and markets in which we
operate, resulting in reduced demand and increased price competition for our
products and services. Our operating results in one or more geographic regions
may also be affected by uncertain or changing economic conditions within that
region, such as the challenges that are currently affecting economic conditions
in the United States. Volatility in commodity prices might have an impact on
many of our customers, which in turn could have a negative impact on their
ability to meet their obligations to us. In addition, decreases in the prices of
crude oil and natural gas liquids will have a negative impact on the results of
our CO2 business
segment. If global economic and market conditions (including volatility in
commodity markets), or economic conditions in the United States or other key
markets, remain uncertain or persist, spread or deteriorate further, we may
experience material impacts on our business, financial condition and results of
operations.
The
recent downturn in the credit markets has increased the cost of borrowing and
has made financing difficult to obtain, each of which may have a material
adverse effect on our results of operations and business.
Recent
events in the financial markets have had an adverse impact on the credit markets
and, as a result, the availability of credit has become more expensive and
difficult to obtain. Some lenders are imposing more stringent restrictions on
the terms of credit and there may be a general reduction in the amount of credit
available in the markets in which we conduct business. In addition, as a result
of the current credit market conditions and the recent downgrade of Kinder
Morgan Energy Partners’ short-term credit ratings by Standard & Poor’s
Rating Services, it is currently unable to access commercial paper borrowings
and instead is meeting its short-term financing and liquidity needs through
borrowings under its bank credit facility. The negative impact on the tightening
of the credit markets may have a material adverse effect on Kinder Morgan Energy
Partners resulting from, but not limited to, an inability to expand facilities
or finance the acquisition of assets on favorable terms, if at all, increased
financing costs or financing with increasingly restrictive
covenants.
The
failure of any bank in which we deposit our funds could reduce the amount of
cash we have available for operations to pay distributions and to make
additional investments.
We
have diversified our cash and cash equivalents between several banking
institutions in an attempt to minimize exposure to any one of these entities.
However, the Federal Deposit Insurance Corporation, or “FDIC,” only insures
amounts up to $250,000 per depositor per insured bank. We currently have cash
and cash equivalents and restricted cash deposited in certain financial
institutions in excess of federally insured levels. If any of the banking
institutions in which we have deposited funds ultimately fails, we may lose our
deposits over $250,000. The loss of our deposits could reduce the amount of cash
we have available to distribute or invest and could result in a decline in the
value of your investment.
There
can be no assurance as to the impact on the financial markets of the U.S.
government’s plan to purchase large amounts of illiquid, mortgage-backed and
other securities from financial institutions.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, President Bush signed the Emergency Economic Stabilization Act of
2008 (“EESA”) into law on October 3, 2008. Pursuant to the EESA, the U.S.
Treasury has the authority to, among other things, purchase up to $700 billion
of mortgage-backed and other securities from financial institutions for the
purpose of stabilizing the financial markets. There can be no assurance what
impact the EESA will have on the financial markets, including the extreme levels
of volatility currently being experienced. Although we are not one of the
institutions that will sell securities to the U.S. Treasury pursuant to the
EESA, the ultimate effects of the EESA on the financial markets and the economy
in general could materially and adversely affect our business, financial
condition and results of operations, or the trading prices of Kinder Morgan
Energy Partners’ common units and Kinder Morgan Management’s common
stock.
Our
business is subject to extensive regulation that affects our operations and
costs.
Our
assets and operations are subject to regulation by federal, state, provincial
and local authorities, including regulation by the FERC, and by various
authorities under federal, state and local environmental, human health and
safety and pipeline safety laws. Regulation affects almost every aspect of our
business, including, among other things, our ability to determine terms and
rates for our interstate pipeline services, to make acquisitions or to build
extensions of existing facilities. The costs of complying with such laws and
regulations are already significant, and additional or more stringent regulation
could have a material adverse impact on our business, financial condition and
results of operations.
In
addition, regulators have taken actions designed to enhance market forces in the
gas pipeline industry, which have led to increased competition. In a number of
U.S. markets, natural gas interstate pipelines face competitive pressure from a
number of new industry participants, such as alternative suppliers, as well as
traditional pipeline competitors. Increased competition driven by regulatory
changes could have a material impact on business in our markets and therefore
adversely affect our financial condition and results of operations.
Environmental
laws and regulations could expose us to significant costs and
liabilities.
Our
operations are subject to federal, state, provincial and local laws, regulations
and potential liabilities arising under or relating to the protection or
preservation of the environment, natural resources and human health and safety.
Such laws and regulations affect many aspects of our present and future
operations, and generally require us to obtain and comply with various
environmental registrations, licenses, permits, inspections and other approvals.
Liability under such laws and regulations may be incurred without regard to
fault under the Comprehensive Environmental Response, Compensation, and
Liability Act, commonly known as CERCLA or Superfund, the Resource Conservation
and Recovery Act, commonly known as RCRA, or analogous state laws for the
remediation of contaminated areas. Private parties, including the owners of
properties through which our pipelines pass may also have the right to pursue
legal actions to enforce compliance as well as to seek damages for
non-compliance with such laws and regulations or for personal injury or property
damage. Our insurance may not cover all environmental risks and costs or may not
provide sufficient coverage in the event an environmental claim is made against
us.
Failure
to comply with these laws and regulations may expose us to civil, criminal and
administrative fines, penalties and/or interruptions in our operations that
could influence our results of operations. For example, if an accidental leak,
release or spill of liquid petroleum products, chemicals or other hazardous
substances occurs at or from our pipelines or our storage or other facilities,
we may experience significant operational disruptions and it may have to pay a
significant amount to clean up the leak, release or spill, pay for government
penalties, address natural resource damage, compensate for human exposure or
property damage, install costly pollution control equipment or a combination of
these and other measures. The resulting costs and liabilities could materially
and negatively affect our level of earnings and cash flows. In addition,
emission controls required under the Federal Clean Air Act and other similar
federal, state and provincial laws could require significant capital
expenditures at our facilities.
We
own and/or operate numerous properties that have been used for many years in
connection with our business activities. While we have utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other hazardous substances may have been released at or from properties
owned, operated or used by us or our predecessors, or at or from properties
where our or our predecessors’ wastes have been taken for disposal. In addition,
many of these properties have been owned and/or operated by third parties whose
management, handling and disposal of hydrocarbons or other hazardous substances
were not under our control. These properties and the hazardous substances
released and wastes disposed on them may be subject to laws in the United States
such as CERCLA, which impose joint and several liability without regard to fault
or the legality of the original conduct. Under the regulatory schemes of the
various Canadian
provinces,
such as British Columbia’s Environmental Management Act, Canada has similar laws
with respect to properties owned, operated or used by us or our predecessors.
Under such laws and implementing regulations, we could be required to remove or
remediate previously disposed wastes or property contamination, including
contamination caused by prior owners or operators. Imposition of such liability
schemes could have a material adverse impact on our operations and financial
position.
In
addition, our oil and gas development and production activities are subject to
numerous federal, state and local laws and regulations relating to environmental
quality and pollution control. These laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuance of a
given operation. Specifically, these activities are subject to laws and
regulations regarding the acquisition of permits before drilling, restrictions
on drilling activities in restricted areas, emissions into the environment,
water discharges, and storage and disposition of wastes. In addition,
legislation has been enacted that requires well and facility sites to be
abandoned and reclaimed to the satisfaction of state authorities.
Further,
we cannot ensure that such existing laws and regulations will not be revised or
that new laws or regulations will not be adopted or become applicable to us. The
clear trend in environmental regulation is to place more restrictions and
limitations on activities that may be perceived to affect the environment, and
thus there can be no assurance as to the amount or timing of future expenditures
for environmental compliance or remediation, and actual future expenditures may
be different from the amounts we currently anticipate. Revised or additional
regulations that result in increased compliance costs or additional operating
restrictions, particularly if those costs are not fully recoverable from our
customers, could have a material adverse effect on our business, financial
position, results of operations and prospects.
Climate
change regulation at the federal, state or regional levels and/or new
regulations issued by the Department of Homeland Security could result in
increased operating and capital costs for us.
Studies
have suggested that emissions of certain gases, commonly referred to as
“greenhouse gases,” may be contributing to warming of the Earth’s atmosphere.
Methane, a primary component of natural gas, and carbon dioxide, a byproduct of
the burning of natural gas, are examples of greenhouse gases. The U.S. Congress
is actively considering legislation to reduce emissions of greenhouse gases. In
addition, at least nine states in the Northeast and five states in the West have
developed initiatives to regulate emissions of greenhouse gases, primarily
through the planned development of greenhouse gas emission inventories and/or
regional greenhouse gas cap and trade programs. The EPA is separately
considering whether it will regulate greenhouse gases as “air pollutants” under
the existing federal Clean Air Act. Passage of climate control legislation or
other regulatory initiatives by Congress or various states of the U.S. or the
adoption of regulations by the EPA or analogous state agencies that regulate or
restrict emissions of greenhouse gases including methane or carbon dioxide in
areas in which we conduct business could result in changes to the consumption
and demand for natural gas and could have adverse effects on our business,
financial position, results of operations and prospects.
Such
changes could increase the costs of our operations, including costs to operate
and maintain our facilities, install new emission controls on our facilities,
acquire allowances to authorize our greenhouse gas emissions, pay any taxes
related to our greenhouse gas emissions and administer and manage a greenhouse
gas emissions program. While we may be able to include some or all of such
increased costs in the rates charged by some of our pipelines, such recovery of
costs is uncertain and may depend on events beyond our control including the
outcome of future rate proceedings before the FERC and the provisions of any
final legislation.
The
Department of Homeland Security Appropriation Act of 2007 requires the
Department of Homeland Security, or DHS, to issue regulations establishing
risk-based performance standards for the security of chemical and industrial
facilities, including oil and gas facilities that are deemed to present “high
levels of security risk.” The DHS has issued rules that establish chemicals of
interest and their respective threshold quantities that will trigger compliance
with these standards. Covered facilities that are determined by DHS to pose a
high level of security risk will be required to prepare and submit Security
Vulnerability Assessments and Site Security Plans as well as comply with other
regulatory requirements, including those regarding inspections, audits,
recordkeeping and protection of chemical-terrorism vulnerability information. We
have not yet determined the extent of the costs to bring our facilities into
compliance, but it is possible that such costs could be
substantial.
Our
substantial debt could adversely affect our financial health and make us more
vulnerable to adverse economic conditions.
As
of September 30, 2008, we had outstanding $11.5 billion of consolidated debt
(excluding the value of interest rate swaps). Of this amount, $8.3 billion was
debt of Kinder Morgan Energy Partners and its subsidiaries, and the remaining
$3.2 billion was debt of Knight Inc. and its subsidiaries, other than Kinder
Morgan Energy Partners and its subsidiaries. Knight Inc.’s
debt
is currently secured by most of the assets of Knight Inc. and its subsidiaries,
but the security interest does not apply to the assets of Kinder Morgan G.P.,
Inc., Kinder Morgan Energy Partners, Kinder Morgan Management and their
respective subsidiaries. This level of debt could have important consequences,
such as:
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limiting
our ability to obtain additional financing to fund our working capital,
capital expenditures, debt service requirements or potential growth or for
other purposes;
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limiting
our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to make
payments on our debt;
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placing
us at a competitive disadvantage compared to competitors with less debt;
and
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increasing
our vulnerability to adverse economic and industry
conditions.
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Each
of these factors is to a large extent dependent on economic, financial,
competitive and other factors beyond our control.
Our
variable rate debt makes us vulnerable to increases in interest
rates.
As
of September 30, 2008, we had outstanding $11.5 billion of consolidated debt
(excluding fair value of interest rate swaps). Of this amount, approximately
36.1% was subject to floating interest rates, either as short-term or long-term
debt of floating rate credit facilities or as long-term fixed-rate debt
converted to floating rates through the use of interest rate swaps. Should
interest rates increase significantly, the amount of cash required to service
our debt would increase.
Terrorist
attacks, or the threat of them, may adversely affect our business.
The
U.S. government has issued public warnings that indicate that pipelines and
other energy assets might be specific targets of terrorist organizations. These
potential targets might include our pipeline systems or storage facilities. Our
operations could become subject to increased governmental scrutiny that would
require increased security measures. Recent federal legislation provides an
insurance framework that should cause current insurers to continue to provide
sabotage and terrorism coverage under standard property insurance policies.
Nonetheless, there is no assurance that adequate sabotage and terrorism
insurance will be available at rates we believe are reasonable in the near
future. These developments may subject our operations to increased risks, as
well as increased costs, and, depending on their ultimate magnitude, could have
a material adverse effect on our business, results of operations and financial
condition.
None.
None.
None.
None.
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4.1
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Certain
instruments with respect to the long-term debt of Knight Inc. and its
consolidated subsidiaries that relate to debt that does not exceed 10% of
the total assets of Knight Inc. and its consolidated subsidiaries are
omitted pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, 17 C.F.R.
sec.229.601. Knight Inc. hereby agrees to furnish supplementally to the
Securities and Exchange Commission a copy of each such instrument upon
request.
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10.1
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First
Amendment to Retention and Relocation Agreement dated as of July 16, 2008,
between Knight Inc. and Scott E. Parker (filed as Exhibit 10.1 to Knight
Inc. Form 8-K, filed July 25, 2008 and incorporated herein by
reference).
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31.1*
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Section
13a – 14(a) / 15d – 14(a) Certification of Chief Executive
Officer
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31.2*
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Section
13a – 14(a) / 15d – 14(a) Certification of Chief Financial
Officer
|
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32.1*
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Section
1350 Certification of Chief Executive
Officer
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32.2*
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Section
1350 Certification of Chief Financial
Officer
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______________
*Filed
herewith
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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KNIGHT
INC.
(Registrant)
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November
12, 2008
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/s/
Kimberly A. Dang
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Kimberly
A. Dang
Vice
President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
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