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 March 31,
2009
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 has submitted electronically and posted on
its corporate Web site, if any, every
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
Yes
¨ No
o
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 April 30, 2009 was
100 shares.
KNIGHT
INC. AND SUBSIDIARIES
FORM
10-Q
QUARTER
ENDED MARCH 31, 2009
Contents
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Page
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3-4
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5
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6-7
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8-41
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42-57
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57
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58
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58
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58
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58
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58
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58
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58
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58-59
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60
|
CONSOLIDATED
BALANCE SHEETS (Unaudited)
(In
millions)
|
March
31, 2009
|
|
December
31, 2008
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
$
|
110.5
|
|
|
$
|
118.6
|
|
Restricted
Deposits
|
|
3.3
|
|
|
|
-
|
|
Accounts,
Notes and Interest Receivable, Net
|
|
684.3
|
|
|
|
992.5
|
|
Inventories
|
|
66.5
|
|
|
|
44.2
|
|
Gas
Imbalances
|
|
6.6
|
|
|
|
14.1
|
|
Fair
Value of Derivative Instruments
|
|
118.5
|
|
|
|
115.2
|
|
Other
|
|
27.5
|
|
|
|
32.6
|
|
|
|
1,017.2
|
|
|
|
1,317.2
|
|
|
|
|
|
|
|
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|
Property,
Plant and Equipment, Net
|
|
16,168.4
|
|
|
|
16,109.8
|
|
Notes
Receivable—Related Parties
|
|
174.9
|
|
|
|
178.1
|
|
Investments
|
|
1,987.6
|
|
|
|
1,827.4
|
|
Goodwill
|
|
4,691.8
|
|
|
|
4,698.7
|
|
Other
Intangibles, Net
|
|
246.8
|
|
|
|
251.5
|
|
Fair
Value of Derivative Instruments, Non-current
|
|
577.7
|
|
|
|
828.0
|
|
Deferred
Charges and Other Assets
|
|
213.7
|
|
|
|
234.2
|
|
Total
Assets
|
$
|
25,078.1
|
|
|
$
|
25,444.9
|
|
KNIGHT
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Unaudited)
(In
millions except share and per share amounts)
|
March
31, 2009
|
|
December
31, 2008
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Current
Portion of Debt
|
$
|
530.6
|
|
|
$
|
302.5
|
|
Cash
Book Overdrafts
|
|
41.8
|
|
|
|
45.2
|
|
Accounts
Payable
|
|
524.5
|
|
|
|
849.8
|
|
Accrued
Interest
|
|
115.3
|
|
|
|
241.9
|
|
Accrued
Taxes
|
|
101.1
|
|
|
|
152.1
|
|
Gas
Imbalances
|
|
12.2
|
|
|
|
12.4
|
|
Fair
Value of Derivative Instruments
|
|
139.4
|
|
|
|
129.5
|
|
Other
|
|
207.4
|
|
|
|
281.3
|
|
|
|
1,672.3
|
|
|
|
2,014.7
|
|
|
|
|
|
|
|
|
|
Long-term
Debt
|
|
|
|
|
|
|
|
Outstanding
Notes and Debentures
|
|
11,003.9
|
|
|
|
11,020.1
|
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
|
35.7
|
|
|
|
35.7
|
|
Preferred
Interest in General Partner of Kinder Morgan Energy
Partners
|
|
100.0
|
|
|
|
100.0
|
|
Value
of Interest Rate Swaps
|
|
833.3
|
|
|
|
971.0
|
|
|
|
11,972.9
|
|
|
|
12,126.8
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes, Non-current
|
|
2,064.9
|
|
|
|
2,081.3
|
|
Fair
Value of Derivative Instruments, Non-current
|
|
98.0
|
|
|
|
92.2
|
|
Other
Long-term Liabilities and Deferred Credits
|
|
631.3
|
|
|
|
653.0
|
|
|
|
14,767.1
|
|
|
|
14,953.3
|
|
|
|
|
|
|
|
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|
Commitments
and Contingencies (Notes 12 and 17)
|
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Stockholders’
Equity
|
|
|
|
|
|
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Common
Stock – Authorized and Outstanding – 100 Shares, Par Value $0.01 Per
Share
|
|
-
|
|
|
|
-
|
|
Additional
Paid-in Capital
|
|
7,818.4
|
|
|
|
7,810.0
|
|
Retained
Deficit
|
|
(3,287.0
|
)
|
|
|
(3,352.3
|
)
|
Accumulated
Other Comprehensive Loss
|
|
(80.1
|
)
|
|
|
(53.4
|
)
|
Total
Knight Inc. Stockholders’
Equity
|
|
4,451.3
|
|
|
|
4,404.3
|
|
Noncontrolling
Interests
|
|
4,187.4
|
|
|
|
4,072.6
|
|
Total
Stockholders’ Equity
|
|
8,638.7
|
|
|
|
8,476.9
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
25,078.1
|
|
|
$
|
25,444.9
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
(In
millions)
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
Operating
Revenues
|
|
|
|
|
|
|
|
Natural
Gas Sales
|
$
|
888.7
|
|
|
$
|
1,721.8
|
|
Services
|
|
661.4
|
|
|
|
807.9
|
|
Product
Sales and Other
|
|
278.8
|
|
|
|
365.3
|
|
Total
Operating Revenues
|
|
1,828.9
|
|
|
|
2,895.0
|
|
|
|
|
|
|
|
|
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Operating
Costs and Expenses
|
|
|
|
|
|
|
|
Gas
Purchases and Other Costs of Sales
|
|
865.6
|
|
|
|
1,760.6
|
|
Operations
and Maintenance
|
|
256.4
|
|
|
|
301.8
|
|
General
and Administrative
|
|
92.9
|
|
|
|
86.3
|
|
Depreciation,
Depletion and Amortization
|
|
264.8
|
|
|
|
218.1
|
|
Taxes,
Other Than Income Taxes
|
|
39.0
|
|
|
|
52.5
|
|
Other
Expenses (Income)
|
|
0.3
|
|
|
|
(0.5
|
)
|
Total
Operating Costs and Expenses
|
|
1,519.0
|
|
|
|
2,418.8
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
309.9
|
|
|
|
476.2
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
Earnings
of Equity Investees
|
|
47.2
|
|
|
|
43.7
|
|
Interest
Expense, Net
|
|
(141.5
|
)
|
|
|
(210.7
|
)
|
Interest
Income (Expense) – Deferrable Interest Debentures
|
|
(0.5
|
)
|
|
|
6.7
|
|
Other,
Net
|
|
10.6
|
|
|
|
3.2
|
|
Total
Other Income and (Expenses)
|
|
(84.2
|
)
|
|
|
(157.1
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Income Taxes
|
|
225.7
|
|
|
|
319.1
|
|
Income
Taxes
|
|
80.6
|
|
|
|
87.1
|
|
Income
from Continuing Operations
|
|
145.1
|
|
|
|
232.0
|
|
Loss
from Discontinued Operations, Net of Tax
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Net
Income
|
|
144.9
|
|
|
|
231.9
|
|
Net
Income Attributable to Noncontrolling Interests
|
|
(29.6
|
)
|
|
|
(126.2
|
)
|
|
|
|
|
|
|
|
|
Net
Income Attributable
to Knight Inc.’s Stockholder
|
$
|
115.3
|
|
|
$
|
105.7
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(In
millions)
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
Net
Income
|
$
|
144.9
|
|
|
$
|
231.9
|
|
Adjustments
to Reconcile Net Income to Net Cash Flows from
Operating Activities
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations, Net of Tax
|
|
0.2
|
|
|
|
0.1
|
|
Loss
on Early Extinguishment of Debt
|
|
-
|
|
|
|
18.4
|
|
Depreciation,
Depletion and Amortization
|
|
264.8
|
|
|
|
218.1
|
|
Deferred
Income Taxes
|
|
17.0
|
|
|
|
15.9
|
|
Income
from the Allowance for Equity Funds Used During
Construction
|
|
(9.3
|
)
|
|
|
-
|
|
Equity
in Earnings of Equity Investees
|
|
(47.2
|
)
|
|
|
(43.7
|
)
|
Distributions
from Equity Investees
|
|
60.0
|
|
|
|
24.1
|
|
Net
Losses (Gains) on Sales of Assets
|
|
0.4
|
|
|
|
(0.5
|
)
|
Mark-to-Market
Interest Rate Swap Gain
|
|
-
|
|
|
|
(19.8
|
)
|
Changes
in Working Capital Items
|
|
(326.1
|
)
|
|
|
(307.2
|
)
|
Proceeds
from (Payment for) Termination of Interest Rate Swaps
|
|
144.4
|
|
|
|
(2.5
|
)
|
Kinder
Morgan Energy Partners’ Rate Reparations, Refunds
and Reserve Adjustments
|
|
-
|
|
|
|
(23.3
|
)
|
Other,
Net
|
|
(35.5
|
)
|
|
|
(10.9
|
)
|
Net
Cash Flows Provided by Continuing Operations
|
|
213.6
|
|
|
|
100.6
|
|
Net
Cash Flows Used in Discontinued Operations
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
Net
Cash Flows Provided by Operating Activities
|
|
213.3
|
|
|
|
100.5
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
(417.6
|
)
|
|
|
(638.3
|
)
|
Proceeds
from Sale of 80% Interest in NGPL PipeCo LLC, Net of $1.1
Cash Sold
|
|
-
|
|
|
|
2,899.3
|
|
Proceeds
from NGPL PipeCo LLC Restricted Cash
|
|
-
|
|
|
|
3,106.4
|
|
Other
Acquisitions
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
Repayments
from Customers
|
|
98.1
|
|
|
|
-
|
|
Net
Investments in Margin Deposits
|
|
(5.8
|
)
|
|
|
(98.8
|
)
|
Distributions
from Equity Investees
|
|
-
|
|
|
|
89.1
|
|
Contributions
to Investments
|
|
(174.2
|
)
|
|
|
(336.5
|
)
|
Change
in Natural Gas Storage and NGL Line Fill Inventory
|
|
-
|
|
|
|
(2.7
|
)
|
Net
(Cost of Removal) Proceeds from Sales of Other Assets
|
|
(0.8
|
)
|
|
|
62.0
|
|
Net
Cash Flows (Used in) Provided by Investing Activities
|
$
|
(500.8
|
)
|
|
$
|
5,080.2
|
|
KNIGHT
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
(In
millions)
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Short-term
Debt, Net
|
$
|
471.6
|
|
|
$
|
(521.4
|
)
|
Long-term
Debt Issued
|
|
-
|
|
|
|
900.0
|
|
Long-term
Debt Retired
|
|
(251.6
|
)
|
|
|
(5,859.9
|
)
|
Discount
on Early Extinguishment of Debt
|
|
-
|
|
|
|
69.2
|
|
(Decrease)
Increase in Cash Book Overdrafts
|
|
(3.3
|
)
|
|
|
35.0
|
|
Short-term
Advances from (to) Unconsolidated Affiliates
|
|
1.2
|
|
|
|
(14.7
|
)
|
Cash
Dividends
|
|
(50.0
|
)
|
|
|
-
|
|
Contributions
from Noncontrolling Interests
|
|
287.9
|
|
|
|
384.5
|
|
Distributions
to Noncontrolling Interests
|
|
(175.8
|
)
|
|
|
(143.5
|
)
|
Debt
Issuance Costs
|
|
(1.5
|
)
|
|
|
(6.6
|
)
|
Other,
Net
|
|
1.8
|
|
|
|
1.8
|
|
Net
Cash Flows Provided by (Used in) Financing Activities
|
|
280.3
|
|
|
|
(5,155.6
|
)
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(0.9
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
(8.1
|
)
|
|
|
24.4
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
118.6
|
|
|
|
148.6
|
|
Cash
and Cash Equivalents at End of Period
|
$
|
110.5
|
|
|
$
|
173.0
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. General
We
are a large energy transportation and storage company, operating or owning an
interest in approximately 36,000 miles of pipelines and approximately 170
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. We are a wholly owned subsidiary of Knight Holdco LLC, a
private company. 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 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, subject to Kinder Morgan
G.P., Inc.’s right to approve certain transactions.
As
further disclosed in Note 1 of Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form
10-K”), on May 30, 2007, 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. This transaction is
referred to in this report as “the Going Private transaction.” Effective with
the closing of the Going Private transaction, all of our assets and liabilities
were recorded at their estimated fair market values based on an allocation of
the aggregate purchase price paid in the Going Private transaction.
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 2008 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.
Canadian dollars are designated as C$. Notwithstanding the consolidation of
Kinder Morgan Energy Partners and its subsidiaries into our financial
statements, we are not liable for, and our assets are not available to satisfy,
the obligations of Kinder Morgan Energy Partners and/or its subsidiaries and
vice versa. Responsibility for payments of obligations reflected in our or
Kinder Morgan Energy Partners’ financial statements is a legal determination
based on the entity that incurs the liability.
On
August 28, 2008, we sold our one-third interest in the net assets of the Express
pipeline system (“Express”), as well as our full ownership of the net assets of
the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy Partners. We
accounted for this transaction as a transfer of net assets between entities
under common control. Therefore, following our sale of Express and Jet Fuel to
Kinder Morgan Energy Partners, Kinder Morgan Energy Partners recognized the
assets and liabilities acquired at our carrying amounts (historical cost) at the
date of transfer. The results of Express and Jet Fuel are now reported in the
segment referred to as Kinder Morgan Canada–KMP. For more information on our
reportable business segments, see Note 13.
Noncontrolling
Interests in Consolidated Subsidiaries
In
January 2009, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 160 establishes
accounting and reporting standards for noncontrolling ownership interests in
subsidiaries (previously referred to as minority interests) and is applied
prospectively with the exception of the presentation and disclosure
requirements, which must be applied retrospectively for all periods presented.
Noncontrolling ownership interests in consolidated subsidiaries are now
presented in the accompanying Consolidated Balance Sheets within equity as a
component separate from stockholders’ equity. Net Income in the accompanying
Consolidated Statements of Operations now includes earnings
attributable to both Knight Inc.’s stockholder, and the noncontrolling
interests. See Note 5 for further information regarding changes in stockholders’
equity.
Changes
in the carrying amount of our goodwill for the three months ended March 31, 2009
are summarized as follows:
|
December
31, 2008
|
|
Acquisitions
and
Purchase
Price
Adjustments1
|
|
Impairment
of
Assets
|
|
Other2
|
|
March
31, 2009
|
|
(In
millions)
|
Products
Pipelines–KMP
|
$
|
850.0
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
850.0
|
|
Natural
Gas Pipelines–KMP
|
|
1,349.2
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,349.2
|
|
CO2–KMP
|
|
1,521.7
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,521.7
|
|
Terminals–KMP
|
|
774.2
|
|
|
|
|
0.1
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
774.3
|
|
Kinder
Morgan Canada–KMP
|
|
203.6
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(7.0
|
)
|
|
|
196.6
|
|
Consolidated
Total
|
$
|
4,698.7
|
|
|
|
$
|
0.1
|
|
|
|
$
|
-
|
|
|
$
|
(7.0
|
)
|
|
$
|
4,691.8
|
|
____________
1
|
Adjustments
relate primarily to a reallocation between goodwill and property, plant,
and equipment in our final purchase price
allocation.
|
2
|
Adjustments
relate to the translation of goodwill denominated in foreign
currencies.
|
4. Other
Intangibles
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:
|
March
31,
2009
|
|
December
31,
2008
|
|
(In
millions)
|
Customer
Relationships, Contracts and Agreements
|
|
|
|
|
|
|
|
Gross
Carrying Amount
|
$
|
270.9
|
|
|
$
|
270.9
|
|
Accumulated
Amortization
|
|
(34.9
|
)
|
|
|
(30.3
|
)
|
Net
Carrying Amount
|
|
236.0
|
|
|
|
240.6
|
|
|
|
|
|
|
|
|
|
Technology-based
Assets, Lease Values and Other
|
|
|
|
|
|
|
|
Gross
Carrying Amount
|
|
11.7
|
|
|
|
11.7
|
|
Accumulated
Amortization
|
|
(0.9
|
)
|
|
|
(0.8
|
)
|
Net
Carrying Amount
|
|
10.8
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
Total
Other Intangibles, Net
|
$
|
246.8
|
|
|
$
|
251.5
|
|
Amortization
expense on our intangibles consisted of the following:
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Customer
Relationships, Contracts and Agreements
|
$
|
4.6
|
|
|
$
|
5.1
|
|
Technology-based
Assets, Lease Value and Other
|
|
0.1
|
|
|
|
0.1
|
|
Total
Amortization
|
$
|
4.7
|
|
|
$
|
5.2
|
|
As
of March 31, 2009, the weighted-average amortization period for our intangible
assets was approximately 16.4 years.
5. Changes
in Stockholders' Equity and Noncontrolling Interests
Changes
in Stockholders' Equity
(In
millions)
|
Three
Months Ended March 31,
|
|
|
2009
|
|
|
|
2008
|
|
|
Knight
Inc.
|
|
|
|
Noncontrolling
Interests
|
|
|
|
Total
|
|
|
|
Knight
Inc.
|
|
|
|
Noncontrolling
Interests
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
$
|
4,404.3
|
|
|
$
|
4,072.6
|
|
|
$
|
8,476.9
|
|
|
$
|
7,821.5
|
|
|
$
|
3,314.0
|
|
|
$
|
11,135.5
|
|
Impact
from Equity Transactions of Kinder Morgan Energy Partners
|
|
6.5
|
|
|
|
(10.1
|
)
|
|
|
(3.6
|
)
|
|
|
(16.0
|
)
|
|
|
(15.4
|
)
|
|
|
(31.4
|
)
|
A-1
and B Unit Amortization
|
|
1.9
|
|
|
|
-
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
-
|
|
|
|
1.9
|
|
Distributions
to Noncontrolling Interests
|
|
-
|
|
|
|
(176.3
|
)
|
|
|
(176.3
|
)
|
|
|
-
|
|
|
|
(144.4
|
)
|
|
|
(144.4
|
)
|
Contributions
from Noncontrolling Interests
|
|
-
|
|
|
|
287.9
|
|
|
|
287.9
|
|
|
|
-
|
|
|
|
384.5
|
|
|
|
384.5
|
|
Cash
Dividends
|
|
(50.0
|
)
|
|
|
-
|
|
|
|
(50.0
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
-
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
-
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
115.3
|
|
|
|
29.6
|
|
|
|
144.9
|
|
|
|
105.7
|
|
|
|
126.2
|
|
|
|
231.9
|
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fair Value of Derivatives Utilized for Hedging Purposes
|
|
15.9
|
|
|
|
17.5
|
|
|
|
33.4
|
|
|
|
(219.8
|
)
|
|
|
(189.6
|
)
|
|
|
(409.4
|
)
|
Reclassification
of Change in Fair Value of Derivatives to Net Income
|
|
(20.5
|
)
|
|
|
(8.4
|
)
|
|
|
(28.9
|
)
|
|
|
115.5
|
|
|
|
75.7
|
|
|
|
191.2
|
|
Change
in Employee Benefit Plans
|
|
(0.9
|
)
|
|
|
(1.4
|
)
|
|
|
(2.3
|
)
|
|
|
1.9
|
|
|
|
1.6
|
|
|
|
3.5
|
|
Change
in Foreign Currency Translation Adjustment
|
|
(21.2
|
)
|
|
|
(26.7
|
)
|
|
|
(47.9
|
)
|
|
|
(24.3
|
)
|
|
|
(25.7
|
)
|
|
|
(50.0
|
)
|
Total
Other Comprehensive Loss
|
|
(26.7
|
)
|
|
|
(19.0
|
)
|
|
|
(45.7
|
)
|
|
|
(126.7
|
)
|
|
|
(138.0
|
)
|
|
|
(264.7
|
)
|
Total
Comprehensive Income (Loss)
|
|
88.6
|
|
|
|
10.6
|
|
|
|
99.2
|
|
|
|
(21.0
|
)
|
|
|
(11.8
|
)
|
|
|
(32.8
|
)
|
Ending
Balance
|
$
|
4,451.3
|
|
|
$
|
4,187.4
|
|
|
$
|
8,638.7
|
|
|
$
|
7,786.4
|
|
|
$
|
3,524.9
|
|
|
$
|
11,311.3
|
|
The
caption “Noncontrolling Interests” in the accompanying interim Consolidated
Balance Sheets consists of interests in the following subsidiaries:
|
March
31,
2009
|
|
December
31,
2008
|
|
(In
millions)
|
Kinder
Morgan Energy Partners
|
$
|
2,313.2
|
|
|
$
|
2,198.2
|
|
Kinder
Morgan Management
|
|
1,828.3
|
|
|
|
1,826.5
|
|
Triton
Power Company LLC
|
|
37.2
|
|
|
|
39.0
|
|
Other
|
|
8.7
|
|
|
|
8.9
|
|
|
$
|
4,187.4
|
|
|
$
|
4,072.6
|
|
6. Related
Party Transactions
Significant
Investors
Two
of Knight Holdco LLC’s investors are considered “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 March 31, 2009 and December 31, 2008, the fair values of these derivative
contracts are included in the accompanying interim Consolidated Balance Sheets
within the captions indicated in the following table:
|
March
31, 2009
|
|
December
31, 2008
|
|
(In
millions)
|
Derivative
Assets (Liabilities)
|
|
|
|
|
|
|
|
Current
Assets: Fair Value of Derivative Instruments
|
$
|
46.5
|
|
|
$
|
60.4
|
|
Assets:
Fair Value of Derivative Instruments, Non-current
|
$
|
27.2
|
|
|
$
|
20.1
|
|
Current
Liabilities: Fair Value of Derivative Instruments
|
$
|
(9.8
|
)
|
|
$
|
(13.2
|
)
|
Liabilities
and Stockholders’ Equity: Fair Value of Derivative Instruments,
Non-current
|
$
|
(24.4
|
)
|
|
$
|
(24.1
|
)
|
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 $87.3 million and
$88.5 million as of March 31, 2009 and December 31, 2008, respectively. Of these
amounts, $2.5 million and $3.7 million, respectively, were included within
“Current Assets: Accounts, Notes and Interest Receivable, Net” in our
accompanying interim Consolidated Balance Sheets as of March 31, 2009 and
December 31, 2008 and the remainder was included within “Notes Receivable –
Related Parties” in our accompanying interim Consolidated Balance Sheets at each
reporting date.
NGPL
PipeCo LLC
On
February 15, 2008, Knight Inc. entered into an Operations and Reimbursement
Agreement (“Agreement”) with Natural Gas Pipeline Company of America LLC, a
wholly owned subsidiary of NGPL PipeCo LLC. The Agreement provides for Knight
Inc. to be reimbursed, at cost, for pre-approved operations and maintenance
costs, plus a $43.2 million annual general and administration fixed fee charge
(“Fixed Fee”), for services provided under the Agreement. This Fixed Fee
escalates at 3% each year until 2011 and is billed monthly. For the three months
ended March 31, 2009 and 2008, these Fixed Fees totaled $11.4 million and $5.6
million, respectively.
In
addition, Kinder Morgan Energy Partners purchases transportation and storage
services from NGPL PipeCo LLC. For the three months ended March 31, 2009 and
2008, these purchases totaled $1.9 million and $1.7 million,
respectively.
7. Cash Flow
Information
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)
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Accounts
Receivable
|
$
|
199.6
|
|
|
$
|
(122.8
|
)
|
Materials
and Supplies Inventory
|
|
(4.3
|
)
|
|
|
(2.1
|
)
|
Other
Current Assets
|
|
5.3
|
|
|
|
(38.9
|
)
|
Accounts
Payable
|
|
(246.2
|
)
|
|
|
32.4
|
|
Accrued
Interest
|
|
(126.5
|
)
|
|
|
(138.8
|
)
|
Accrued
Taxes
|
|
(52.9
|
)
|
|
|
43.4
|
|
Other
Current Liabilities
|
|
(101.1
|
)
|
|
|
(80.4
|
)
|
|
$
|
(326.1
|
)
|
|
$
|
(307.2
|
)
|
Supplemental
Disclosures of Cash Flow Information
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Cash
Paid During the Period for
|
|
|
|
|
|
|
|
Interest,
Net of Amount Capitalized
|
$
|
271.6
|
|
|
$
|
341.6
|
|
Income
Taxes Paid (Net of Refunds)1
|
$
|
140.5
|
|
|
$
|
1.1
|
|
__________
1
|
Income
taxes paid include amounts paid related to prior
periods.
|
During
the three months ended March 31, 2009 and 2008, Kinder Morgan Energy Partners
acquired no assets and $0.3 million of assets, respectively, by the assumption
of liabilities.
During
the three months ended March 31, 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 associated with the early extinguishment of debt.
Income
Taxes from continuing operations included in our Consolidated Statements of
Operations were as follows:
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Income
Taxes
|
$
|
80.6
|
|
|
$
|
87.1
|
|
Effective
Tax Rate
|
|
35.7
|
%
|
|
|
27.3
|
%
|
During
the three months ended March 31, 2009, our effective tax rate was higher than
the statutory federal income tax rate of 35% due to (i) state income taxes, (ii)
additional taxes resulting from non-cash deferred tax liability adjustments at
Kinder Morgan Energy Partners’ TransMountain pipeline, and (iii) taxes resulting
from decreases in non-deductible goodwill. The above increase to income tax
expense was partially offset by adjustments to our FIN No. 48 reserve and a
dividends received deduction from our 20% ownership interest in NGPL PipeCo
LLC. During the three months ended March 31, 2008, our effective tax
rate was lower than the statutory federal tax rate due to the impact of
non-taxable non-controlling interests. This decrease to the effective tax rate
was partially offset by state income taxes.
The
January 2009 adoption of SFAS No. 160 changed the computation of our effective
tax rate as earnings attributable to noncontrolling interests are no longer
deducted from income from continuing operations before
income taxes.
9. Kinder
Morgan Management, LLC
On
February 13, 2009, Kinder Morgan Management made a share distribution of
0.024580 shares per outstanding share (1,917,189 total shares) to shareholders
of record as of January 30, 2009, based on the $1.05 per common unit
distribution declared by Kinder Morgan Energy Partners. On May 15, 2009, Kinder
Morgan Management will make a share distribution of 0.025342 shares per
outstanding share (2,025,208 total shares) to shareholders of record as of April
30, 2009, based on the $1.05 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.
10. Business
Combinations, Investments, and Sales
During
the first quarter of 2009, we did not enter into new business acquisitions or
any new joint ventures. Pro forma consolidated income statement information that
gives effect to all of the acquisitions we have made and all of the joint
ventures we have entered into since January 1, 2008 as if they had occurred as
of January 1, 2008 is not presented because it would not be materially different
from the information presented in the accompanying interim Consolidated
Statements of Operations.
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 PipeCo LLC,” 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 PipeCo LLC’s assets pursuant
to a 15-year operating agreement. 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
12).
Investment
in Rockies Express Pipeline
In
the first three months of 2009, Kinder Morgan Energy Partners made capital
contributions of $51.0 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 March
31, 2009, and it is included within “Cash Flows from Investing Activities: Other
Investments” in the accompanying interim Consolidated Statement of Cash Flows
for the three months ended March 31, 2009. Kinder Morgan Energy Partners owns a
51% equity interest in West2East Pipeline LLC.
Midcontinent
Express Pipeline LLC
In
the first three months of 2009, Kinder Morgan Energy Partners made capital
contributions of $111.0 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 interim Consolidated Balance Sheet as of March 31, 2009, and is
included within “Cash Flows from Investing Activities: Other Investments” in the
accompanying interim Consolidated Statement of Cash Flows for the three months
ended March 31, 2009. Kinder Morgan Energy Partners owns a 50% equity interest
in Midcontinent Express Pipeline LLC.
Kinder
Morgan Energy Partners received, in the first three 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 Express Pipeline LLC 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 interim Consolidated Statement of Cash Flows for the three months
ended March 31, 2008.
Fayetteville
Express Pipeline LLC
In
the first three months of 2009, Kinder Morgan Energy Partners made capital
contributions of $9.0 million to Fayetteville Express Pipeline LLC, to partially
fund its Fayetteville Express Pipeline construction costs. This cash
contribution has been recorded as an increase to “Investments” in the
accompanying interim Consolidated Balance Sheet as of March 31, 2009, and is
included within “Cash Flows from Investing Activities: Other Investments” in the
accompanying interim Consolidated Statement of Cash Flows for the three months
ended March 31, 2009. Kinder Morgan Energy Partners owns a 50% equity interest
in Fayetteville Express Pipeline LLC.
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.
11. Discontinued
Operations
In
October 2007, Kinder Morgan Energy Partners completed the sale of the North
System natural gas liquids pipeline and its 50% ownership interest in the
Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $298.6
million in cash. In the first three months of 2008, Kinder Morgan Energy
Partners paid a net amount of $2.4 million to ONEOK Partners, L.P. to partially
settle the sale of working capital items, the allocation of pre-acquisition
investee distributions, and the sale of liquids inventory balances. Due to the
fair market valuation resulting from the Going Private transaction, 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 these assets
were included in our Products Pipelines–KMP business segment.
Credit
Facilities
|
March
31, 2009
|
|
Short-term
Notes
Payable
|
|
Commercial
Paper
Outstanding
|
|
Weighted-
Average
Interest
Rate
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Knight
Inc. – Secured Debt1
|
|
$
|
40.7
|
|
|
$
|
-
|
|
|
|
1.66
|
%
|
|
Kinder
Morgan Energy Partners – Unsecured Debt2
|
|
$
|
439.8
|
|
|
$
|
-
|
|
|
|
1.12
|
%
|
|
____________
1
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $121.2 million (2.29%) during the three months ended March 31,
2009.
|
2
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $266.0 million (2.02%) during the three months ended March 31,
2009.
|
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. Knight Inc. had $8.8 million outstanding under
its credit facility at December 31, 2008.
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 $2.0 billion. Borrowings under the credit facility can be used for
partnership purposes and as a backup for Kinder Morgan Energy Partners’
commercial paper program. Kinder Morgan Energy Partners currently does not have
access to the commercial paper market. Borrowings under Kinder Morgan Energy
Partners’ commercial paper program would reduce the borrowings allowed under its
credit facility.
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. One Lehman entity was a lending institution that provided $63.3
million of the credit facility. During the first quarter of 2009, Kinder Morgan
Energy Partners
amended
its facility to remove Lehman as a lender, effectively reducing the facility by
$63.3 million. The commitments of the other banks remain unchanged, and the
facility is not defaulted.
As
of March 31, 2009, the amount available for borrowing under Kinder Morgan Energy
Partners’ credit facility was reduced by an aggregate amount of
$290.0 million, consisting of (i) 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, (ii) a combined $90.8 million in three letters of credit that
support tax-exempt bonds, (iii) a combined $55.9 million in letters of credit
that support Kinder Morgan Energy Partners’ pipeline and terminal operations in
Canada, (iv) 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 and (v) a combined $16.5 million in other letters of credit
supporting other obligations of Kinder Morgan Energy Partners and its
subsidiaries.
Significant
Financing Transactions
On
February 17, 2009, we paid a cash dividend on our common stock of $50.0 million
to our sole shareholder, Knight Holdco LLC.
On
February 1, 2009, Kinder Morgan Energy Partners paid $250 million to retire the
principal amount of 6.30% senior notes that matured on that date. Kinder Morgan
Energy Partners borrowed the necessary funds under its bank credit
facility.
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.
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.
Since
we are accounting for the May 31, 2007 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 March 31, 2009 were $38.8 million and $6.5 million, representing decreases to
the carrying value of our long-term debt and the balance of our value of
interest rate swaps, respectively.
Kinder
Morgan Operating L.P. “A” and Kinder Morgan Canada Company.
On
March 31, 2009, Kinder Morgan Energy Partners made a principal payment of $10.0
million on behalf of its subsidiaries, Kinder Morgan Operating L.P. “A” and
Kinder Morgan Canada. As of March 31, 2009 and December 31, 2008, the measured
present value of the note was $26.9 million and $36.6 million,
respectively.
Contingent
Debt
Cortez Pipeline Company Debt.
Pursuant to a certain Throughput and Deficiency Agreement, the partners of
Cortez Pipeline Company (Kinder Morgan CO2 Company,
L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37% partner; and
Cortez Vickers Pipeline Company – 13% partner) are required, on a several,
proportional percentage ownership basis, to contribute capital to Cortez
Pipeline Company in the event of a cash deficiency. Furthermore, due to Kinder
Morgan Energy Partners’ indirect ownership of Cortez Pipeline Company through
Kinder Morgan CO2 Company,
L.P., Kinder Morgan Energy Partners severally guarantees 50% of the debt of
Cortez Capital Corporation, a wholly owned subsidiary of Cortez Pipeline
Company.
As
of March 31, 2009, the debt facilities of Cortez Capital Corporation consisted
of (i) $53.6 million of Series D notes due May 15, 2013; (ii) a $125 million
short-term commercial paper program; and (iii) a $125 million five-year
committed revolving credit facility due December 22, 2009 (to support the
above-mentioned $125 million commercial paper program). Cortez Capital
Corporation is unable to access commercial paper borrowings; however, it expects
that its financing and liquidity needs will continue to be met through
borrowings made under its long-term bank credit facility.
As
of March 31, 2009, in addition to the $53.6 million of outstanding Series D
notes, Cortez Capital Corporation had outstanding borrowings of $109.5 million
under its five-year credit facility. Accordingly, as of March 31, 2009, Kinder
Morgan Energy Partners’ contingent share of Cortez Capital Corporation’s debt
was $81.6 million (50% of total guaranteed
borrowings).
With
respect to Cortez Capital Corporation’s Series D notes, the average interest
rate on the notes is 7.14%, and the outstanding $53.6 million principal amount
of the notes is due in five equal annual installments of approximately $10.7
million beginning May 2009. Shell Oil Company shares Kinder Morgan Energy
Partners’ several guaranty obligations jointly and severally; however, Kinder
Morgan Energy Partners is obligated to indemnify Shell for liabilities it incurs
in connection with such guaranty. As of March 31, 2009, JP Morgan Chase has
issued a letter of credit on Kinder Morgan Energy Partners’ behalf in the amount
of $26.8 million to secure Kinder Morgan Energy Partners’ indemnification
obligations to Shell for 50% of the $53.6 million in principal amount of Series
D notes outstanding as of that date.
Nassau County, Florida Ocean Highway
and Port Authority Debt. 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 March 31, 2009, this letter of credit had a face amount
of $21.2 million.
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 (London
Interbank Offered Rate) with a floor of 4.25% plus a spread of
0.85%.
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 March 31, 2009, in addition to the $600 million in senior notes, Rockies
Express Pipeline LLC had outstanding borrowings of $1,913.0 million under its
five-year facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy
Partners’ contingent share of Rockies Express Pipeline LLC’s debt was $1,281.6
million (51% of total guaranteed borrowings).
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.
One
of the Lehman entities was a lending bank with a $41 million commitment to the
Rockies Express $2.0 billion credit facility. During the first quarter of 2009,
Rockies Express Pipeline LLC amended its facility to remove Lehman as a lender,
effectively reducing the facility by $41.0 million. However, 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 are
primarily used to finance the construction of the Midcontinent Express Pipeline
system and to pay related expenses. One of the Lehman entities was a lending
bank with a $100 million commitment to the Midcontinent Express Pipeline LLC
$1.4 billion credit facility. Since declaring bankruptcy, Lehman has not met its
obligations to lend under the credit 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
March 31, 2009, Midcontinent Express Pipeline LLC had borrowed $1,218.1 million
under its three-year credit facility. Accordingly, as of March 31, 2009, Kinder
Morgan Energy Partners’ contingent share of Midcontinent Express Pipeline LLC’s
debt was $609.1 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 March 31, 2009, a
letter of credit having a face amount of $33.3 million was issued under the
credit facility. Accordingly, as of March 31, 2009, Kinder Morgan Energy
Partners’ contingent responsibility with regard to this outstanding letter of
credit was $16.7 million (50% of total face amount).
Kinder
Morgan G.P., Inc. Preferred Shares
On
April 15, 2009, 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 May 18, 2009 to
shareholders of record as of April 30, 2009. On January 21, 2009, 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 February 18, 2009 to shareholders on record as of January 30,
2009.
Kinder
Morgan Energy Partners’ Common Units
On
April 15, 2009, Kinder Morgan Energy Partners declared a cash distribution of
$1.05 per common unit for the first quarter of 2009, payable on May 15, 2009 to
unitholders of record as of April 30, 2009. On February 13, 2009, Kinder Morgan
Energy Partners paid a quarterly distribution of $1.05 per common unit for the
fourth quarter of 2008, of which $175.1 million was paid to the public holders
(included in noncontrolling interests) of Kinder Morgan Energy Partners common
units.
On
January 16, 2009, Kinder Morgan Energy Partners entered into an Equity
Distribution Agreement with UBS Securities LLC to offer and sell from time to
time common units having an aggregate offering value of up to $300 million
through UBS Securities LLC, as sales agent, at a price agreed upon at the time
of the sale. Any sale of common units would be pursuant to the terms of a
separate terms agreement between Kinder Morgan Energy Partners and UBS
Securities LLC.
During
the first quarter of 2009, Kinder Morgan Energy Partners issued 612,083 of
common units pursuant to this Agreement. After commissions of $0.6 million,
Kinder Morgan Energy Partners received net proceeds of approximately $29.9
million for the issuance of these common units, and used the proceeds to reduce
the borrowings under its bank credit facility.
On
March 3, 2009, Kinder Morgan Energy Partners issued, in a public offering,
5,500,000 of common units at a price of $46.95 per unit, less commissions and
underwriting expenses. At the time of the offering, Kinder Morgan Energy
Partners granted the underwriters a 30-day option to purchase up to an
additional 825,000 common units on the same terms and conditions, and pursuant
to a partial exercise of this option, an additional 166,000 common units were
issued on March 27, 2009. After commissions and underwriting expenses, Kinder
Morgan Energy Partners received net proceeds of $258.0 million for the issuance
of these 5,666,000 common units, and used the proceeds to reduce the borrowings
under its bank credit facility.
These
issuances, collectively, had the associated effects of increasing our (i)
noncontrolling interests associated with Kinder Morgan Energy Partners by $277.8
million (ii) associated accumulated deferred income taxes by $3.7 million and
(iii) paid-in capital by $6.5 million.
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 $10.0 million and $10.1 million for
the three months ended March 31, 2009 and 2008, 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 three months ended March 31, 2008, we recorded $(29.2) million and
$10.8 million of (losses) gains from the early extinguishment of debt in the
captions “Interest Expense, Net” and “Interest Expense – Deferred Interest
Debentures,” respectively, 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 Statement of Operations.
13. Business
Segments
In
accordance with the manner in which we manage our businesses, we report our
operations in the following seven business segments:
|
·
|
NGPL PipeCo LLC—after
February 15, 2008, this segment consists of our 20% interest in NGPL
PipeCo LLC, a major interstate natural gas pipeline and storage system
which we operate.
|
|
·
|
Power consists of a
natural gas-fired electric generation
facility.
|
|
·
|
Products Pipelines–KMP
derives its revenues primarily from the transportation and terminaling of
refined petroleum products, including gasoline, diesel fuel, jet fuel and
natural gas liquids.
|
|
·
|
Natural Gas
Pipelines–KMP derives its revenues primarily from the sale,
transport, processing, treating, storage and gathering of natural
gas.
|
|
·
|
CO2–KMP derives its
revenues primarily from the production and sale of crude oil from fields
in the Permian Basin of West Texas and from the transportation and
marketing of carbon dioxide used as a flooding medium for recovering crude
oil from mature oil fields.
|
|
·
|
Terminals–KMP derives
its revenues primarily from the transloading and storing of refined
petroleum products and dry and liquid bulk products, including coal,
petroleum coke, cement, alumina, salt and other bulk
chemicals.
|
|
·
|
Kinder Morgan
Canada–KMP derives its revenues primarily from the transportation
of crude oil and refined products.
|
The
accounting policies we apply in the generation of business segment earnings are
generally the same as those applied to our consolidated operations, 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 segment earnings before DD&A (sometimes referred to in this report
as EBDA) in relation to the level of capital employed.
Business
Segment Information
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Segment
Earnings before Depreciation, Depletion, Amortization and Amortization of
Excess Cost of Equity Investments
|
|
|
|
|
|
|
|
NGPL
PipeCo LLC1
|
$
|
12.3
|
|
|
$
|
96.0
|
|
Power
|
|
1.1
|
|
|
|
2.1
|
|
Products
Pipelines–KMP2
|
|
145.4
|
|
|
|
140.2
|
|
Natural
Gas Pipelines–KMP2
|
|
200.0
|
|
|
|
188.4
|
|
CO2–KMP2
|
|
191.7
|
|
|
|
233.3
|
|
Terminals–KMP2
|
|
134.3
|
|
|
|
125.8
|
|
Kinder
Morgan Canada–KMP2,3
|
|
19.5
|
|
|
|
34.6
|
|
Total
Segment Earnings before DD&A
|
|
704.3
|
|
|
|
820.4
|
|
Depreciation,
Depletion and Amortization
|
|
(264.8
|
)
|
|
|
(218.1
|
)
|
Amortization
of Excess Cost of Equity Investments
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
Other
Operating Income
|
|
11.5
|
|
|
|
-
|
|
General
and Administrative Expense
|
|
(92.9
|
)
|
|
|
(86.3
|
)
|
Interest
and Other, Net4
|
|
(150.3
|
)
|
|
|
(204.5
|
)
|
Add
Back: Income Taxes Included in Segments Above2
|
|
19.3
|
|
|
|
9.0
|
|
Income
from Continuing Operations Before Income Taxes
|
$
|
225.7
|
|
|
$
|
319.1
|
|
Revenues
from External Customers
|
|
|
|
|
|
|
|
NGPL
PipeCo LLC1
|
$
|
-
|
|
|
$
|
132.1
|
|
Power
|
|
6.6
|
|
|
|
7.5
|
|
Products
Pipelines–KMP
|
|
188.2
|
|
|
|
198.3
|
|
Natural
Gas Pipelines–KMP
|
|
1,051.7
|
|
|
|
1,912.5
|
|
CO2–KMP
|
|
253.2
|
|
|
|
319.9
|
|
Terminals–KMP
|
|
267.7
|
|
|
|
280.0
|
|
Kinder
Morgan Canada–KMP3
|
|
50.0
|
|
|
|
43.9
|
|
Other
|
|
11.5
|
|
|
|
0.8
|
|
Total
Revenues
|
$
|
1,828.9
|
|
|
$
|
2,895.0
|
|
Intersegment
Revenues
|
|
|
|
|
|
|
|
NGPL
PipeCo LLC
1
|
$
|
-
|
|
|
$
|
0.9
|
|
Terminals–KMP
|
|
0.2
|
|
|
|
0.2
|
|
Other
|
|
-
|
|
|
|
(0.8
|
)
|
Total
Intersegment Revenues
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
March
31, 2009
|
|
(In
millions)
|
Assets
|
|
|
|
NGPL PipeCo LLC
1
|
$
|
730.9
|
|
Power
|
|
53.1
|
|
Products
Pipelines–KMP
|
|
5,518.4
|
|
Natural
Gas Pipelines–KMP
|
|
7,754.0
|
|
CO2–KMP
|
|
4,457.4
|
|
Terminals–KMP
|
|
4,347.7
|
|
Kinder
Morgan Canada–KMP3
|
|
1,503.9
|
|
Total
segment assets
|
|
24,365.4
|
|
Other5
|
|
712.7
|
|
Total
Consolidated Assets
|
$
|
25,078.1
|
|
____________
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 $19.3 million and $9.0 million
for the three months ended March 31, 2009 and 2008, respectively, are
included in segment earnings before depreciation, depletion, amortization
and amortization of excess cost of equity
investments.
|
3
|
On
August 28, 2008, we sold our one-third interest in the net assets of the
Express pipeline system (“Express”), as well as our full ownership of the
net assets of the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan
Energy Partners. The results of Express and Jet Fuel are now reported in
the segment referred to as Kinder Morgan Canada–KMP for all
periods.
|
4
|
Includes
(i) interest expense and (ii) miscellaneous other income and expenses not
allocated to business segments.
|
5
|
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.
|
14. Accounting
for Derivative Instruments and Hedging Activities
We
are exposed to risks associated with unfavorable changes in the market price of
natural gas, natural gas liquids and crude oil. We have exposure to interest
rate risk as a result of the issuance of our debt obligations and to foreign
currency risk from our investments in businesses owned and operated outside the
United States. Pursuant to our management’s approved risk management policy, we
use derivative contracts to hedge or reduce our exposure to certain of these
risks, and we account for these hedging transactions according to the provisions
of 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 as a result of
the forecasted purchase or sale of these products. 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 in the same line as the associated hedged
transaction. The remaining gain or loss on the derivative contract in excess of
the cumulative change in the present value of future cash flows of the hedged
item, if any (i.e., the ineffective portion) is recognized in earnings during
the current period. We currently do not exclude any component of the derivative
contracts’ gain or loss from the assessment of hedge ineffectiveness. During the
three months ended March 31, 2009 and 2008, we reclassified $20.5 million of
accumulated other comprehensive income and $115.5 million of accumulated other
comprehensive loss, respectively, into earnings, as a result of hedged
forecasted transactions occurring during the periods. Furthermore, during the
three months ended March 31, 2009 and 2008, no amounts were reclassified into
earnings as a result of the discontinuance of cash flow hedges. During the next
twelve months, we expect to reclassify approximately $54.8 million of
accumulated other comprehensive income into earnings.
As
of March 31, 2009, Kinder Morgan Energy Partners had the following outstanding
commodity forward contracts that were entered into to hedge forecasted energy
commodity purchases and sales:
Derivatives
Designated as Hedging Contracts
under
SFAS No. 133
|
|
Notional
Quantity
|
Crude
oil
|
|
30.6
million barrels
|
Natural
gas
|
|
19.7
billion cubic feet1
|
As
of March 31, 2009, Kinder Morgan Energy Partners had the following outstanding
commodity forward contracts that were not designated as hedges for accounting
purposes:
Derivatives
Not Designated as Hedging Contracts
under
SFAS No. 133
|
|
Notional
Quantity
|
Crude
oil
|
|
0.1
million barrels
|
Natural
gas
|
|
0.5
billion cubic feet1
|
____________
1 Notional
quantities are shown net of short positions.
As
of March 31, 2009, the maximum length of time over which we have hedged our
exposure to the variability in future cash flows associated with energy
commodity price risk is through April 2013.
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.
As
of December 31, 2008, we were not party to any interest rate swap agreements and
our subsidiary, Kinder Morgan Energy Partners was party to interest rate swap
agreements with a total notional principal amount of $2.8 billion. During the
first quarter of 2009, Kinder Morgan Energy Partners both terminated an existing
fixed-to-variable interest rate swap agreement having a notional principal
amount of $300 million and a maturity date of March 15, 2031, and entered into
five additional fixed-to-variable swap agreements having a combined notional
principal amount of $1 billion. Kinder Morgan Energy Partners received proceeds
of $144.4 million from the early termination of the $300 million swap agreement.
In addition, an existing fixed-to-variable rate swap agreement having a notional
principal amount of $250 million matured on February 1, 2009. This swap
agreement corresponded with the maturity of Kinder Morgan Energy Partners $250
million in principal amount of 6.30% senior notes that also matured on that date
(discussed in Note 12).
Therefore,
as of March 31, 2009, Kinder Morgan Energy Partners had a combined notional
principal amount of $3.25 billion of fixed-to-variable interest rate swap
agreements 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. 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 March 31, 2009, the maximum length of
time over which we have hedged a portion of our exposure to the variability in
the value of this debt due to interest rate risk is through January 15,
2038.
In
April and May 2009, Kinder Morgan Energy Partners entered into additional
fixed-to-variable interest rate swap agreements. Refer to Note 19 for further
details.
Fair
Value of Derivative Contracts
The
following table summarizes the fair values of our derivative contracts included
in the accompanying Consolidated Balance Sheets as of March 31, 2009 and
December 31, 2008 (in millions):
Fair
Value of Derivative Contracts
|
|
Asset
Derivatives
|
|
|
|
Liability
Derivatives
|
|
March
31, 2009
|
|
December
31, 2008
|
|
|
|
March
31, 2009
|
|
December
31, 2008
|
|
Balance
Sheet
Location
|
Fair
Value
|
|
Balance
Sheet
Location
|
Fair
Value
|
|
|
|
Balance
Sheet
Location
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Contracts under SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
Energy
Commodity Derivative Contracts
|
Fair
Value of Derivative Instrument
|
$115.7
|
|
Fair
Value of Derivative Instruments
|
$113.5
|
|
|
|
Fair
Value of Derivative Instruments
|
$(138.6
|
)
|
|
Fair
Value of Derivative Instruments
|
$(129.4
|
)
|
|
Fair
Value of Derivative Instruments, Non-current
|
76.0
|
|
Fair
Value of Derivative Instruments, Non-current
|
48.9
|
|
|
|
Fair
Value of Derivative Instruments, Non-current
|
(94.6
|
)
|
|
Fair
Value of Derivative Instruments, Non-current
|
(92.2
|
)
|
Subtotal
|
|
191.7
|
|
|
162.4
|
|
|
|
|
(233.2
|
)
|
|
|
(221.6
|
)
|
Interest
Rate Swap Agreements
|
Fair
Value of Derivative Instruments, Non-current
|
475.7
|
|
Fair
Value of Derivative Instruments, Non-current
|
747.1
|
|
|
|
Fair
Value of Derivative Instruments, Non-current
|
(3.4
|
)
|
|
Fair
Value of Derivative Instruments, Non-current
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross
Currency Swap Agreements
|
Fair
Value of Derivative Instruments, Non-current
|
26.0
|
|
Fair
Value of Derivative Instruments, Non-current
|
32.0
|
|
|
|
Fair
Value of Derivative Instruments, Non-current
|
-
|
|
|
Fair
Value of Derivative Instruments, Non-current
|
-
|
|
Total
|
|
693.4
|
|
|
941.5
|
|
|
|
|
(236.6
|
)
|
|
|
(221.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not
Designated as Hedging Contracts under SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
Energy
Commodity Derivative Contracts
|
Fair
Value of Derivative Instruments
|
2.8
|
|
Fair
Value of Derivative Instruments
|
1.8
|
|
|
|
Fair
Value of Derivative Instruments
|
(0.8
|
)
|
|
Fair
Value of Derivative Instruments
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
$696.2
|
|
|
$943.3
|
|
|
|
|
$(237.4
|
)
|
|
|
$(221.7
|
)
|
The
offsetting entry to adjust the carrying value of the debt securities whose fair
value was being hedged is included within “Value of Interest Rate Swaps” in the
accompanying interim Consolidated Balance Sheets, which also includes any
unamortized portion of proceeds received from the early termination of interest
rate swap agreements. As of March 31, 2009 and December 31, 2008, this
unamortized premium totaled $354.1 million and $216.8 million,
respectively.
Effect
of Derivative Contracts on the Income Statement
The
following two tables summarize the impact of our derivative contracts under SFAS
No. 133 in the accompanying Consolidated Statements of Operations for the three
months ended March 31, 2009 and March 31, 2008 (in millions):
Derivatives
in
Fair
Value
Hedging
|
|
Location
of
Gain/(Loss)
Recognized
in Income
on
|
|
Amount
of Gain/(Loss)
Recognized
in Income on Derivative
|
|
|
Hedged
Items in
Fair
Value
Hedging
|
|
Location
of
Gain/(Loss)
Recognized
in Income
on Related
|
|
Amount
of Gain/(Loss)
Recognized
in Income on
Related
Hedged Items
|
|
Three
Months Ended
|
|
|
|
|
Three
Months Ended
|
Relationships
|
|
Derivative
|
|
2009
|
|
2008
|
|
|
Relationships
|
|
Hedged
Item
|
|
2009
|
|
|
2008
|
|
Interest
Rate Swap Agreements
|
|
Interest,
Net – Income/(Expense)
|
|
$
|
(130.4
|
)
|
|
$
|
119.1
|
|
|
Fixed
Rate Debt
|
|
Interest,
Net – Income/(Expense)
|
|
$
|
130.4
|
|
|
$
|
(119.1
|
)
|
Total
|
|
|
|
$
|
(130.4
|
)
|
|
$
|
119.1
|
|
|
Total
|
|
|
|
$
|
130.4
|
|
|
$
|
(119.1
|
)
|
The
table above reflects the change in the fair value of interest rate swap
agreements and the change in the fair value of the associated fixed rate debt,
which exactly offset each other as a result of no hedge ineffectiveness. It does
not reflect the impact on interest expense of the interest rate swaps under
which we pay variable and receive fixed.
Derivatives
in
Cash
Flow
|
|
Amount
of Gain/(Loss)
Recognized
in OCI
on
Derivative
|
|
Location
of
Gain/(Loss)Reclassified
from
|
|
Amount
of Gain/(Loss)
Reclassified
from
Accumulated
OCI
into
Income
|
|
Location
of
Gain/(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount
|
|
Amount
of Gain/(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount
Excluded
from
|
(Effective
Portion)
|
|
Accumulated
OCI
|
|
(Effective
Portion)
|
|
Excluded
from
|
|
Effectiveness
Testing)
|
Hedging
|
|
Three
Months Ended
|
|
into
Income
|
|
Three
Months Ended
|
|
Effectiveness
|
|
Three
Months Ended
|
Relationships
|
|
2009
|
|
2008
|
|
(Effective
Portion)
|
|
2009
|
|
2008
|
|
Testing)
|
|
2009
|
|
2008
|
Energy
Commodity Derivative Contracts
|
|
$
|
15.9
|
|
|
$
|
(219.8
|
)
|
|
Revenues-Natural
Gas Sales
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Revenues-Product
Sales and Other
|
|
|
20.1
|
|
|
|
(115.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Purchases and Other Costs of Sales
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
Gas
Purchases and Other Costs of Sales
|
|
|
—
|
|
|
|
(1.6
|
)
|
Total
|
|
$
|
15.9
|
|
|
$
|
(219.8
|
)
|
|
Total
|
|
$
|
20.5
|
|
|
$
|
(115.5
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
(1.6
|
)
|
Derivatives
in Net
|
|
Amount
of Gain/(Loss)
Recognized
in OCI
on
Derivative
|
|
Location
of
Gain/(Loss)
Reclassified from
|
|
Amount
of Gain/(Loss)
Reclassified
from
Accumulated
OCI
into
Income
|
|
Location
of
Gain/(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount
|
|
Amount
of Gain/(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion and Amount Excluded from
|
(Effective
Portion)
|
|
Accumulated
OCI
|
|
(Effective
Portion)
|
|
Excluded
from
|
|
Effectiveness
Testing)
|
Investment
Hedging
|
|
Three
Months Ended
|
|
into
Income
|
|
Three
Months Ended
|
|
Effectiveness
|
|
Three
Months Ended
|
Relationships
|
|
2009
|
|
2008
|
|
(Effective
Portion)
|
|
2009
|
|
2008
|
|
Testing)
|
|
2009
|
|
2008
|
Cross
Currency Swap Agreements
|
|
$
|
(6.0
|
)
|
|
$
|
22.2
|
|
|
Revenues-Natural
Gas Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
(6.0
|
)
|
|
$
|
22.2
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives
Not
Designated
as
|
|
Location
of Gain/(Loss)
Recognized
in
|
|
Amount
of Gain/(Loss)
Recognized
in Income
on
Derivative
|
|
|
Three
Months Ended
|
Hedging
Contracts
|
|
Income
on Derivative
|
|
2009
|
|
2008
|
Energy
commodity derivative contracts
|
|
Gas
Purchases and Other Costs of Sales
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
Total
|
|
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
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. 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 March 31,
2009 was approximately C$154.7 million.
Credit
Risk
As
discussed in our 2008 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 counterparties 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. The maximum potential exposure to credit
losses on derivative contracts as of March 31, 2009 was (in
millions):
|
Asset
Position
|
Interest
Rate Swap Agreements
|
$
|
475.7
|
|
Energy
Commodity Derivative Contracts
|
|
194.5
|
|
Cross
Currency Swap Agreements
|
|
26.0
|
|
Gross
Exposure
|
|
696.2
|
|
Netting
Agreement Impact
|
|
(127.5
|
)
|
Net
Exposure
|
$
|
568.7
|
|
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 March 31, 2009 and December 31, 2008, Kinder Morgan
Energy Partners had outstanding letters of credit totaling less than $0.1
million and $40.0 million, respectively, in support of its hedging of commodity
price risks associated with the sale of natural gas, natural gas liquids and
crude oil. Additionally, as of March 31, 2009, Kinder Morgan Energy Partners had
cash margin deposits associated with its commodity contract positions and
over-the-counter swap partners totaling $3.3 million, and we reported this
amount as “Current Assets: Restricted Deposits” in the accompanying interim
Consolidated Balance Sheet. As of December 31, 2008, counterparties associated
with Kinder Morgan Energy Partners’ energy commodity contract positions and
over-the-counter swap agreements had margin deposits with us totaling $3.1
million, and we reported this amount within “Current Liabilities: Other” within
the accompanying interim Consolidated Balance Sheet.
Kinder
Morgan Energy Partners also has agreements with certain counterparties to its
derivative contracts that contain provisions requiring it to post additional
collateral upon a decrease in its credit rating. Based on contractual provisions
as of March 31, 2009, we estimate that if Kinder Morgan Energy Partners’ credit
rating was downgraded, Kinder Morgan Energy Partners would have the following
additional collateral obligations (in millions):
Credit Ratings
Downgraded1
|
|
Incremental
Obligations
|
|
Cumulative
Obligations2
|
One
Level to BBB-/Baa3
|
|
$
|
75.9
|
|
|
$
|
79.2
|
|
Two
Levels to Below BBB-/Baa3 (Below Investment Grade)
|
|
$
|
57.8
|
|
|
$
|
137.0
|
|
____________
1
|
If
there are split ratings among the independent credit rating agencies, most
counterparties use the higher credit rating to determine our incremental
collateral obligations, while the remaining use the lower credit rating.
Therefore, a one level downgrade to BBB-/Baa3 by one agency would not
trigger the entire $75.9 million incremental
obligation.
|
2
|
Includes
current posting at current
rating.
|
Fair
value measurements and disclosures are made in accordance with the provisions of
SFAS No. 157, Fair Value
Measurements. On February 12, 2008, the FASB issued FASB Staff Position
No. FAS 157-2, Effective Date
of FASB Statement No. 157, referred to as FAS 157-2 in this report. FAS
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 adopted SFAS No. 157 for financial assets and financial liabilities effective
January 1, 2008. The adoption did not have a material impact on our financial
statements since we already applied its basic concepts in measuring fair values.
We adopted SFAS No. 157 for non-financial assets and non-financial liabilities
effective January 1, 2009. This includes applying 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. The adoption did not have a material impact on our
financial statements since we already applied its basic concepts in measuring
fair values. For more information on subsequent Staff Positions issued by the
FASB pertaining to SFAS No. 157, see Note 18.
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).
|
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 March 31, 2009 and December
31, 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 Using
|
|
Total
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
As
of March 31, 2009
|
(In
millions)
|
Energy
Commodity Derivative Contracts1
|
$
|
194.5
|
|
|
$
|
0.1
|
|
|
$
|
126.5
|
|
|
$
|
67.9
|
|
|
Interest
Rate Swap Agreements
|
$
|
475.7
|
|
|
$
|
-
|
|
|
$
|
475.7
|
|
|
$
|
-
|
|
|
Cross
Currency Interest Rate Swap Agreements
|
$
|
26.0
|
|
|
$
|
-
|
|
|
$
|
26.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Commodity Derivative Contracts2
|
$
|
164.2
|
|
|
$
|
0.1
|
|
|
$
|
108.9
|
|
|
$
|
55.2
|
|
|
Interest
Rate Swap Agreements
|
$
|
747.1
|
|
|
$
|
-
|
|
|
$
|
747.1
|
|
|
$
|
-
|
|
|
Cross
Currency Interest Rate Swap Agreements
|
$
|
32.0
|
|
|
$
|
-
|
|
|
$
|
32.0
|
|
|
$
|
-
|
|
|
|
Liability
Fair Value Measurements Using
|
|
Total
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
As
of March 31, 2009
|
(In
millions)
|
Energy
Commodity Derivative Contracts3
|
$
|
(234.0
|
)
|
|
$
|
-
|
|
|
$
|
(219.5
|
)
|
|
$
|
(14.5
|
)
|
|
Interest
Rate Swap Agreements
|
$
|
(3.4
|
)
|
|
$
|
-
|
|
|
$
|
(3.4
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Commodity Derivative Contracts4
|
$
|
(221.7
|
)
|
|
$
|
-
|
|
|
$
|
(210.6
|
)
|
|
$
|
(11.1
|
)
|
|
Interest
Rate Swap Agreements
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
____________
1
|
Level
1 consists primarily of NYMEX natural gas futures. Level 2 consists
primarily of OTC West Texas Intermediate hedges and NYMEX natural gas
futures. Level 3 consists primarily of West Texas Sour hedges, natural gas
basis swaps and West Texas Intermediate
options.
|
2
|
Level
1 consists primarily of NYMEX natural gas futures. Level 2 consists
primarily of OTC West Texas Intermediate hedges and OTC natural gas hedges
that are settled on NYMEX. Level 3 consists primarily of West Texas
Intermediate options and West Texas Sour
hedges.
|
3
|
Level
2 consists primarily of OTC West Texas Intermediate hedges. Level 3
consists primarily of West Texas Sour hedges, natural gas basis swaps and
West Texas Intermediate
options.
|
4
|
Level
2 consists primarily of OTC West Texas Intermediate hedges. Level 3
consists primarily of natural gas basis swaps, natural gas options 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 months ended March 31, 2009
and 2008:
Significant Unobservable Inputs
(Level 3)
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Net
Asset (Liability)
|
|
|
|
|
|
|
|
Beginning
of Period Balance
|
$
|
44.1
|
|
|
$
|
(100.3
|
)
|
Realized
and Unrealized Net Losses
|
|
6.3
|
|
|
|
(44.8
|
)
|
Purchases
and Settlements
|
|
3.0
|
|
|
|
21.3
|
|
End
of Period Balance
|
$
|
53.4
|
|
|
$
|
(123.8
|
)
|
Change
in Unrealized Net Losses Relating to Contracts Still Held at End of
Period
|
$
|
(14.5
|
)
|
|
$
|
(37.7
|
)
|
15. Employee
Benefits
Knight
Inc.
Retirement
Plans – Components of Net Periodic Pension Cost
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Service
Cost
|
$
|
1.2
|
|
|
$
|
2.8
|
|
Interest
Cost
|
|
3.9
|
|
|
|
3.6
|
|
Expected
Return on Assets
|
|
(3.9
|
)
|
|
|
(5.8
|
)
|
Amortization
of Net Loss
|
|
2.1
|
|
|
|
-
|
|
Net
Periodic Pension Cost
|
$
|
3.3
|
|
|
$
|
0.6
|
|
We
previously disclosed in our financial statements for the year ended December 31,
2008 that we expected to make approximately $20 million in contributions to the
Plan during 2009. We contributed $20 million to the Plan on May 1,
2009.
Commencing
April 2009 and continuing through the end of the 2009 plan year, we suspended
our 3% cash balance credit to employees as part of an overall cost control
initiative.
Other
Postretirement Employee Benefits – Components of Net Periodic Benefit
Cost
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Service
Cost
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest
Cost
|
|
1.2
|
|
|
|
1.1
|
|
Expected
Return on Assets
|
|
(1.2
|
)
|
|
|
(1.6
|
)
|
Amortization
of Net Loss (Gain)
|
|
0.1
|
|
|
|
(0.1
|
)
|
Net
Periodic Pension Cost (Benefit)
|
$
|
0.2
|
|
|
$
|
(0.5
|
)
|
We
previously disclosed in our financial statements for the year ended December 31,
2008 that NGPL PipeCo LLC expected to contribute approximately $8.7 million to
the Plan during 2009. As of March 31, 2009, $8.7 million in contributions have
been made and no further contributions are expected to be made to the Plan
during 2009.
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 each of the three months ended March 31, 2009 and 2008 was
approximately $0.8 million.
As
of March 31, 2009, Kinder Morgan Energy Partners estimates that its overall net
2009 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 $4.8 million
to these benefit plans in 2009.
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 March 31, 2009, Kinder Morgan Energy Partners estimates no material overall
net periodic postretirement benefit cost for the SFPP postretirement benefit
plan for the year 2009; 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 three months ended March 31, 2009. The credit
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 $0.3 million to this postretirement
benefit plan in 2009.
16. Regulatory
Matters
The
following updates the disclosure in Note 19 to the
Consolidated Financial Statements included in our 2008 Form 10-K with respect to
developments that occurred during the three months ended March 31,
2009.
Notice
of Proposed Rulemaking – Natural Gas Price Transparency
On
November 20, 2008, the FERC issued Order 720, which established new reporting
requirements for interstate and major non-interstate natural gas pipelines. A
major non-interstate pipeline is defined as a pipeline who delivers annually
more than 50 million British thermal units (MMBtu) of natural gas measured in
average deliveries for the previous three calendar years. Interstate pipelines
are required to post no-notice activity at each receipt and delivery point three
days after the day of gas
flow.
Major non-interstate pipelines are required to post design capacity, scheduled
volumes and available capacity at each receipt or delivery point with a design
capacity of 15,000 MMBtus of natural gas per day or greater when gas is
scheduled at the point. The final rule became effective January 27, 2009 for
interstate pipelines. On January 15, 2009, the FERC issued an order granting an
extension of time for major non-interstate pipelines to comply with the
requirements of Order No 720 until 150 days following the issuance of an order
addressing the pending requests for rehearing. A technical conference is
scheduled for May 18, 2009 to discuss two proposed posting requirements for
major non-interstate pipelines. We do not expect this Order to have a material
impact on our consolidated financial statements.
In
Order No. 704, the FERC established reporting requirements on annual volumes of
relevant transactions. The FERC issued Order No. 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. Order
704-A became effective October 27, 2009. On December 18, 2008, the FERC issued
Order No. 704-B, denying rehearing and reconsideration of Order No. 704-A and
granting a clarification regarding certain reportable volumes. On April 9, 2009,
the FERC granted an extension of time until July 1, 2009 for filing the initial
Form 552.
Natural
Gas Pipeline Expansion Filings
Rockies
Express Meeker to Cheyenne Expansion Project
Pursuant
to certain rights exercised by Encana Gas Marketing USA as a result of its
foundation shipper status on the former Entrega Gas Pipeline LLC facilities (now
part of the Rockies Express Pipeline), Rockies Express Pipeline LLC is
requesting authorization to construct and operate certain facilities that will
comprise its Meeker, Colorado to Cheyenne, Wyoming Rockies Express Pipeline
expansion project. Kinder Morgan Energy Partners operates the Rockies Express
Pipeline and it owns a 51% interest in Rockies Express Pipeline
LLC.
The
proposed expansion will add natural gas compression at its Big Hole compressor
station located in Moffat County, Colorado, and its Arlington compressor station
located in Carbon County, Wyoming. Upon completion, the additional compression
will permit the transportation of an additional 200 million cubic feet per day
of natural gas from (i) the Meeker Hub located in Rio Blanco County, Colorado
northward to the Wamsutter Hub located in Sweetwater County, Wyoming; and (ii)
the Wamsutter Hub eastward to the Cheyenne Hub located in Weld County, Colorado.
The expansion is fully contracted and is expected to be operational in April
2010. The total estimated cost for the proposed project is approximately $78
million. Rockies Express Pipeline LLC submitted a FERC application seeking
approval to construct and operate this expansion on February 3,
2009.
Rockies
Express Pipeline-East Project
Construction
continued during the first quarter of 2009 on the previously announced Rockies
Express Pipeline-East Pipeline project. The Rockies Express-East project
includes the construction of an additional natural gas pipeline segment,
comprising 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. 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. Rockies Express-East is currently
projected to commence service in May 2009, with capacity of approximately 1.6
billion cubic feet per day of natural gas. Service to the Lebanon Hub in Warren
County, Ohio is expected to commence on June 15, 2009, and final completion and
deliveries to Clarington, Ohio are expected to commence by November 1, 2009.
Including expansions, the current estimate of total construction costs on the
entire Rockies Express Pipeline is now approximately $6.6 billion (consistent
with Kinder Morgan Energy Partners’ April 15, 2009 first quarter earnings press
release).
On
October 31, 2008, Rockies Express Pipeline LLC filed an amendment to its
certificate application, seeking authorization to revise its tariff-based
recourse rates for transportation service on the Rockies Express East pipeline
segment to reflect updated construction costs for the project. By order issued
March 16, 2009, the FERC authorized the revised rates as filed.
Kinder
Morgan Interstate Gas Transmission Pipeline - Huntsman 2009 Expansion
Project
The
Kinder Morgan Interstate Gas Transmission natural gas pipeline system (“KMIGT”)
has filed an application with the FERC for authorization to construct and
operate certain storage facilities necessary to increase the storage capability
of the existing Huntsman Storage Facility, located near Sidney, Nebraska. KMIGT
also requests approval of new incremental rates for the project facilities under
its currently effective Cheyenne Market Center Service Rate Schedule CMC-2. When
fully constructed, the proposed facilities will create incremental firm storage
capacity for up to one million dekatherms of natural gas, with an associated
injection capability of approximately 6,400 dekatherms per day and an associated
deliverability of
approximately
10,400 dekatherms per day. As a result of an open season, KMIGT and one shipper
have executed a firm precedent agreement for 100% of the capacity to be created
by the project facilities over a five-year term.
Kinder
Morgan Louisiana Pipeline
Construction
continued during the first quarter of 2009 on the previously announced Kinder
Morgan Louisiana Pipeline. The entire estimated project cost for the
approximately 135-mile natural gas pipeline system is now expected to be
approximately $980 million (consistent with Kinder Morgan Energy Partners’ April
15, 2009 first quarter earnings press release). All of the capacity of
approximately 3.2 billion cubic feet per day of natural gas on the pipeline has
been fully subscribed by Chevron and Total, and the pipeline is expected to be
fully operational in June 2009. One transportation contract will be effective
starting in June 2009, and the second during the third quarter of
2009.
On
December 30, 2008, Kinder Morgan Energy Partners filed a second amendment to its
certificate application, seeking authorization to revise its initial rates for
transportation service on the Kinder Morgan Louisiana Pipeline system to reflect
additional increases in projected construction costs for the project (a first
amendment revising its initial rates was filed in July 2008 and accepted by the
FERC in August 2008). The filing was approved by the FERC on February 27, 2009.
On April 16, 2009, Kinder Morgan Louisiana Pipeline received authorization from
the FERC to begin service on Leg 2 of the pipeline. Service on Leg 2 started on
April 18, 2009.
Midcontinent
Express Pipeline
Construction
continued during the first quarter of 2009 on the previously announced
Midcontinent Express Pipeline project. The Midcontinent Express Pipeline is
owned by Midcontinent Express Pipeline LLC, a 50/50 joint venture between Kinder
Morgan Energy Partners and Energy Transfer Partners, L.P. The pipeline will
extend from southeast Oklahoma, across northeast Texas, northern Louisiana and
central Mississippi, and terminate at an interconnection with the Transco
Pipeline near Butler, Alabama. The entire estimated project cost for the
approximately 500-mile natural gas pipeline system is now expected to be
approximately $2.3 billion (consistent with Kinder Morgan Energy Partners’ April
15, 2009 first quarter earnings press release). Service to an interconnect with
Natural Gas Pipeline Company of America LLC’s pipeline in northeast Texas began
on April 10, 2009, and the remainder of the first portion of the pipeline (to an
interconnection with Columbia Gas Transportation in eastern Louisiana) began
interim service on April 24, 2009. Deliveries to Texas Gas Transmission began on
April 28, 2009 and deliveries to ANR Pipeline Company near Perryville, La., in
Ouachita Parish, began on May 1, 2009. Receipts from Enogex Bennington Bryan and
deliveries to CenterPoint Energy Gas Transmission near Delhi, Louisiana, in
Richland Parish, will be available in May 2009. The second construction
phase (to the Transco Pipeline interconnect) is expected to be completed by
August 1, 2009
On
January 9, 2009, Midcontinent Express filed an amendment to its original
certificate application requesting authorization to revise its initial rates for
transportation service on the pipeline system to reflect an increase in
projected construction costs for the project. The filing was approved by the
FERC on March 25, 2009.
Fayetteville
Express Pipeline
Development
continued during the first quarter of 2009 on the previously announced
Fayetteville Express Pipeline project. The Fayetteville Express Pipeline is
owned by Fayetteville Express Pipeline LLC, another 50/50 joint venture between
Kinder Morgan Energy Partners and Energy Transfer Partners, L.P. The
Fayetteville Express Pipeline is a 187-mile, 42-inch diameter natural gas
pipeline that will begin in Conway County, Arkansas, and end in Panola County,
Mississippi. The pipeline will have an initial capacity of two billion cubic
feet per day, and has currently secured ten-year binding commitments totaling
1.85 billion cubic feet per day of capacity. Pending regulatory approvals, the
pipeline is expected to be in service by late 2010 or early 2011. The estimate
of the total costs of this pipeline project is approximately $1.2 billion
(consistent with Kinder Morgan Energy Partners’ April 15, 2009 first quarter
earnings press release).
17. 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 three months
ended March 31, 2009. Additional information with respect to these proceedings
can be found in Note 20 to the Consolidated Financial Statements included in our
2008 Form 10-K. The note also contains a description of any material legal
proceedings that were initiated against us during the three months ended March
31, 2009.
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; America West Airlines,
Inc., Continental Airlines, Inc., Northwest Airlines, Inc., Southwest Airlines
Co. and US Airways, Inc., collectively, as the Airline Complainants; and the
Federal Energy Regulatory Commission, as FERC.
Following
is a listing of certain current FERC proceedings pertaining to Kinder Morgan
Energy Partners’ 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; FERC Docket
No. OR92-8-025—Complainants/Protestants: BP WCP; ExxonMobil; Chevron;
ConocoPhillips; and Ultramar—Defendant: SFPP—Subject: Complaints against
East Line and West Line rates and Watson Station Drain-Dry
Charge;
|
|
·
|
FERC
Docket No. OR96-2, et al.—Complainants/Protestants: All Shippers except
Chevron (which is an intervenor)—Defendant: SFPP—Subject: Complaints
against all SFPP rates;
|
|
·
|
FERC
Docket Nos. OR02-4 and OR03-5—Complainant/Protestant: Chevron—Defendant:
SFPP; FERC Docket No. OR04-3—Complainants/Protestants: America West
Airlines, Southwest Airlines, Northwest Airlines, and Continental
Airlines—Defendant: SFPP; FERC Docket Nos. OR03-5, OR05-4 and
OR05-5—Complainants/Protestants: BP WCP, ExxonMobil, and ConocoPhillips
(other shippers intervened)—Defendant: SFPP—Subject: Complaints against
all SFPP rates; OR02-4 was dismissed and Chevron appeal pending at U.S.
Court of Appeals for D.C. Circuit, referred to in this report as D.C.
Circuit;
|
|
·
|
FERC
Docket Nos. OR07-1 & OR07-2—Complainant/Protestant: Tesoro—Defendant:
SFPP—Subject: Complaints against North Line and West Line rates; held in
abeyance;
|
|
·
|
FERC
Docket Nos. OR07-3 & OR07-6—Complainants/Protestants: BP WCP, Chevron,
ConocoPhillips; ExxonMobil, Tesoro, and Valero Marketing—Defendant:
SFPP—Subject: Complaints against 2005 and 2006 indexed rate increases;
dismissed by FERC; appeal pending at D.C.
Circuit;
|
|
·
|
FERC
Docket No. OR07-4—Complainants/Protestants: BP WCP, Chevron, and
ExxonMobil—Defendants: SFPP, Kinder Morgan G.P., Inc., and Knight
Inc.—Subject: Complaints against all SFPP rates; held in abeyance;
complaint withdrawn as to SFPP’s
affiliates;
|
|
·
|
FERC
Docket Nos. OR07-5 and OR07-7 (consolidated) and
IS06-296—Complainants/Protestants: ExxonMobil and Tesoro—Defendants:
Calnev, Kinder Morgan G.P., Inc., and Knight Inc —Subject: Complaints and
protest against Calnev rates; OR07-5 and IS06-296 were settled in
2008;
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·
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FERC
Docket Nos. OR07-8 and OR07-11 (consolidated)—Complainants/Protestants: BP
WCP and ExxonMobil —Defendant: SFPP—Subject: Complaints against SFPP 2005
index rates; settled in 2008;
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·
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FERC
Docket No. OR07-9—Complainant/Protestant: BP WCP—Defendant: SFPP—Subject:
Complaint against ultra low sulfur diesel surcharge; dismissed by FERC; BP
WCP appeal dismissed by D.C.
Circuit;
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·
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FERC
Docket No. OR07-14—Complainants/Protestants: BP WCP and
Chevron—Defendants: SFPP, Calnev, and several affiliates—Subject:
Complaint against cash management practices; dismissed by
FERC;
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·
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FERC
Docket No. OR07-16—Complainant/Protestant: Tesoro—Defendant:
Calnev—Subject: Complaint against Calnev 2005, 2006 and 2007 indexed rate
increases; dismissed by FERC; Tesoro appeal dismissed by D.C.
Circuit;
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·
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FERC
Docket Nos. OR07-18, OR07-19 & OR07-22—Complainants/Protestants:
Airline Complainants, BP WCP, Chevron, ConocoPhillips and Valero
Marketing—Defendant: Calnev—Subject: Complaints against Calnev rates;
complaint amendments pending before
FERC;
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·
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FERC
Docket No. OR07-20—Complainant/Protestant: BP WCP—Defendant: SFPP—Subject:
Complaint against 2007 indexed rate increases; dismissed by FERC; appeal
pending at D.C. Circuit;
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·
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FERC
Docket Nos. OR08-13 & OR08-15—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: SFPP—Subject: Complaints against all SFPP rates and
2008 indexed rate increases;
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·
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FERC
Docket No. IS05-230 (North Line rate case)—Complainants/Protestants:
Shippers—Defendant: SFPP—Subject: SFPP filing to increase North Line rates
to reflect expansion; initial decision issued; pending at
FERC;
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·
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FERC
Docket No. IS05-327—Complainants/Protestants: Shippers—Defendant:
SFPP—Subject: 2005 indexed rate increases; protests dismissed by FERC;
appeal dismissed by D.C. Circuit;
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·
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FERC
Docket Nos. IS06-283, IS06-356, IS08-28 and
IS08-302—Complainants/Protestants: Shippers—Defendant: SFPP—Subject: East
Line expansion rate increases;
settled;
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·
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FERC
Docket Nos. IS06-356, IS07-229 and IS08-302—Complainants/Protestants:
Shippers—Defendant: SFPP—Subject: 2006, 2007 and 2008 indexed rate
increases; protests dismissed by FERC; East Line rates resolved by East
Line settlement;
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·
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FERC
Docket No. IS07-137—Complainants/Protestants: Shippers—Defendant:
SFPP—Subject: ULSD surcharge; settlement pending with
FERC;
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·
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FERC
Docket No. IS07-234—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: Calnev—Subject: 2007 indexed rate increases;
protests dismissed by FERC;
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·
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FERC
Docket No. IS08-390—Complainants/Protestants: BP WCP, ExxonMobil,
ConocoPhillips, Valero, Chevron, the Airlines—Defendant: SFPP—Subject:
West Line rate increase; and
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·
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Motions
to compel payment of interim damages (various
dockets)—Complainants/Protestants: Shippers—Defendants: SFPP, Kinder
Morgan G.P., Inc., and Knight Inc.; Motion for resolution on the merits
(various dockets)—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: SFPP and
Calnev.
|
The
tariffs and rates charged by SFPP and Calnev (Kinder Morgan Energy Partners
subsidiaries within our West Coast Products Pipeline group) are subject to
numerous ongoing proceedings at the FERC, including the above listed shippers’
complaints and protests regarding interstate rates on these pipeline systems.
These complaints have been filed over numerous years beginning in 1992 through
and including 2008. In general, these complaints allege the rates and tariffs
charged by SFPP and Calnev are not just and reasonable. If the shippers are
successful in proving their claims, they are entitled to seek reparations (which
may reach up to two years prior to the filing of their complaint) or refunds of
any excess rates paid, and SFPP and Calnev may be required to reduce their rates
going forward. These proceedings tend to be protracted, with decisions of the
FERC often appealed to the federal courts.
As
to SFPP, the issues involved in these proceedings include, among others: (i)
whether certain of SFPP operations’ rates are “grandfathered” under the Energy
Policy Act of 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 are justified; and (iv) the appropriate level of return
and income tax allowance it may include in its rates. The issues involving
Calnev are similar.
During
2008, SFPP and Calnev made combined settlement payments to various shippers
totaling approximately $30 million. In October 2008 in connection with
OR92-8-025, IS06-283 and OR07-5, SFPP entered into a settlement resolving
disputes regarding its East Line rates filed in Docket No. IS08-28 and related
dockets. In January 2009, the FERC approved the settlement. Reduced settlement
rates went into effect on May 1, 2009, and SFPP will make refunds and settlement
payments on May 18, 2009, which are estimated to total approximately $16.0
million.
Based
on our review of these FERC proceedings, we estimate that as of March 31, 2009,
shippers are seeking approximately $355 million in reparation and refund
payments and approximately $30 to $35 million in additional annual rate
reductions. We assume that, with respect to our SFPP litigation reserves, any
reparations and accrued interest thereon will be paid no earlier than the third
quarter of 2009.
California
Public Utilities Commission Proceedings
SFPP
has previously reported ratemaking proceedings pending with the California
Public Utilities Commission, referred to in this note as the CPUC. The
complaints generally challenge rates charged by SFPP for intrastate
transportation of refined petroleum products through its pipeline system in the
state of California and request prospective rate adjustments and refunds with
respect to previously untariffed charges for certain pipeline transportation and
related services. All of these 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 these matters will be received. 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.
Carbon
Dioxide Litigation
Gerald
O. Bailey et al. v. Shell Oil Co. et al/Southern District of Texas
Lawsuit
Kinder
Morgan CO2 Company,
L.P. (referred to in this note as 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 located in
southwest Colorado. 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.
On
April 22, 2008, the federal district court granted defendants’ motions for
summary judgment and ruled that plaintiffs Bailey and Ptasynski take nothing on
their claims and that the claims of Gray were dismissed with prejudice. The
court entered final judgment in favor of defendants on April 30, 2008.
Defendants have filed a motion seeking sanctions against plaintiffs Bailey and
Ptasynski and their attorneys. The plaintiffs have appealed the final judgment
to the United States Fifth Circuit Court of Appeals. The parties concluded their
briefing to the Fifth Circuit Court of Appeals in February 2009.
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 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. On August 7, 2006, the arbitration panel issued its
opinion finding that defendants did not breach the settlement agreement. 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 plaintiffs 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 June 3, 2008, the plaintiff filed a
request with the American Arbitration Association seeking administration of the
arbitration. In October 2008, the New Mexico federal district court entered an
order declaring that the panel in the first arbitration should decide whether
the claims in the second arbitration are barred by res judicata. The plaintiffs
filed a motion for reconsideration of that order, which was denied by the New
Mexico federal district court in January 2009. Plaintiffs have appealed to the
Tenth Circuit Court of Appeals and continue to seek administration of the second
arbitration by the American Arbitration Association. The American Arbitration
Association has indicated it intends to stay any action pending the Tenth
Circuit appeal.
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 carbon
dioxide produced at McElmo Dome, during the period from June 2005 through
October 2006. The MMS stated that civil penalties will continue to accrue at the
same rate until the alleged violations are corrected.
The parties have reached a
settlement of the Notice of Noncompliance and Civil Penalty. The settlement
agreement is subject to final MMS approval and upon approval will be
funded from existing reserves and indemnity payments by Shell CO2 General
LLC and Shell CO2 LLC
pursuant to a royalty claim indemnification agreement.
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. The MMS claims that
the Cortez Pipeline Company 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.
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 Company 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. The MMS issued a second “Order to Report and
Pay” based on the “Audit Issue Letter” in August 2007 and Kinder Morgan CO2 filed its
notice of appeal and statement of reasons in response in September
2007.
The
MMS and Kinder Morgan CO2 reached a
settlement of the March 2007 and August 2007 Orders to Report and Pay. The
settlement is subject to final MMS approval and upon approval will be funded
from existing reserves and indemnity payments from Shell CO2 General
LLC and Shell CO2 LLC
pursuant to a royalty claim indemnification agreement.
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 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.
On
January 6, 2009, the district court entered orders vacating the judgment and
granting a new trial in the case. Kinder Morgan filed a petition with the New
Mexico Supreme Court, asking that court to authorize an immediate appeal of the
new trial orders. In a 2 to 1 decision, the New Mexico Supreme Court denied
Kinder Morgan’s petition for immediate review of the new trial orders. The
district court has scheduled a new trial to occur beginning on October 19,
2009.
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, and Colorado county
taxing authorities.
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
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. 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 and in December 2008, the appellate court affirmed the
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 in determining when relocations are necessary
and in completing relocations. 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. A decision by the Tenth Circuit Court of Appeals
affirming the dismissal of the Kinder Morgan Defendants was issued on March 17,
2009. Grynberg filed a Petition for Rehearing En Banc and for Panel Rehearing on
April 14, 2009, and the petition for rehearing was subsequently
denied.
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. A decision is still pending
on the Motions to Dismiss and for Sanctions and the Requests for Attorney
Fees.
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.
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, Texas
Commission of Environmental Quality 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. Following
court ordered mediation, we have settled with plaintiffs in all of the wrongful
death cases and the personal injury and property damages cases. On January 12,
2009, the Contra Costa Superior Court granted summary judgment in favor of
Kinder Morgan G.P. Services Co., Inc. in the last remaining civil suit – a claim
for indemnity brought by co-defendant Camp, Dresser & McKee, Inc. The only
remaining pending matter is our appeal of a civil fine of approximately $0.1
million issued by the California Division of Occupational Safety and
Health.
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 Rockies Express), 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 Rockies Express, and we do not expect that it will do
so. Immediately following the incident, Rockies Express 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, Rockies Express and several
other parties in the District Court of Harris County, Texas, 189th
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, Rockies Express and its contractors.
Kinder Morgan Energy Partners was indemnified for the full amount of this
settlement by one of Rockies Express’ 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. The remaining plaintiffs re-filed their
Complaint against Rockies Express, Kinder Morgan Energy Partners and several
other parties on November 7, 2008, Cause No. 2008-66788, currently pending in
the District Court of Harris County, Texas, 189th
Judicial District. The parties are currently engaged in discovery.
Charlotte,
North Carolina
On
November 27, 2006, the Plantation Pipeline experienced a release of
approximately 95 barrels of gasoline from a Plantation Pipe Line Company block
valve on a delivery line into a terminal owned by a third party company. 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 has engaged 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. The payments and work required under the
consent decree have been completed and Plantation has asked EPA’s concurrence to
terminate the consent decree.
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 Transportation Safety Board
released its investigation report (“Report”) on the incident on March 18, 2009.
The Report confirmed that an absence of pipeline location marking in advance of
excavation and inadequate communication between the contractor and Kinder Morgan
Energy Partners’ subsidiary Kinder Morgan Canada, the operator of the line, were
the primary causes of the accident. No directives, penalties or actions of
Kinder Morgan Canada are required as a result of the report. The incident
remains under investigation by Provincial agencies. We do not expect this matter
to have a material adverse impact on our 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.
PHMSA
Final Order
On
March 27, 2009, the U.S. Department of Transportation Pipeline and Hazardous
Materials Safety Administration (PHMSA) issued a Final Order denying
Plantation’s administrative appeal of a Notice of Probable Violation and
proposed Civil Penalty (Notice) in the amount of $0.15 million. The Final Order,
which stems from a July 2004 inspection at two
Plantation facilities in Virginia, alleges three violations of the
PHMSA regulations including that Plantation failed to follow
procedures and update certain documents. While Plantation believes it
has defenses to the Final Order, it determined that it was not cost
effective to appeal the Order and therefore paid the penalty on April 14,
2009. No other work is required by the Final Order and Plantation previously
took steps to address the alleged violations. The matter is, therefore, fully
resolved.
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.
In
February, 2009 the parties submitted an agreed upon order which has been entered
by the Kansas trial court certifying a class consisting of “All holders of
Kinder Morgan, Inc. common stock, during the period of August 28, 2006, through
May 30, 2007, and their transferees, successors and assigns. Excluded from the
class are defendants, members of their immediate families or trusts for the
benefit of defendants or their immediate family members, and any majority-owned
affiliates of any defendant.” The parties agreed that the certification and
definition of the above class was subject to revision and without prejudice to
defendants’ right to seek decertification of the class or modification of the
class definition.
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. In addition, on November 19, 2008, by
agreement of the parties, the Texas trial court issued an order staying all
proceedings in the Texas actions until such time as a final judgment shall be
issued in the Kansas actions. The effect of this stay is that the consolidated
matters will proceed only in the Kansas trial court.
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.
General
We
are a defendant in various lawsuits arising from the day-to-day operations of
our businesses. 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 March 31, 2009 and December
31, 2008, we have recorded total reserves for legal fees, transportation rate
cases and other litigation liabilities of $227.2 million and $234.8 million,
respectively. The reserve is primarily related to various claims from lawsuits
related to West Coast Products Pipelines 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.
Environmental
Matters
ExxonMobil
Corporation v. GATX Terminals Corporation, Kinder Morgan Liquids Terminals LLC
and Support Terminals Services, Inc.
On
April 23, 2003, Exxon Mobil Corporation (“ExxonMobil”) filed a complaint in the
Superior Court of New Jersey, Gloucester County. 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 Corporation (“GATX”). from 1989 through September 2000, later owned by
Support Terminals Services, Inc. (“Support Terminals”). The terminal is now
owned by Pacific Atlantic Terminals, LLC, (PAT) and it too is a party to the
lawsuit.
The
complaint seeks any and all damages related to remediating all environmental
contamination 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. The parties are
currently involved in mandatory mediation and met in June and October 2008. No
progress was made at any of the mediations. The mediation judge will now refer
the case back to the litigation courtroom.
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 and Kinder
Morgan Liquids Terminals LLC, f/k/a GATX. The complaint was filed in Gloucester
County, New Jersey. Both ExxonMobil and Kinder Morgan Liquids Terminals LLC
filed third party complaints against Support Terminals seeking to bring Support
Terminals into the case. Support Terminals filed motions to dismiss the third
party complaints, which were denied. Support Terminals is now joined in the case
and it filed an Answer denying all claims.
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 cleanup costs and 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’ actions. As in the case
brought by ExxonMobil against GATX, the issue is whether the plaintiffs’ claims
are within the scope of the indemnity obligations between GATX (and
therefore, Kinder Morgan Liquids Terminals LLC) and Support Terminals. The court
may consolidate the two cases. The parties are now conducting
discovery.
State
of Texas v. Kinder Morgan Petcoke, L.P.
Harris
County, Texas Criminal Court No. 11, Cause No. 1571148. On February 24, 2009 a
subsidiary of Kinder Morgan Energy Partners, Kinder Morgan Petcoke, L.P., was
served with a misdemeanor summons alleging the unintentional discharge of
petcoke into the Houston Ship Channel during maintenance activities. The maximum
potential fine for the alleged violation is $0.2 million. The allegations in the
summons are currently under investigation.
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.
General
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 March 31,
2009 and December 31, 2008, we have accrued an environmental reserve of $81.4 million and $85.0
million, respectively, 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. 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 $20.5 million and $20.9 million as of March 31, 2009 and December
31, 2008, respectively, for expected cost recoveries that have been deemed
probable.
18. Recent
Accounting Pronouncements
SFAS
141(R) and FASB Staff Position No. 141(R)-a
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. 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 was adopted by us effective January 1, 2009, and the adoption of this
Statement did not have a material impact on our consolidated financial
statements.
On
April 1, 2009, the FASB issued FASB Staff Position FAS No. 141(R)-a, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies This Staff Position amends the provisions
related to the initial recognition and measurement, subsequent measurement and
disclosure of assets and liabilities arising form contingencies in a business
combination under SFAS No. 141R. This Staff Position carries forward the
requirements in SFAS No. 141R for acquired contingencies, which would require
that such contingencies be recognized at fair value on the acquisition date if
fair value can be reasonably estimated during the allocation period. Otherwise,
companies would typically account for the acquired contingencies in accordance
with SFAS No. 5, Accounting
for Contingencies. This Staff Position will have the same effective date
as SFAS No. 141R, and did not have a material impact on our consolidated
financial statements.
SFAS
No. 160
For
information on SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements, see Note 2.
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 provides for enhanced disclosure
requirements that 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 was adopted by us effective January
1, 2009, and the adoption of this Statement did not have a material impact on
our consolidated financial statements. Also, see Note 14.
FASB
Staff Position No. FAS 142-3
FASB
Staff Position No. FAS 157-3
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. This Staff
Position provides
guidance clarifying how SFAS No. 157, “Fair Value Measurements” should be
applied when valuing securities in markets that are not active. This Staff
Position applies the objectives and framework of SFAS No. 157 to determine the
fair value of a financial asset in a market that is not active, and it reaffirms
the notion of fair value as an exit price as of the measurement date. Among
other things, the guidance also states that significant judgment is required in
valuing financial assets. This Staff Position became effective upon issuance,
and did not have any material effect on our consolidated financial
statements.
EITF
08-6
On
November 24, 2008, the Financial Accounting Standards Board ratified the
consensus reached by the Emerging Issues Task Force on Issue No. 08-6, or EITF
08-6, Equity Method Investment
Accounting Considerations. EITF 08-6 clarifies certain accounting and
impairment considerations involving equity method investments. For us, this
Issue was effective January 1, 2009, and the adoption of this Issue did not have
any impact on our consolidated financial statements.
FASB
Staff Position No. FAS 132(R)-1
On
December 30, 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1,
Employer’s Disclosures About Postretirement
Benefit Plan Assets. This Staff Position is effective for financial
statements ending after December 15, 2009 (December 31, 2009 for us) and
requires additional disclosure of pension and postretirement benefit plan assets
regarding (i) investment asset classes; (ii) fair value measurement of
assets; (iii) investment strategies; (iv) asset risk and (v)
rate-of-return assumptions. We do not expect this Staff Position to have a
material impact on our consolidated financial statements.
Securities
and Exchange Commission’s Final Rule on Oil and Gas Disclosure
Requirements
On
December 31, 2008, the Securities and Exchange Commission issued its final rule
Modernization of Oil and Gas
Reporting, which revises the disclosures required by oil and gas
companies. The SEC disclosure requirements for oil and gas companies have been
updated to include expanded disclosure for oil and gas activities, and certain
definitions have also been changed that will impact the determination of oil and
gas reserve quantities. The provisions of this final rule are effective for
registration statements filed on or after January 1, 2010, and for annual
reports for fiscal years ending on or after December 31, 2009. We are currently
reviewing the effects of this final rule.
FASB
Staff Position No. FAS 157-4
FASB
Staff Position No. FAS 107-1 and APB 28-1
FASB
Staff Position No. FAS 115-2 and FAS 124-2
On
April 9, 2009, the FASB issued three separate Staff Positions intended to
provide additional application guidance and enhance disclosures regarding fair
value measurements and impairments of securities. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly, provides guidelines for making fair value measurements more
consistent with the principles presented in SFAS No. 157, Fair Value Measurements. This
Staff Position provides additional guidance to highlight and expand on
the
factors
that should be considered in estimating fair value when there has been a
significant decrease in market activity for a financial asset.
FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures from annual only to quarterly, in order to provide financial
statement users with more timely information about the effects of current market
conditions on their financial instruments. This Staff Position requires us to
disclose in our interim financial statements the fair value of all financial
instruments within the scope of SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, as well as the method(s) and significant
assumptions we use to estimate the fair value of those financial
instruments.
FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed
to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. This Staff Position changes (i) the method for
determining whether an other-than-temporary impairment exists for debt
securities and (ii) the amount of an impairment charge to be recorded in
earnings.
These
three Staff Positions are effective for interim and annual periods ending after
June 15, 2009 (June 30, 2009 for us). We do not expect these
Staff Positions to have a material impact on our consolidated financial
statements.
19. Subsequent
Events
On
April 6, 2009, Kinder Morgan Energy Partners entered into four additional
fixed-to-floating interest rate swap agreements having a combined notional
principal amount of $750 million related to (i) $125 million 7.75%
senior notes due 2032, (ii) $225 million of 5.00% senior notes due 2013,
(iii) $300 million 7.40% senior notes due 2031 and (iv) $100 million of 5.85%
senior notes due 2012.
On
April 23, 2009, Kinder Morgan Energy Partners acquired certain terminal assets
and operations from Megafleet Towing Co., Inc. for an aggregate consideration of
approximately $23.0 million, consisting of $18.0 million in cash and a
contingent obligation to pay an additional $5 million in cash on April 23, 2014,
five years from closing. The contingent obligation will be recorded at its fair
value, and is based upon the purchased assets providing Kinder Morgan Energy
Partners an agreed-upon amount of earnings during the five-year period. The
acquired assets primarily consist of nine marine vessels that provide towing and
harbor boat services in the Gulf coastal area, the intracoastal waterways, and
the Houston Ship Channel. The acquisition complements and expands existing Gulf
Coast and Texas petroleum coke terminal operations, and all of the acquired
assets are included in the Terminals-KMP business segment. Kinder Morgan Energy
Partners will allocate the total purchase price to assets acquired and
liabilities assumed in the second quarter of 2009.
On
May 7, 2009 (effective May 14, 2009), Kinder Morgan Energy Partners entered into
an agreement to issue $300 million of 5.625% senior note due February 15, 2015
and $700 million of 6.85% senior notes due February 15, 2020. Kinder Morgan
Energy Partners will use net proceeds to reduce borrowings under its bank credit
facility.
On
May 7, 2009 (and effective May 14, 2009), Kinder Morgan Energy Partners entered
into three additional fixed-to-floating interest rate swap agreements having a
combined notional principal amount of $700 million related to the issuance of
$700 million of 6.85% senior notes due February 15, 2020.
General
The
following information should be read in conjunction with (i) the accompanying
interim consolidated financial statements and related notes; and (ii) the
consolidated financial statements, related notes and management’s discussion and
analysis of financial condition and results of operations included in our Annual
Report on Form 10-K for the year ended December 31, 2008 (“2008 Form
10-K”).
Our
financial statements and the financial information contained in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations reflect the August 28, 2008 transfer of our 33 1/3% interest in the
Express and Platte crude oil pipeline system net assets (collectively referred
to in this report as the Express pipeline system) and the Jet Fuel pipeline
system net assets to Kinder Morgan Energy Partners for all periods presented
within the Kinder Morgan Canada–KMP business segment.
The
February 15, 2008 sale of our 80% interest in NGPL PipeCo LLC affects
comparisons of our financial position and results of operations between the
dates and periods reported below.
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.”
Critical
Accounting Policies and Estimates
Accounting
standards require information in financial statements about the risks and
uncertainties inherent in significant estimates, and the application of
generally accepted accounting principles involves the exercise of varying
degrees of judgment. Certain amounts included in or affecting our consolidated
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. These
estimates and assumptions affect the amounts we report for our assets and
liabilities, our revenues and expenses during the reporting period, and our
disclosure of contingent assets and liabilities at the date of our financial
statements. We routinely evaluate these estimates, 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.
Further
information about us and information regarding our accounting policies and
estimates that we consider to be “critical” can be found in our 2008 Form 10-K.
There have not been any significant changes in these policies and estimates
during the three months ended March 31, 2009.
Noncontrolling
Interests in Consolidated Subsidiaries
As
prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, the noncontrolling ownership interests
is no longer classified as an expense. Instead, Net Income is allocated between
Knight Inc.’s stockholder and the non-controlling interests. As prescribed by
this Statement, we applied SFAS No. 160 for all periods presented.
Impact
of the Purchase Method of Accounting on Segment Earnings
As
further disclosed in Note 1 of Notes to Consolidated Financial Statements in our
2008 Form 10-K, on May 30, 2007, 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. This transaction is
referred to in this report as “the Going Private transaction.” Effective with
the closing of the Going Private transaction, all of our assets and liabilities
were recorded at their estimated fair market values based on an allocation of
the aggregate purchase price paid in the Going Private transaction.
The
impacts of the purchase method of accounting on segment earnings before
depreciation, depletion and amortization (“DD&A”) relate primarily to the
revaluation of the accumulated other comprehensive income related to derivatives
accounted for as hedges in the CO2–KMP
segment. The impact of this revaluation on the CO2–KMP
segment is described in its segment discussion, which follows. 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 effects on “Interest and Other, 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.
Results
of Operations
Consolidated
Results of Operations
|
Three
Months Ended March 31,
|
|
Increase/(Decrease)
Change
from 2008
|
|
2009
|
|
2008
|
|
Dollars
|
|
Percent
|
|
(In
millions, except percentages)
|
Segment
Earnings before Depreciation, Depletion and Amortization Expense and
Amortization of Excess Cost of Equity Investments1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGPL
PipeCo LLC
2
|
$
|
12.3
|
|
|
|
96.0
|
|
|
$
|
(83.7
|
)
|
|
|
(87
|
)%
|
Power
|
|
1.1
|
|
|
|
2.1
|
|
|
|
(1.0
|
)
|
|
|
(48
|
)%
|
Products
Pipelines–KMP3
|
|
145.4
|
|
|
|
140.2
|
|
|
|
5.2
|
|
|
|
4
|
%
|
Natural
Gas Pipelines–KMP4
|
|
200.0
|
|
|
|
188.4
|
|
|
|
11.6
|
|
|
|
6
|
%
|
CO2–KMP5
|
|
191.7
|
|
|
|
233.3
|
|
|
|
(41.6
|
)
|
|
|
(18
|
)%
|
Terminals–KMP6
|
|
134.3
|
|
|
|
125.8
|
|
|
|
8.5
|
|
|
|
7
|
%
|
Kinder
Morgan Canada–KMP7
|
|
19.5
|
|
|
|
34.6
|
|
|
|
(15.1
|
)
|
|
|
(44
|
)%
|
Segment
Earnings before DD&A
|
|
704.3
|
|
|
|
820.4
|
|
|
|
(116.1
|
)
|
|
|
(14
|
)%
|
Depreciation,
Depletion and Amortization Expense
|
|
(264.8
|
)
|
|
|
(218.1
|
)
|
|
|
(46.7
|
)
|
|
|
(21
|
)%
|
Amortization
of Excess Cost of Equity Investments
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
-
|
|
|
|
-
|
%
|
Other
Operating Income
|
|
11.5
|
|
|
|
-
|
|
|
|
11.5
|
|
|
|
NA
|
|
General
and Administrative Expense
|
|
(92.9
|
)
|
|
|
(86.3
|
)
|
|
|
(6.6
|
)
|
|
|
(8
|
)%
|
Interest
and Other, Net
|
|
(150.3
|
)
|
|
|
(204.5
|
)
|
|
|
54.2
|
|
|
|
27
|
%
|
Income
from Continuing Operations before Income Taxes1
|
|
206.4
|
|
|
|
310.1
|
|
|
|
(103.7
|
)
|
|
|
(33
|
)%
|
Income
Taxes1
|
|
(61.3
|
)
|
|
|
(78.1
|
)
|
|
|
16.8
|
|
|
|
22
|
%
|
Income
from Continuing Operations
|
|
145.1
|
|
|
|
232.0
|
|
|
|
(86.9
|
)
|
|
|
(37
|
)%
|
Loss
from Discontinued Operations, Net of Tax
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(100
|
)%
|
Net
Income
|
|
144.9
|
|
|
|
231.9
|
|
|
|
(87.0
|
)
|
|
|
(38
|
)%
|
Net
Income Attributable to Noncontrolling Interests
|
|
(29.6
|
)
|
|
|
(126.2
|
)
|
|
|
96.6
|
|
|
|
77
|
%
|
Net
Income Attributable to Knight Inc.’s Stockholder
|
$
|
115.3
|
|
|
$
|
105.7
|
|
|
$
|
9.6
|
|
|
|
9
|
%
|
_____________
1
|
Kinder
Morgan Energy Partners’ income taxes of $19.3 million and $9.0 million for
the three months ended March 31, 2009 and 2008, respectively, are included
in segment earnings.
|
2
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria Acquisition Inc. (“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
|
2009
and 2008 amounts include decreases in income of $0.6 million and $0.8
million, respectively, resulting from unrealized foreign currency losses
on long-term debt transactions.
|
4
|
2009
amount includes a $1.3 million decrease in income resulting from
unrealized mark to market gains and losses due to the discontinuance of
hedge accounting at Casper Douglas. 2008 amount includes a $0.2 million
increase in segment earnings 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. 2009 amount includes a $0.8 million decrease in segment
earnings related to assets sold, which had been revalued as part of the
Going Private transaction and recorded in the application of the purchase
method of accounting.
|
5
|
2009
and 2008 amounts include $24.3 million and $33.5 million, respectively,
increases in segment earnings 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.
|
6
|
2009
amount includes a $0.4 million decrease in segment earnings related to
assets sold, which had been revalued as part of the Going Private
transaction and recorded in the application of the purchase method of
accounting.
|
7
|
Includes
earnings of the Trans Mountain pipeline system, our interest in the
Express pipeline system and the Jet Fuel pipeline system. 2009 amount
includes a $14.9 million increase in expense primarily due to certain
non-cash regulatory accounting adjustments to the carrying amount of the
previously established deferred tax
liability.
|
Net
Income Attributable
to Knight Inc.’s Stockholder, totaled $115.3 million in the first quarter of
2009 as compared to $105.7 million in the first quarter of 2008. Our total
revenues for the comparative first quarter periods were $1,828.9 million and
$2,895.0 million, respectively.
Because
Kinder Morgan Energy Partners’ partnership agreement requires it to distribute
100% of its available cash to its partners on a quarterly basis (available cash
as defined in Kinder Morgan Energy Partners’ partnership agreement generally
consists of all cash receipts, less cash disbursements and changes in reserves),
we, and Kinder Morgan Energy Partners,
consider
each period’s earnings before all non-cash depreciation, depletion and
amortization expenses, including amortization of excess cost of equity
investments, to be an important measure of our success in maximizing returns to
our stockholder. We
also use segment earnings before depreciation, depletion and amortization
expenses (presented in the table above and sometimes referred to in this report
as EBDA) internally as a measure of profit and loss used for evaluating segment
performance and for deciding how to allocate resources to our seven reportable
business segments.
Total
segment EBDA totaled $704.3 million in the first quarter of 2009, compared to
$820.4 million in the first quarter of 2008. The overall $116.1 million (14%)
decrease in total segment EBDA, relative to the first three months of last year,
included a $26.6 million decrease from the combined effect of the certain items
described in the footnotes to the table above (combining to increase total
segment EBDA by $6.3 million in 2009 and to increase total segment EBDA by $32.9
million in 2008). The remaining $89.5 million decrease in EBDA between the first
quarter 2009 and 2008 is primarily due to decreases in the NGPL PipeCo LLC business segment
primarily due to the sale of an 80% interest in NGPL PipeCo LLC on February 15, 2008
and a decrease in EBDA from the CO2–KMP
segment primarily due to lower combined crude oil and natural gas plant product
sales. These decreases were partially offset by higher earnings in 2009 from the
Natural Gas Pipelines–KMP, Terminals–KMP and Products Pipelines–KMP business
segments.
Although
the majority of the cash generated by our assets is fee based and is not
sensitive to commodity prices, the CO2–KMP
business segment’s oil and gas producing activities are exposed to commodity
price risk. That risk is primarily mitigated by a long term hedging strategy
under which Kinder Morgan Energy Partners has hedged the majority of its
long-term production. However, Kinder Morgan Energy Partners does have exposure
on unhedged volumes, most of which are natural gas liquids.
Following
are operating results by individual business segment (before intersegment
eliminations), including explanations of significant variances between the three
months ended March 31, 2009 and 2008.
NGPL
PipeCo LLC
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Segment
Earnings before DD&A
|
$
|
12.3
|
|
|
$
|
96.0
|
|
The
$83.7 million decrease in segment earnings before DD&A between the first
quarter 2009 and 2008 in the NGPL
PipeCo LLC business segment was primarily due to the February 15, 2008,
sale of an 80% ownership interest in NGPL PipeCo LLC to Myria Acquisition Inc.
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. Segment
earnings before DD&A at the 100% asset ownership level were $89.7 million
for the period from January 1, 2008 to February 14, 2008 and for the period
February 15, 2008 to March 31, 2008 our equity earnings were $6.3
million.
At
the 100% asset ownership level, NGPL PipeCo LLC’s net income for the quarters
ended March 31, 2009 and March 31, 2008 was $61.8 million and $62.4 million,
respectively, a decrease of $0.6 million. Operating revenues increased to $289.1
million for the three months ended March 31, 2009 from $275.1 million for the
same period in 2008. The $14.0 million (5.3%) increase in revenues between the
first quarters of 2009 and 2008 contributed to $11.6 million of incremental
gross profit, which was offset by $10.3 million of incremental operations and
maintenance expense, $1.6 million of higher interest expense, net of interest
income, and $1.2 million of additional depreciation and other expense. The net
$1.5 million reduction in income before taxes and modest reduction in the
effective tax rate contributed to a $0.9 million reduction in tax expense
between the quarters ended March 31, 2009 and March 31, 2008.
Power
The
Power segment consists of Triton Power Michigan LLC’s lease and operation of the
Jackson, Michigan 550-megawatt natural gas fired electric power
plant.
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues
|
$
|
6.6
|
|
|
|
7.5
|
|
Operating
Expenses and Noncontrolling Interests
|
|
(5.5
|
)
|
|
|
(5.4
|
)
|
Segment
Earnings before DD&A
|
$
|
1.1
|
|
|
|
2.1
|
|
Power’s
segment earnings before DD&A decreased by $1.0 million in the first quarter
of 2009, when compared to the first quarter of 2008, primarily due to a $1.5
million reduction in operating expenses in the first quarter of 2008 from a
property tax settlement.
Products
Pipelines–KMP
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues
|
$
|
188.2
|
|
|
$
|
198.3
|
|
Operating
Expenses
|
|
(49.0
|
)
|
|
|
(62.4
|
)
|
Other
Expense
|
|
-
|
|
|
|
(0.1
|
)
|
Earnings
from Equity Investments
|
|
3.5
|
|
|
|
4.8
|
|
Interest
Income and Other Income, Net1
|
|
2.8
|
|
|
|
0.5
|
|
Income
Tax Benefit (Expense)
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
Segment
Earnings (Loss) Before DD&A
|
$
|
145.4
|
|
|
$
|
140.2
|
|
|
|
|
|
|
|
|
|
Operating
Statistics (MMBbl)
|
|
|
|
|
|
|
|
Gasoline
|
|
95.6
|
|
|
|
97.8
|
|
Diesel
Fuel
|
|
35.5
|
|
|
|
38.6
|
|
Jet
Fuel
|
|
26.8
|
|
|
|
29.7
|
|
Total
Refined Product Volumes
|
|
157.9
|
|
|
|
166.1
|
|
Natural
Gas Liquids
|
|
4.8
|
|
|
|
6.9
|
|
Total
Delivery Volumes2
|
|
162.7
|
|
|
|
173.0
|
|
____________
1
|
2009
and 2008 amounts include decreases in income of $0.6 million and $0.8
million, respectively, resulting from unrealized foreign currency losses
on long-term debt transactions.
|
2
|
Includes
Pacific, Plantation, Calnev, Central Florida, Cochin and Cypress pipeline
volumes.
|
Combined,
the certain items described in the footnote to the table above account for a
$0.2 million increase in the segment’s EBDA between the first quarter of 2009
and the first quarter of 2008. Following is information related to the increases
and decreases, in the same comparable periods of 2009 and 2008, of the segment’s
remaining changes in EBDA and changes in operating revenues:
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
West
Coast Terminals
|
$
|
5.7
|
|
|
50
|
%
|
|
$
|
4.6
|
|
|
26
|
%
|
Central
Florida Pipeline
|
|
2.5
|
|
|
25
|
%
|
|
|
3.1
|
|
|
26
|
%
|
Cochin
Pipeline System
|
|
1.1
|
|
|
11
|
%
|
|
|
(3.7
|
)
|
|
(26
|
)%
|
Plantation
Pipeline
|
|
(2.1
|
)
|
|
(18
|
)%
|
|
|
(6.1
|
)
|
|
(55
|
)%
|
Pacific
Operations
|
|
(1.1
|
)
|
|
(2
|
)%
|
|
|
(4.9
|
)
|
|
(5
|
)%
|
All
Other (Including Eliminations)
|
|
(1.1
|
)
|
|
(3
|
)%
|
|
|
(3.1
|
)
|
|
(6
|
)%
|
Total
Products Pipelines
|
$
|
5.0
|
|
|
4
|
%
|
|
$
|
(10.1
|
)
|
|
(5
|
)%
|
The
earnings growth from the Products Pipelines-KMP business segment in the first
quarter of 2009 was driven by higher rates and asset expansions at the West
Coast Terminals, and by higher ethanol revenues on the Central Florida Pipeline.
Ongoing weak economic conditions continued to dampen demand for refined
petroleum products at many of the remaining assets in this segment, resulting in
lower revenues and volumes relative to the first quarter of 2008. However,
reduced demand has been partially offset by lower fuel and power expenses, and
by negotiating new service and supply contracts at lower prices compared to last
year.
Total
segment operating expenses, which include costs of sales, operations and
maintenance expenses, fuel and power expenses and taxes, other than income taxes
decreased $13.4 million (21%) in the first quarter of 2009, when compared to the
first quarter of 2008. Also in the first quarter of 2009, Kinder Morgan Energy
Partners entered into certain commercial agreements with several customers to
ship biodiesel on a portion of the Plantation Pipeline beginning in April
2009.
The
quarter-to-quarter earnings increase from Kinder Morgan Energy Partners’ West
Coast terminal operations was largely revenue related, driven by higher revenues
from its combined Carson/Los Angeles Harbor terminal system and by
incremental
returns from the completion of a number of capital expansion projects that
modified and upgraded terminal infrastructure since the end of the first quarter
of 2008. Revenues at the Carson/Los Angeles terminal complex increased $3.5
million in the first quarter of 2009, mainly due to increased warehouse revenues
resulting from customer contract revisions made since the first quarter a year
ago. Revenues from the remaining West Coast facilities increased $1.1 million,
due mostly to additional throughput and storage services associated with
renewable fuels (both ethanol and biodiesel).
The
earnings increase from the Central Florida Pipeline was driven by incremental
ethanol revenues, resulting from capital expansion projects that provided
ethanol storage and terminal service beginning in mid-April 2008 at the Tampa
and Orlando terminals.
Compared
to the first quarter last year, earnings before depreciation, depletion and
amortization from the Cochin pipeline system also increased in the first quarter
of 2009, despite a 26% drop in revenues largely attributable to lower propane
delivery volumes in the three-month 2009 period. In the first quarter of 2009,
total throughput volumes on the Cochin pipeline system declined 18% compared to
the prior year first quarter, due primarily to propane supply constraints in
Western Canada contributing to the 26% decrease in revenues for the first
quarter of 2009 as compared to the first quarter in 2008. However, this $3.7
million decrease in revenues was more than offset by decreases in operating
expenses and higher other income.
The
overall increase in segment earnings before depreciation, depletion and
amortization in the first quarter of 2009 compared to the first quarter of 2008
also included period-to-period decreases in earnings from both Kinder Morgan
Energy Partners’ equity investment in Plantation and from its Pacific
operations. The segment’s $1.3 million (27%) decrease in earnings from equity
investments relates to lower net income earned by Plantation Pipe Line Company.
Plantation’s lower net income was primarily attributable to lower oil loss
allowance revenues in the first quarter of 2009, relative to last year,
reflecting the decline in refined product market prices since the end of the
first quarter of 2008.
Combining
all of the segment’s operations, total revenues from refined petroleum products
deliveries decreased 3.4% in the first quarter of 2009, while total products
delivery volumes decreased 4.9 %, when compared to the first quarter of 2008.
Excluding Plantation, total refined products delivery revenues were down 2% and
volumes were down 7.4%, when compared to last year. Total gasoline delivery
volumes decreased 2.3% (primarily on the Pacific operations), diesel volumes
decreased 7.9%, and jet fuel volumes decreased 9.6%, respectively, in the first
quarter of 2009 compared to the first quarter of 2008. Natural gas liquids
delivery volumes decreased by 30% in the first quarter of 2009 compared to the
first quarter last year, chiefly due to lower propane deliveries on the Cochin
Pipeline and to lower liquids deliveries from the Cypress Pipeline.
Natural
Gas Pipelines–KMP
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues
|
$
|
1,051.7
|
|
|
$
|
1,912.5
|
|
Operating
Expenses1
|
|
(890.5
|
)
|
|
|
(1,744.9
|
)
|
Other
Expense2
|
|
(0.8
|
)
|
|
|
-
|
|
Earnings
from Equity Investments
|
|
26.6
|
|
|
|
23.5
|
|
Interest
Income and Other Income, Net
|
|
14.7
|
|
|
|
0.2
|
|
Income
Tax Expense
|
|
(1.7
|
)
|
|
|
(2.9
|
)
|
Segment
Earnings before DD&A
|
$
|
200.0
|
|
|
$
|
188.4
|
|
|
|
|
|
|
|
|
|
Operating
Statistics (Trillion Btus)
|
|
|
|
|
|
|
|
Natural
Gas Transport Volumes3
|
|
545.2
|
|
|
|
495.4
|
|
Natural
Gas Sales Volumes4
|
|
203.7
|
|
|
|
215.0
|
|
___________
1
|
2009
amount includes a $1.3 million decrease in income resulting from
unrealized mark to market gains and losses due to the discontinuance of
hedge accounting at Casper Douglas. 2008 amount includes a $0.2 million
increase in segment earnings 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
|
2009
amount includes a $0.8 million decrease in segment earnings related to
assets sold, which had been revalued as part of the Going Private
transaction and recorded in the application of the purchase method of
accounting.
|
3
|
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
volumes.
|
4
|
Represents
Texas intrastate natural gas pipeline group
volumes.
|
Combined,
the certain items described in the footnotes to the table above account for a
$2.3 million decrease in EBDA between the first quarter of 2009 and the first
quarter of 2008. Following is information related to the increases and
decreases, in the same comparable periods of 2009 and 2008, of the segment’s
remaining changes in EBDA and changes in operating revenues:
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Kinder
Morgan Louisiana Pipeline
|
$
|
8.6
|
|
|
NA
|
|
|
$
|
-
|
|
|
NA
|
|
Rockies
Express Pipeline
|
|
4.7
|
|
|
31
|
%
|
|
|
-
|
|
|
NA
|
|
Kinder
Morgan Interstate Gas Transmission
|
|
4.2
|
|
|
16
|
%
|
|
|
1.4
|
|
|
4
|
%
|
Texas
Intrastate Natural Gas Pipeline Group
|
|
(1.8
|
)
|
|
(2
|
)%
|
|
|
(841.2
|
)
|
|
(47
|
)%
|
Thunder
Creek
|
|
(1.2
|
)
|
|
(100
|
)%
|
|
|
-
|
|
|
NA
|
|
All
Others
|
|
(0.6
|
)
|
|
(2
|
)%
|
|
|
(23.4
|
)
|
|
(34
|
)%
|
Intrasegment
Eliminations
|
|
-
|
|
|
NA
|
|
|
|
2.4
|
|
|
91
|
%
|
Total
Natural Gas Pipelines
|
$
|
13.9
|
|
|
7
|
%
|
|
$
|
(860.8
|
)
|
|
(45
|
)%
|
The
overall increase in the Natural Gas Pipeline-KMP segment earnings before
depreciation, depletion and amortization expenses in the three months ended
March 31, 2009, when compared to the same period last year, was driven primarily
by incremental earnings from the Kinder Morgan Louisiana Pipeline, incremental
contributions from the 51% equity ownership interest in the Rockies Express
Pipeline, and higher earnings from the Kinder Morgan Interstate Gas Transmission
pipeline system (“KMIGT”).
The
incremental earnings before depreciation, depletion and amortization expenses
from the Kinder Morgan Louisiana Pipeline reflects other non-operating income
realized in the first quarter of 2009 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.
Kinder
Morgan Energy Partners’ equity investment in Rockies Express Pipeline LLC
provided incremental earnings for the first quarter of 2009 primarily due to
earnings attributable to its Rockies Express-West natural gas pipeline segment,
which began full operations in May 2008. Transport volumes for the entire
Rockies Express Pipeline increased 66% in the first quarter of 2009, when
compared to the first quarter last year, and this increase was primarily due to
the full operations of Rockies Express-West.
The
increase in earnings from the KMIGT natural gas pipeline system reflects a
higher period-to-period operating margin, driven by higher firm transportation
demand fees and higher pipeline fuel recoveries, relative to the first quarter a
year ago. The increase in demand fees was mainly due to the Colorado Lateral and
Ethanol expansions.
The
segment’s overall increase in earnings before depreciation, depletion and
amortization expenses in the first quarter of 2009 was partly offset by lower
earnings from Kinder Morgan Energy Partners’ Texas intrastate natural gas
pipeline group, and by the lack of earnings from its previously owned equity
investment in Thunder Creek Gas Services, LLC. Kinder Morgan Energy Partners
sold its 25% ownership interest in Thunder Creek to a third party in April 2008,
and it received cash proceeds, net of closing costs and settlements, of
approximately $50.7 million for its investment.
The
Texas intrastate natural gas pipeline group includes the operations of the
Kinder Morgan Tejas (including Kinder Morgan Border Pipeline), Kinder Morgan
Texas Pipeline, Kinder Morgan North Texas Pipeline and the Mier-Monterrey Mexico
Pipeline, and although combined earnings from the intrastate group dropped $1.8
million (2%) in the first quarter of 2009 compared to the first quarter of 2008,
the group’s combined earnings accounted for more than half (53% and 58%,
respectively) of the Natural Gas Pipelines-KMP segment’s total earnings before
depreciation, depletion and amortization expenses in each of the first three
months of 2009 and 2008.
The
Texas intrastate natural gas pipeline group’s decrease in earnings in the first
quarter of 2009 was mainly attributable to lower margins from natural gas sales
and processing activities, but partially offset by higher earnings from both
natural gas storage activities and transportation demand fees. In the first
quarter of 2009, the Texas intrastate natural gas pipeline group benefitted from
several new storage and transport demand fee contracts.
CO2–KMP
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues1
|
$
|
253.2
|
|
|
$
|
319.9
|
|
Operating
Expenses
|
|
(66.6
|
)
|
|
|
(90.7
|
)
|
Earnings
from Equity Investments
|
|
5.8
|
|
|
|
5.6
|
|
Other
Income, Net
|
|
-
|
|
|
|
(0.2
|
)
|
Income
Tax Benefit (Expense)
|
|
(0.7
|
)
|
|
|
(1.3
|
)
|
Segment
Earnings before DD&A
|
$
|
191.7
|
|
|
$
|
233.3
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Carbon
Dioxide Delivery Volumes(Bcf)2
|
|
212.8
|
|
|
|
180.2
|
|
SACROC
Oil Production (Gross)(MBbl/d)3
|
|
30.0
|
|
|
|
27.3
|
|
SACROC
Oil Production (Net)(MBbl/d)4
|
|
25.0
|
|
|
|
22.8
|
|
Yates
Oil Production (Gross)(MBbl/d)3
|
|
26.5
|
|
|
|
28.6
|
|
Yates
Oil Production (Net)(MBbl/d)4
|
|
11.7
|
|
|
|
12.7
|
|
Natural
Gas Liquids Sales Volumes (Net)(MBbl/d)4
|
|
8.9
|
|
|
|
9.5
|
|
Realized
Weighted Average Oil Price per Bbl5,
6
|
$
|
43.85
|
|
|
$
|
50.03
|
|
Realized
Weighted Average Natural Gas Liquids Price per Bbl6,
7
|
$
|
28.10
|
|
|
$
|
65.93
|
|
1
|
2009
and 2008 amounts include $24.3 million and $33.5 million, respectively,
increases in segment earnings 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
|
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.
Combined, the certain items described in the footnote to the table above account
for a $9.2 million decrease in both the segment’s EBDA and operating revenues
between the first quarter of 2009 and the first quarter of 2008. 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 2009 and 2008,
of the segment’s remaining EBDA and operating revenues:
|
EBDA
Increase/(Decrease)
|
|
Revenues
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Sales
and Transportation Activities
|
$
|
(6.7
|
)
|
|
(10
|
)%
|
|
$
|
(6.0
|
)
|
|
(8
|
)%
|
Oil
and Gas Producing Activities
|
|
(25.7
|
)
|
|
(19
|
)%
|
|
|
(55.2
|
)
|
|
(24
|
)%
|
Intrasegment
Eliminations
|
|
-
|
|
|
N/A
|
|
|
|
3.7
|
|
|
21
|
%
|
Total
|
$
|
(32.4
|
)
|
|
(16
|
)%
|
|
$
|
(57.5
|
)
|
|
(20
|
)%
|
The
CO2–KMP
segment’s overall quarter-to-quarter decrease in segment earnings before
depreciation, depletion and amortization expenses in 2009 versus 2008 was
primarily due to lower earnings from oil and gas producing activities, which
include the operations associated with Kinder Morgan Energy Partners’ ownership
interests in oil-producing fields and natural gas processing plants. The
decrease in earnings from oil and gas producing activities was driven by a $51.3
million (23%) decrease in combined crude oil and natural gas plant products
sales revenues in the first quarter of 2009, when compared to the first quarter
a year ago.
Overall,
the segment’s average realization for crude oil in the first quarter of 2009
decreased 12% when compared to the first quarter of 2008 (from $50.03 per barrel
in 2008 to $43.85 per barrel in 2009). The average natural gas liquids
realization decreased 57% in the first quarter of 2009, when compared to the
first quarter of 2008 (from $65.93 per barrel in 2008 to $28.10 per barrel in
2009).
The
quarter-to-quarter decrease in revenues from lower realized weighted average
prices was partly offset by an over 2% increase in sales volumes in 2009 versus
2008 and lower operating expenses. An increase in average gross oil production
at SACROC more than offset a decline at Yates and in natural gas liquids. SACROC
averaged 30.0 thousand barrels per day for the first quarter of 2009, up
nearly 10% compared to the first quarter of 2008. At Yates, average gross oil
production for the first quarter of 2009 declined by 7% versus the same quarter
last year and natural gas liquids products volumes decreased over 6%. The
decrease in volumes was partly due to the lingering effects from the 2008
hurricane season, which resulted in pipeline pro-rationing (production
allocation) in January 2009.
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, decreases in the
prices of crude oil and natural gas liquids will have a negative impact on the
results of the CO2–KMP
business segment, and even though Kinder Morgan Energy Partners hedges the
majority of its crude oil production, it does have exposure to unhedged volumes,
the majority of which are natural gas liquids volumes.
All
of Kinder Morgan Energy Partners’ hedge gains and losses for crude oil and
natural gas liquids are included in the realized average price for oil, and had
it not used energy derivative contracts to transfer commodity price risk, its
crude oil sales prices would have averaged $38.48 per barrel in the first
quarter of 2009, and $96.91 per barrel in the first quarter of 2008. For more
information on hedging activities, see Note 14 of the accompanying Notes to
Consolidated Financial Statements.
The
quarter-to-quarter decrease in EBDA from the segment’s sales and transportation
activities was also largely revenue related, reflecting both a $2.3 million
decrease in carbon dioxide and crude oil pipeline transportation revenues and a
$2.8 million decrease in earnings from lower asset sales (due to the sale of
certain pipeline meters in March 2008). The decrease in pipeline transportation
revenues was largely due to lower transport revenues in the first quarter of
2009 from Kinder Morgan Energy Partners’ Wink crude oil pipeline and its Central
Basin carbon dioxide pipeline. The decrease in Wink revenues was due to
favorable pipeline imbalance adjustments realized in the first quarter of 2008,
and the decrease in Central Basin revenues was mainly due to a favorable
transportation settlement reached with a pipeline customer in the first quarter
of 2008.
Revenues
from carbon dioxide sales to third parties were essentially flat across the
first quarters of 2009 and 2008 (decreasing by only $1.0 million (2%) in 2009
versus 2008), and Kinder Morgan Energy Partners does not recognize profits on
carbon dioxide sales to itself. Quarter-to-quarter carbon dioxide delivery
volumes increased 18% in 2009, due to both incremental volumes attributable to
expansion projects completed since the end of the first quarter of 2008, and
incremental volumes from the Doe Canyon carbon dioxide source field located in
Dolores County, Colorado, which began operations in mid-January
2008.
Compared
to the first quarter of 2008, the segment’s $24.1 million (27%) decrease in
combined operating expenses in the first quarter of 2009 was largely due to a
$9.9 million (47%) decrease in severance and property tax expenses, a $7.5
million (32%) decrease in fuel and power expenses, and a $5.6 million (13%)
decrease in field operating expenses. The decrease in severance tax expenses was
primarily related to the period-to-period decrease in crude oil revenues. The
decreases in fuel, power, and other operating expenses were largely related to
lower prices charged by the industry’s material and service providers since the
end of the first quarter of 2008, which impacted rig costs and other materials
and services. The drop in price levels was primarily due to the same external
factors that impacted sales revenues—as price levels for such expenses (and
capital and exploratory costs) are largely driven by the volatility of the
industry’s own supply and demand conditions.
Terminals–KMP
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues
|
$
|
267.9
|
|
|
$
|
280.2
|
|
Operating
Expenses
|
|
(133.6
|
)
|
|
|
(152.8
|
)
|
Other
Income1
|
|
0.5
|
|
|
|
0.6
|
|
Earnings
from Equity Investments
|
|
0.1
|
|
|
|
1.0
|
|
Interest
Income and Other Income (Expense), Net
|
|
(0.1
|
)
|
|
|
1.3
|
|
Income
Tax Expense
|
|
(0.5
|
)
|
|
|
(4.5
|
)
|
Segment
Earnings before DD&A
|
$
|
134.3
|
|
|
$
|
125.8
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Bulk
Transload Tonnage (MMtons)2
|
|
18.8
|
|
|
|
23.9
|
|
Liquids
Leaseable Capacity (MMBbl)
|
|
54.2
|
|
|
|
50.0
|
|
Liquids
Utilization
|
|
97.3
|
%
|
|
|
97.5
|
%
|
____________
1
|
2009
amount includes a $0.4 million decrease in segment earnings related to
assets sold, which had been revalued as part of the Going Private
transaction and recorded in the application of the purchase method of
accounting.
|
2
|
Volumes
for acquired terminals are included for both
periods.
|
The
Terminals-KMP business segment includes the operations of Kinder Morgan Energy
Partners’ petroleum, chemical and other liquids terminal facilities (other than
those included in the Products Pipelines-KMP segment), along with coal,
petroleum coke, fertilizer, steel, ores and other dry-bulk material services
facilities. The
Terminals-KMP segment groups its bulk and liquids terminal operations into
regions based on geographic location and/or primary operating function. This
structure allows management to organize and evaluate segment performance and to
help make operating decisions and allocate resources.
The
segment’s $8.5 million (7%) increase in earnings before depreciation, depletion
and amortization and its $12.3 million (4%) decrease in operating revenues in
the first quarter of 2009 versus the first quarter of 2008 represent net changes
in terminal results at various locations, and include incremental amounts of
earnings and revenues of $1.0 million and $2.5 million, respectively,
attributable to terminal operations Kinder Morgan Energy Partners acquired since
the end of the first quarter of 2008.
The
certain item described in the footnote to the table above accounts for a $0.4
million decrease in EBDA between the first quarter of 2009 and the first quarter
of 2008. Following is information, by terminal operating region, related to the
remaining $7.9 million (6%) increase in segment EBDA and the remaining $14.8
million (5%) decrease in segment revenues in the first quarter of 2009 versus
the first quarter of 2008. These increases represent changes from the terminal
operations Kinder Morgan Energy Partners owned during the first three months of
both comparable years.
|
EBDA
|
|
Revenues
|
|
Increase/(Decrease)
|
|
Increase/(Decrease)
|
|
(In
millions, except percentages)
|
Mid-Atlantic
|
$
|
4.2
|
|
|
62
|
%
|
|
$
|
3.8
|
|
|
19
|
%
|
Texas
Petcoke
|
|
3.4
|
|
|
23
|
%
|
|
|
(0.8
|
)
|
|
(2
|
)%
|
Lower
River (Louisiana)
|
|
3.3
|
|
|
41
|
%
|
|
|
(2.9
|
)
|
|
(11
|
)%
|
Northeast
|
|
3.1
|
|
|
17
|
%
|
|
|
3.5
|
|
|
12
|
%
|
West
|
|
1.7
|
|
|
27
|
%
|
|
|
1.9
|
|
|
12
|
%
|
Mid
River
|
|
(3.0
|
)
|
|
(44
|
)%
|
|
|
(9.0
|
)
|
|
(41
|
)%
|
Materials
Services
|
|
(2.1
|
)
|
|
(45
|
)%
|
|
|
(4.6
|
)
|
|
(35
|
)%
|
Southeast
|
|
(1.8
|
)
|
|
(17
|
)%
|
|
|
(4.7
|
)
|
|
(19
|
)%
|
All
others
|
|
(0.9
|
)
|
|
(2
|
)%
|
|
|
(2.0
|
)
|
|
(2
|
)%
|
Total
Terminals
|
$
|
7.9
|
|
|
6
|
%
|
|
$
|
(14.8
|
)
|
|
(5
|
)%
|
The
overall increase in earnings before depreciation, depletion and amortization in
the first quarter of 2009 from the Mid-Atlantic terminals was primarily related
to the Pier IX bulk terminal located in Newport News, Virginia. The
earnings
increase
at Pier IX was driven by higher period-to-period revenues in 2009, due to higher
average coal transfer rates and to incremental coal transfer revenues that were
partly related to an expansion project completed in the first quarter of
2008.
The
increase in earnings from the Texas Petcoke terminals, which primarily handle
petroleum coke tonnage in and around the Texas Gulf Coast, was mainly due to
higher petroleum coke throughput volumes and higher handling rates at its Port
of Houston and Port Arthur, Texas terminal locations, when compared to the first
quarter last year. The period-to-period increases in the Texas terminals’
petcoke shipments were mainly related to higher production volumes in 2009, and
partly related to a refinery shutdown in the first quarter of 2008.
The
quarter-to-quarter earnings increase from the Lower River (Louisiana) terminals
was largely associated with the segment’s $4.0 million decrease in income tax
expense due to lower taxable income in the tax paying Kinder Morgan Energy
Partners subsidiaries in the first quarter of 2009, when compared to last year’s
first quarter. Kinder Morgan Energy Partners also realized quarter-to-quarter
earnings increases from its Northeast and West terminals, primarily due to
expansion projects at our Kinder Morgan North 40 terminal, and at its three New
York Harbor liquids terminals: Perth Amboy, New Jersey terminal; Carteret, New
Jersey terminal; and Staten Island, New York terminal
Overall,
the liquids terminal operations benefited from an over 4.2 million barrels (8%)
increase in liquids leasable capacity since the end of the first quarter of
2008, with most of the increase coming from internal capital investment driven
by continued strong demand for imported fuel. At the same time Kinder Morgan
Energy Partners increased storage capacity, its overall liquids utilization
capacity rate (the ratio of actual leased capacity to estimated potential
capacity) remained essentially flat across both comparable
quarters.
The
overall increase in segment earnings before depreciation, depletion and
amortization from terminals owned during the first three months of both
comparable years was partly offset by lower earnings from the Mid River
terminals, Materials Services (rail-transloading) facilities, and Southeast
terminals. The decreases in earnings and revenues were primarily driven by lower
business activity at various Kinder Morgan Energy Partners owned and/or operated
rail and terminal sites that are primarily involved in the handling and storage
of steel and alloy products.
The
Terminals-KMP segment first quarter 2009 bulk traffic tonnage was down 5.1
million tons (21%) compared to the first quarter of 2008. While tonnage and
operating results vary by region and terminal, the decrease in bulk tonnage
volume was generally due to the economic contraction that began last year. The
economic downturn negatively affected the worldwide steel industry and has led
to a general decrease in U.S. port activity, relative to the first quarter last
year. As a result, domestic and overseas vessel traffic trailed year-earlier
levels and throughput volumes for steel, metal ores, and construction materials
declined, when compared to the first quarter of 2008.
Kinder
Morgan Canada–KMP
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Operating
Revenues
|
$
|
50.0
|
|
|
|
43.9
|
|
Operating
Expenses
|
|
(15.2
|
)
|
|
|
(15.7
|
)
|
Other
Income
|
|
-
|
|
|
|
2.2
|
|
Earnings
from Equity Investment
|
|
0.3
|
|
|
|
3.6
|
|
Interest
Income and Other Income, Net
|
|
0.7
|
|
|
|
-
|
|
Income
Tax Benefit (Expense)1
|
|
(16.3
|
)
|
|
|
0.6
|
|
Segment
Earnings before DD&A
|
$
|
19.5
|
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
Operating
Statistics
|
|
|
|
|
|
|
|
Transport
Volumes (MMBbl)
|
|
24.8
|
|
|
|
19.5
|
|
____________
1
|
2009
amount includes a $14.9 million increase in expense primarily due to
certain non-cash regulatory accounting adjustments to the carrying amount
of the previously established deferred tax
liability.
|
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 13 of the accompanying
Notes to Consolidated Financial Statements.
Segment
earnings before DD&A decreased by $15.1 million (44%) for the three months
ended March 31, 2009 over the comparable period in 2008. $14.9 million of this
decrease is due to the non-cash income tax adjustment described in footnote (1)
to the table above, the remaining segment decrease in earnings of $0.2 million
is due to $0.3 million lower earnings on Express and $0.1 million higher
earnings on Trans Mountain.
Trans
Mountain’s operating revenues increased by $6.3 million from the first quarter
of 2009 compared to 2008. This reflected a 27% increase in mainline throughput
volumes, due primarily to expansion projects completed since the end of the
first quarter of 2008 that increased pipeline transportation capacity. On both
April 28th and October 30th of 2008, Kinder Morgan Energy Partners completed
separate portions of the pipeline’s Anchor Loop expansion project and combined,
this project boosted pipeline capacity by 15% (from 260,000 barrels per day to
300,000 barrels per day) and resulted in higher period-to-period average toll
rates.
General
and Administrative Expense
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Knight
Inc. General and Administrative Expense
|
$
|
10.4
|
|
|
$
|
9.5
|
|
Kinder
Morgan Energy Partners General and
Administrative Expense
|
|
82.5
|
|
|
|
76.8
|
|
Consolidated
General and Administrative Expense
|
$
|
92.9
|
|
|
$
|
86.3
|
|
General
and Administrative Expense increased $6.6 million (8%) from the first quarter of
2009 as compared to the first quarter of 2008. This increase was primarily due
to $2.7 million increase in payroll and benefit costs, and $3.1 million decrease
in capitalized Kinder Morgan Energy Partners’ overhead expenses, compared to the
first quarter a year ago, primarily due to lower overall spending on capital
projects.
Interest
and Other, Net
|
Three
Months Ended March 31,
|
|
2009
|
|
2008
|
|
(In
millions)
|
Interest
Expense, Net
|
$
|
141.5
|
|
|
$
|
210.7
|
|
Interest
Expense–Deferrable Interest Debentures
|
|
0.5
|
|
|
|
(6.7
|
)
|
Other,
Net1
|
|
8.3
|
|
|
|
0.5
|
|
Consolidated
Interest and Other, Net1
|
$
|
150.3
|
|
|
$
|
204.5
|
|
____________
1
|
“Other,
Net” represents offset to noncontrolling interests and interest income
shown above and included in segment
earnings.
|
The
$69.2 million (33%) decrease in Interest Expense, Net in the first quarter of
2009, relative to 2008, was primarily due to a reduction in Knight Inc.’s debt,
which was paid down with proceeds from asset sales undertaken during the last
year, partially offset by increased debt balances at Kinder Morgan Energy
Partners required to support capital expansion programs.
Income
Taxes
The
$6.5 million (7.5%) decrease in income tax expense from the first quarter of
2009 of $80.6 million, compared to the $87.1 million of first quarter of 2008
income tax expense, is due to (i) lower tax expense as a result of the decrease
in pre-tax income for our taxable subsidiaries and investments, (ii) non-cash
FIN No. 48 adjustments, (iii) a dividends received deduction recorded in the
three months ended March 31, 2009 and (iv) reduction in our state tax rate.
These decreases are partially offset by additional taxes resulting from non-cash
deferred tax liability adjustments associated with Kinder Morgan Energy
Partners’ TransMountain pipeline and additional taxes resulting from a decrease
in non-deductible goodwill. Much of the decrease in income between the first
quarter of 2009 and the first quarter of 2008 is associated with our non-taxable
subsidiaries and investments. See Note 8 of the accompanying Notes to
Consolidated Financial Statements for more information about income
taxes.
Liquidity
and Capital Resources
We
believe that we and our 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.
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 its credit position relating
to amounts owed from these customers. Kinder Morgan Energy Partners cannot
provide assurance that one or more of its financially distressed customers will
not default on its obligations to Kinder Morgan Energy Partners 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.
Invested
Capital
In
addition to the direct sources of debt and equity financing, we obtain financing
indirectly through our ownership interests in unconsolidated entities as
discussed in Note 12 of the accompanying Notes to Consolidated Financial
Statements. In addition to our results of operations, these balances are
affected by our financing activities as discussed following.
Except
for Kinder Morgan Energy Partners and its subsidiaries, we employ a centralized
cash management program that essentially concentrates the cash assets of our
subsidiaries in joint accounts for the purpose of providing financial
flexibility and lowering the cost of borrowing. Our centralized cash management
program provides that funds in excess of the daily needs of our subsidiaries be
concentrated, consolidated, or otherwise made available for use by other
entities within our consolidated group. We place no restrictions on the ability
to move cash between entities, payment of intercompany balances or the ability
to upstream dividends to parent companies other than restrictions that may be
contained in agreements governing the indebtedness of those entities; provided
that neither we nor our subsidiaries (other than Kinder Morgan Energy Partners
and its subsidiaries) have rights with respect to the cash of Kinder Morgan
Energy Partners or its subsidiaries except as permitted by Kinder Morgan Energy
Partners’ partnership agreement.
In
addition, certain of our operating subsidiaries are subject to FERC-enacted
reporting requirements for oil and natural gas pipeline companies that
participate in cash management programs. FERC-regulated entities subject to
these rules must, among other things, place their cash management agreements in
writing, maintain current copies of the documents authorizing and supporting
their cash management agreements, and file documentation establishing the cash
management program with the FERC.
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
March 31, 2009
|
|
At
April 30, 2009
|
|
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
|
$
|
40.7
|
|
$
|
906.9
|
|
$
|
133.1
|
|
$
|
804.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Kinder
Morgan Energy Partners
|
|
|
|
|
|
|
|
|
|
|
|
$1.85
billion, five-year unsecured revolver, due August 2010
|
$
|
439.8
|
|
$
|
1,056.9
|
|
$
|
603.8
|
|
$
|
872.9
|
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.
At
March 31, 2009, our current portion of debt was $530.6 million, primarily
consisting of $439.8 million of outstanding borrowings under Kinder Morgan
Energy Partners’ credit facility. Apart from our current portion of debt and the
fair value of derivative instruments, our current liabilities, net of our
current assets, represent an additional short-term obligation of $103.6 million
at March 31, 2009. 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 (“S&P”) lowered
short-term credit ratings of Kinder Morgan Energy Partners, Rockies Express
Pipeline LLC and Cortez Capital Corporation to A-3 from A-2. On May 6, 2009
Moody’s Investors Service (“Moody’s”) affirmed its long-term debt ratings of
Knight Inc., Kinder Morgan Energy Partners, Cortez Capital Corporation, and
Rockies Express Pipeline LLC. However, Moody’s did downgrade Kinder Morgan
Energy Partners’ commercial paper rating to Prime-3 from Prime-2. The commercial
paper ratings for Cortez Capital Corporation and Rockies Express Pipeline LLC
were not affected and remain at Prime-2.
As
a result of these short-term credit ratings 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. Kinder Morgan Energy Partner is on a negative outlook at S&P and
Moody’s while Knight Inc. is on a negative outlook at Moody’s.
Kinder
Morgan Energy Partners’ Common Units
In
the first quarter of 2009, Kinder Morgan Energy Partners completed issuances
totaling 6.3 million common units for combined net proceeds of approximately
$287.9 million. See Note 13 of the accompanying Notes to Consolidated Financial
Statements for additional information regarding our and Kinder Morgan Energy
Partners’ financing transactions.
Capital
Expenditures
Including
both sustaining and discretionary spending, our capital expenditures were $417.6
million in the first three months of 2009. Our sustaining capital expenditures,
defined as capital expenditures that do not increase the capacity of an asset,
were $26.7 million for the first quarter of 2009. This sustaining expenditure
amount includes Kinder Morgan Energy Partners’ proportionate share of Rockies
Express Pipeline LLC’s sustaining capital expenditures—less than $0.1 million in
the first quarter of 2009. Additionally, our forecasted expenditures for the
remaining nine months of 2009 for sustaining capital expenditures are
approximately $153.5 million—including $0.4 million for Kinder Morgan Energy
Partners’ proportionate share of Rockies Express Pipeline LLC’s sustaining
capital expenditures. Generally, we fund our sustaining capital expenditures
with existing cash or from cash flows from operations. Kinder Morgan Energy
Partners funds its discretionary capital expenditures (and its investment
contributions) through borrowings under its revolving bank credit facility. To
the extent this source of funding is not sufficient, Kinder Morgan Energy
Partners generally funds additional amounts through the issuance of long-term
notes or common units for cash. During the first quarter of 2009, Kinder Morgan
Energy Partners used the net proceeds from sales of common units to refinance
portions of its short-term borrowings under its bank credit facility. In
addition to utilizing cash generated from its operations, Rockies Express
Pipeline LLC can fund its cash requirements for capital expenditures through
borrowings under its own credit facility, issuing its own long-term notes, or
with proceeds from contributions received from its member owners.
Interest
in Kinder Morgan Energy Partners
At
March 31, 2009, we owned, directly, and indirectly in the form of i-units
corresponding to the number of shares of Kinder Morgan Management we owned,
approximately 33.1 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 11.4 million i-units, represent approximately 12.1% 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 13.8% of
Kinder Morgan Energy Partners’ total equity interests at March 31, 2009. 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.
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, 2008 and in its Quarterly Report on
Form 10-Q for the period ended March 31, 2009.
Cash
Flows
The
following table summarizes our net cash flows from operating, investing and
financing activities for each period presented.
|
Three
Months Ended March 31,
|
|
Increase
(Decrease)
|
|
%
|
|
2009
|
|
2008
|
|
|
|
(In
millions, except percentages)
|
Net
Cash Provided by (Used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
$
|
213.3
|
|
|
$
|
100.5
|
|
|
$
|
112.8
|
|
|
|
112
|
%
|
Investing
Activities
|
|
(500.8
|
)
|
|
|
5,080.2
|
|
|
|
(5,581.0
|
)
|
|
|
(110
|
)%
|
Financing
Activities
|
|
280.3
|
|
|
|
(5,155.6
|
)
|
|
|
5,435.9
|
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(0.9
|
)
|
|
|
(0.7
|
)
|
|
|
(0.2
|
)
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
$
|
(8.1
|
)
|
|
$
|
24.4
|
|
|
$
|
(32.5
|
)
|
|
|
(133
|
)%
|
Net
Cash Flows from Operating Activities
The
increase in “Net Cash Flows Provided by Operating Activities” was principally
due to (i) $144.4 million of proceeds received in 2009 compared to a $2.5
million payment in 2008 from the termination of interest rate swap agreements
(see Note 14 of the accompanying Notes to Consolidated Financial Statements),
(ii) a $35.9 million increase in 2009 distributions received from equity
investments, primarily due to $35.2 million of distributions received in 2009
from Kinder Morgan Energy Partners’ investment in West2East Pipeline LLC, the
sole owner of Rockies Express Pipeline LLC and (iii) the fact that 2008 included
$23.3 million of FERC-mandated reparation payments. These positive impacts were
partially offset by (i) a decrease of $49.6 million of net income in 2009, net
of non-cash items and (ii) an $18.9 million increased use of cash for working
capital items during 2009.
Net
Cash Flows from Investing Activities
The
decrease in “Net Cash Flows (Used in) Provided by Investing Activities” was
principally due to (i) the fact that 2008 included (a) $2,899.3 million of net
cash proceeds from the sale of an 80% interest in NGPL PipeCo LLC, (b) $3,106.4
million of proceeds from NGPL PipeCo LLC restricted cash, (see Note 10 of the
accompanying Notes to Consolidated Financial Statements) and (c) an $89.1
million return of capital received from Midcontinent Express Pipeline LLC and
(ii) a $62.8 million net decrease in proceeds received from sales of other
assets in 2009, net of removal costs, primarily due to the fact that 2008
included $63.1 million for the sale of our interest in three natural gas-fired
power plants in Colorado. Partially offsetting these negative impacts were (i) a
$220.7 million decreased use of cash in 2009 for capital expenditures, largely
due to the increased investment undertaken during 2008 to construct Kinder
Morgan Energy Partners’ Kinder Morgan Louisiana Pipeline, and to expand and
improve its Trans Mountain pipeline system and its bulk and liquids terminalling
operations, (ii) a $162.3 million decreased use of cash from incremental
contributions to equity investments in 2009 versus 2008, primarily to West2East
Pipeline LLC and Midcontinent Express Pipeline LLC, (iii) a $98.1 million
partial loan repayment received in 2009 from a single customer of our Texas
intrastate natural gas pipeline group, (iv) a $93.0 million net decrease during
2009 of investments in margin deposits associated with hedging activities
utilizing energy derivative instruments and (v) the fact that 2008 included $2.7
million of cash used for investments in underground natural gas storage volumes
and payments made for natural gas liquids line-fill.
Net
Cash Flows from Financing Activities
The
increase in “Net Cash Flows Provided by (Used in) Financing Activities” was
principally due to (i) the fact that 2008 included (a) a $1.6 billion use of
cash for a cash tender offer to purchase a portion of our outstanding long-term
debt, (b) a $997.5 million use of cash for retirement of our Tranche A term loan
facilities and (c) a $3,191.8 million use of cash for
retirement
of our Tranche B term loan facilities, (ii) a $471.6 million increase in
short-term debt during 2009 versus a $521.4 million decrease in short-term debt
during 2008, (iii) $287.9 million of contributions from noncontrolling
interests, due to Kinder Morgan Energy Partners’ issuance of approximately 6.3
million common units in 2009 and (iv) a $1.2 million source of cash during 2009
versus a $14.7 million use of cash during 2008 for short-term advances from (to)
unconsolidated affiliates. Partially offsetting these factors were (i) the fact
that 2008 included (a) $894.1 million of net proceeds from Kinder Morgan Energy
Partners’ public debt offerings totaling $900 million and (b) $384.5 million of
contributions from noncontrolling interests, primarily related to Kinder Morgan
Energy Partners’ issuances totaling 6.83 million common units receiving combined
net proceeds (after underwriting discount) of $384.3 million, (ii) $250.0
million of cash paid to retire Kinder Morgan Energy Partners’ 6.30 % senior
notes due February 1, 2009, (iii) $50.0 million of cash paid for dividends in
2009, (iv) a $3.3 million use of cash in 2009 versus a $35.0 million source of
cash in 2008 from net changes in cash book overdrafts—which represent checks
issued but not yet presented for payment and (v) a $32.3 million increase in
cash used for noncontrolling interests distributions during 2009, primarily due
to an increase of $31.7 million in Kinder Morgan Energy Partners’ distribution
to common unit owners. See Note 12 of the accompanying Notes to Consolidated
Financial Statements for additional information regarding our and Kinder Morgan
Energy Partners’ financing transactions.
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 approximately 50% 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 2008 Form 10-K contains additional information concerning Kinder
Morgan Energy Partners’ partnership distributions.
On
April 15, 2009, Kinder Morgan Energy Partners declared a cash distribution of
$1.05 per common unit for the first quarter of 2009, which will be paid on May
15, 2009 to unitholders of record as of April 30, 2009. On February 13, 2009,
Kinder Morgan Energy Partners paid a quarterly distribution of $1.05 per common
unit for the fourth quarter of 2008, of which $175.1 million was paid to the
public holders (included in noncontrolling interests) of Kinder Morgan Energy
Partners common units.
Recent
Accounting Pronouncements
Refer
to Note 18 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:
|
·
|
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;
|
|
·
|
economic
activity, weather, alternative energy sources, conservation and
technological advances that may affect price trends and
demand;
|
|
·
|
changes
in tariff rates charged by our or those of Kinder Morgan Energy Partners’
pipeline subsidiaries implemented by the Federal Energy Regulatory
Commission, or other regulatory agencies or the California Public
Utilities Commission;
|
|
·
|
our
ability to acquire new businesses and assets and integrate those
operations into our existing operations, as well as the ability to expand
our facilities;
|
|
·
|
difficulties
or delays experienced by railroads, barges, trucks, ships or pipelines in
delivering products to or from Kinder Morgan Energy Partners’ terminals or
pipelines;
|
|
·
|
our
ability to successfully identify and close acquisitions and make
cost-saving changes in operations;
|
|
·
|
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;
|
|
·
|
crude
oil and natural gas production from exploration and production areas that
we or Kinder Morgan Energy Partners serve, such as the Permian Basin area
of West Texas, the U.S. Rocky Mountains and the Alberta oil
sands;
|
|
·
|
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 ability to compete;
|
|
·
|
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;
|
|
·
|
our
ability to offer and sell equity securities, and Kinder Morgan Energy
Partners’ ability to offer and sell equity securities and its ability to
sell debt securities or obtain debt financing in sufficient amounts to
implement that portion of our or Kinder Morgan Energy Partners’ business
plans that contemplates growth through acquisitions of operating
businesses and assets and expansions of
facilities;
|
|
·
|
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;
|
|
·
|
interruptions
of electric power supply to our facilities due to natural disasters, power
shortages, strikes, riots, terrorism, war or other
causes;
|
|
·
|
our
ability to obtain insurance coverage without significant levels of
self-retention of risk;
|
|
·
|
acts
of nature, sabotage, terrorism or other similar acts causing damage
greater than our insurance coverage
limits;
|
|
·
|
capital
and credit markets conditions, including availability of credit generally,
as well as inflation and interest
rates;
|
|
·
|
the
political and economic stability of the oil producing nations of the
world;
|
|
·
|
national,
international, regional and local economic, competitive and regulatory
conditions and developments;
|
|
·
|
our
ability to achieve cost savings and revenue
growth;
|
|
·
|
foreign
exchange fluctuations;
|
|
·
|
the
timing and extent of changes in commodity prices for oil, natural gas,
electricity and certain agricultural
products;
|
|
·
|
the
extent of Kinder Morgan Energy Partners’ 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;
|
|
·
|
engineering
and mechanical or technological difficulties that Kinder Morgan Energy
Partners may experience with operational equipment, in well completions
and workovers, and in drilling new
wells;
|
|
·
|
the
uncertainty inherent in estimating future oil and natural gas production
or reserves that Kinder Morgan Energy Partners may
experience;
|
|
·
|
the
ability to complete expansion projects on time and on
budget;
|
|
·
|
the
timing and success of Kinder Morgan Energy Partners’ and our business
development efforts; and
|
|
·
|
unfavorable
results of litigation and the fruition of contingencies referred to in the
accompanying Notes to Consolidated Financial
Statements.
|
The
foregoing list should not
be construed to be exhaustive. We believe the forward-looking statements in this
report are reasonable. However, 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
2008 Form 10-K 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 our 2008 Form
10-K. The risk factors could cause our actual results to differ materially from
those contained in any forward-looking statement. Other than as required by
applicable law, we disclaim any obligation 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, 2008, in
Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained
in our 2008 Form 10-K. For more information on our risk management activities,
see Note 14 of the accompanying Notes to Consolidated Financial
Statements.
As
of March 31, 2009, 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 Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2009 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
See
Note 17 of the accompanying Notes to Consolidated Financial Statements in Part
I, Item 1, which is incorporated herein by reference.
There
have been no material changes in or additions to the risk factors disclosed in
Item 1A “Risk Factors” in our 2008 Form 10-K.
None.
None.
None.
None.
In
reviewing the documents included or incorporated by reference as exhibits to
this report, please remember they are included to provide you with information
regarding their terms and are not intended to provide any other factual
information about us or any other parties to the documents. Some of the
documents are agreements that contain representations and warranties by one or
more of the parties of the applicable agreement. These representations and
warranties were made solely for the benefit of the other parties to the
applicable agreement and:
|
·
|
may
have been used for the purpose of allocating risk between the parties
rather than establishing matters of
fact;
|
|
·
|
may
have been qualified by disclosures that were made to the other party in
connection with the negotiation of the applicable agreement, which
disclosures are not necessarily reflected in the
agreement;
|
|
·
|
may
apply standards of materiality in a way that is different from what may be
viewed as material to you or other readers;
and
|
|
·
|
may
apply only as of the date of the applicable agreement or such other date
or dates as may be specified in the agreement and are subject to more
recent developments.
|
Accordingly,
investors should not rely on the representations and warranties in these
agreements as characterizations of the actual state of facts about us or our
business or operations on the date thereof or any other time.
|
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.
|
|
31.1*
|
Section
13a – 14(a) / 15d – 14(a) Certification of Chief Executive
Officer
|
|
31.2*
|
Section
13a – 14(a) / 15d – 14(a) Certification of Chief Financial
Officer
|
|
32.1*
|
Section
1350 Certification of Chief Executive
Officer
|
|
32.2*
|
Section
1350 Certification of Chief Financial
Officer
|
______________
*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.
|
KNIGHT
INC.
(Registrant)
|
May
13, 2009
|
/s/
Kimberly A. Dang
|
|
Kimberly
A. Dang
Vice
President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|