kmi10k2009.htm
Kinder
Morgan, Inc. Form 10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
Form
10-K
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
or
[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from _____to_____
Commission
file number: 1-06446
Kinder
Morgan, Inc.
(Exact
name of registrant as specified in its charter)
Kansas
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48-0290000
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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500
Dallas Street, Suite 1000, Houston, Texas 77002
(Address
of principal executive offices) (zip code)
Registrant’s
telephone number, including area code: 713-369-9000
_____________
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933. Yes [ ] No
[X]
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. Yes [X] No [ ]
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 [ ] No
[X]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Kinder
Morgan, Inc. Form 10-K
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Large
accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer
[X] Smaller reporting company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes [ ] No
[X]
The
number of shares outstanding of the registrant’s common stock, $0.01 par value,
as of January 29, 2010 was 100 shares.
Kinder
Morgan, Inc. Form 10-K
TABLE
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Kinder
Morgan, Inc. Form 10-K
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____________
Note: Individual
financial statements of the parent company are omitted pursuant to the
provisions of Accounting Series Release No. 302.
Items 1 and
2. Business
and Properties. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Items 1 and 2. Business and
Properties.
Unless
the context requires otherwise, references to “we,” “us,” “our,” or the
“Company” are intended to mean Kinder Morgan, Inc. and its consolidated
subsidiaries, including Kinder Morgan Energy Partners, L.P. All dollars are
United States dollars, except where stated otherwise. Canadian dollars are
designated as C$. Unless otherwise indicated, all volumes of natural gas are
stated at a pressure base of 14.73 pounds per square inch absolute and at 60
degrees Fahrenheit and, in most instances, are rounded to the nearest major
multiple. In this report, the term “MMcf” means million cubic feet, the term
“Bcf” means billion cubic feet, the term “MBbl/d” means million barrels per day,
the term “Bbl” means barrels, the term “bpd” means barrels per day and the terms
“Dth” (dekatherms) and “MMBtus” mean million British Thermal Units (“Btus”).
Natural gas liquids consist of ethane, propane, butane, iso-butane and natural
gasoline.
You
should read the following in conjunction with the accompanying audited
Consolidated Financial Statements and related Notes. We have prepared
the Consolidated Financial Statements under the rules and regulations of the
United States Securities and Exchange Commission.
(a) General Development of
Business
Kinder
Morgan, Inc. (formerly Knight Inc.) is a large private pipeline transportation
and storage company based in North America and incorporated in Kansas on May 18,
1927. We operate or own an interest in approximately 37,000 miles of
pipelines and approximately 180 terminals. Our pipelines transport natural gas,
refined petroleum products, crude oil, carbon dioxide and other products, and
our terminals store petroleum products and chemicals and handle bulk materials
like coal and petroleum coke. We are also the leading provider of carbon
dioxide, commonly called “CO2,” for
enhanced oil recovery projects in North America. We have both regulated and
nonregulated operations. The address of our principal executive offices is 500
Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is
(713) 369-9000.
Kinder
Morgan Management, LLC, referred to in this report as “Kinder Morgan Management”
is a publicly traded Delaware limited liability company that was formed on
February 14, 2001. Kinder Morgan G.P., Inc., of which we indirectly own all of
the outstanding common equity, owns all of Kinder Morgan Management’s voting
shares. Kinder Morgan Management, pursuant to a delegation of control agreement,
has been delegated, to the fullest extent permitted under Delaware law, all of
Kinder Morgan G.P., Inc.’s power and authority to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P. (“Kinder Morgan
Energy Partners”), subject to Kinder Morgan G.P., Inc.’s right to approve
certain transactions. Kinder Morgan Management also owns all of the i-units of
Kinder Morgan Energy Partners. The i-units are a class of Kinder Morgan Energy
Partners’ limited partner interests that have been, and will be, issued only to
Kinder Morgan Management. We have certain rights and obligations with respect to
these securities.
Kinder
Morgan Energy Partners is a publicly traded pipeline limited partnership whose
limited partnership units are traded on the New York Stock Exchange under the
ticker symbol “KMP.” Kinder Morgan Management’s shares (other than the voting
shares held by Kinder Morgan G.P., Inc.) are traded on the New York Stock
Exchange under the ticker symbol “KMR.”
The
equity interests in Kinder Morgan Energy Partners and Kinder Morgan Management
(which are both consolidated in our financial statements) owned by the public
are reflected within “noncontrolling interests” on the accompanying Consolidated
Balance Sheets. The earnings recorded by Kinder Morgan Energy Partners and
Kinder Morgan Management that are attributed to their units and shares,
respectively, held by the public are reported as “noncontrolling interests” in
the accompanying Consolidated Statements of Operations.
On
May 30, 2007, Kinder Morgan, Inc. merged with a wholly owned subsidiary of
Kinder Morgan Holdco LLC, with Kinder Morgan, Inc. continuing as the surviving
legal entity and subsequently renamed Knight Inc. On July 15, 2009, the
Company’s name was changed back to Kinder Morgan, Inc. Kinder Morgan Holdco LLC
is a private company owned by Richard D. Kinder, our Chairman and Chief
Executive Officer; our co-founder William V. Morgan; former Kinder Morgan, Inc.
board members Fayez Sarofim and Michael C. Morgan; other members of our senior
management, most of whom are also senior officers of Kinder Morgan G.P., Inc.
and Kinder Morgan Management and affiliates of (i) Goldman Sachs Capital
Partners, (ii) Highstar Capital, (iii) The Carlyle Group and (iv) Riverstone
Holdings LLC. This transaction is referred to in this report as “the Going
Private transaction.” As a result of the Going Private transaction, we are now
privately owned, our stock is no longer traded on the New York Stock Exchange
and we have adopted a new basis of accounting for our assets and
liabilities.
Additional
information concerning the business of, and our investment in and obligations
to, Kinder Morgan Energy Partners and Kinder Morgan Management is contained in
Notes 2 and 10 of the accompanying Notes to Consolidated
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Financial
Statements and in Kinder Morgan Energy Partners’ and Kinder Morgan Management’s
Annual Reports on Form 10-K for the year ended December 31, 2009.
The
following is a brief listing of significant developments since December 31,
2008. We begin with developments pertaining to our reportable
business segments. Additional information regarding most of these
items may be found elsewhere in this report.
Products
Pipelines–KMP
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▪
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On
June 1, 2009, Kinder Morgan Energy Partners completed a phased horsepower
expansion on its West Coast Products Pipelines’ 12-inch diameter, 175-mile
Concord to Fresno, California refined petroleum products pipeline
segment. The expansion added approximately 10,000 barrels per
day of capacity;
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▪
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On
June 16, 2009, Plantation Pipe Line Company successfully completed the
first United States (“U.S.”) transmarket commercial shipment of blended
biodiesel (a 5% blend commonly referred to as B5) on a mainline segment of
its pipeline. During 2009, Plantation successfully delivered
blended biodiesel to marketing terminals located in Georgia North Carolina
and Virginia. Plantation is prepared to deliver biodiesel to other markets
along its pipeline system in response to customers’ need for blending and
transporting biodiesel to meet federal regulatory
requirements;
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▪
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On
September 22, 2009, Kinder Morgan Energy Partners began commercial
transportation of blended biodiesel (a 2% blend commonly referred to as
B2) on its West Coast Products Pipelines’ 115-mile Oregon Pipeline that
extends from Portland to Eugene, Oregon. The first commercial
batch of approximately 100,000 barrels of B2 was created using a newly
installed blending system to inject B99 (a diesel blend that contains 99%
biodiesel and 1% petroleum diesel) into ultra low sulfur diesel at the
Willbridge refined products terminal located in Portland,
Oregon.
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Subsequently, Kinder Morgan Energy Partners has
undertaken additional renewable fuels projects at several of its West
Coast refined products terminal locations, including improvements to allow
for the blending of biodiesel at both the truck-loading rack at its
Willbridge terminal and the barge-loading facilities at its Linnton
terminal, also located in Portland. All of these biodiesel
shipments help diesel fuel suppliers throughout Oregon meet a state
biodiesel mandate that became effective on October 1,
2009; |
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▪
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During
2009, Kinder Morgan Energy Partners approved an approximately $15.8
million investment to install new infrastructure at its West Coast
Products Pipelines’ California terminals to facilitate customer
requirements to increase the ethanol blend rate to 10%, consistent with
recent California environmental initiatives. All of Kinder
Morgan Energy Partners’ California refined products terminals began
blending ethanol at 10% effective January 11, 2010;
and
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▪
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As
of December 31, 2009, Kinder Morgan Energy Partners completed
modifications to its Central Florida Pipeline to more efficiently move
gasoline and ultra-low sulfur diesel fuel within the terminal community at
the Port of Tampa. Kinder Morgan Energy Partners modified its
existing inter-terminal pipelines to provide BP with access to the port’s
deep-draft ship berths. The modifications also provide a
platform for third-party Port of Tampa terminals to tie-in to the Central
Florida pipeline system. Relatedly, in the fourth quarter of
2009, Kinder Morgan Energy Partners placed into service two new storage
tanks at its Central Florida’s Orlando terminal. The additional
tankage (half for ethanol and half for refined petroleum products)
increased the facility’s total storage capacity by 200,000
barrels.
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Natural
Gas Pipelines–KMP
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▪
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On
June 21, 2009, Kinder Morgan Energy Partners completed construction and
fully placed into service its Kinder Morgan Louisiana Pipeline, a
133-mile, 42-inch diameter, pipeline that provides approximately 3.2
billion cubic feet per day of take-away natural gas capacity from the
Cheniere Sabine Pass liquefied natural gas terminal, located in Cameron
Parish, Louisiana. The pipeline system interconnects with
multiple third-party pipelines in Louisiana, and all of the pipeline
capacity has been fully subscribed by Chevron and Total under 20-year firm
transportation contracts. The Kinder Morgan Louisiana Pipeline
project cost approximately $1 billion to
complete;
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▪
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On
August 1, 2009, Kinder Morgan Energy Partners completed construction and
fully placed into service its 50%-owned Midcontinent Express Pipeline, a
507-mile natural gas pipeline system. Energy Transfer Partners
L.P. owns the remaining interest. The pipeline’s Zone 1 segment
extends from Bennington, Oklahoma to an interconnect with Columbia Gulf
Transmission Company in Madison Parish, Louisiana. It has a
design capacity of approximately 1.5 billion cubic feet per day, and
currently transports approximately 1.4 billion cubic feet per
day. The pipeline’s Zone 2 segment extends from the Columbia
Gulf interconnect, and terminates at an interconnection with the Transco
Pipeline near Butler, Alabama. It has a design capacity of
approximately 1.2 billion cubic feet per day, and currently transports
approximately 1.0 billion cubic feet per
day.
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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The Midcontinent Express pipeline system connects the
Barnett Shale, Bossier Sands and other natural gas producing regions in
Texas, Oklahoma and Louisiana to markets in the eastern United States, and
substantially all of the pipeline’s capacity is fully subscribed with
long-term binding commitments from creditworthy shippers. In an
order issued September 17, 2009, the Federal Energy Regulatory Commission,
referred to in this report as the FERC, approved Midcontinent Express’ (i)
amendment to move one compressor station in Mississippi and modify the
facilities at another station in Texas; and (ii) application to expand the
capacity in Zone 1 by 0.3 billion cubic feet per day (this expansion is
expected to be completed in December 2010). The current
estimate of total construction costs on the entire project, including
expansions, is approximately $2.3
billion; |
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▪
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On
June 29, 2009, Kinder Morgan Energy Partners commenced interim
transportation service for up to 1.6 billion cubic feet per day of natural
gas on the first 444 miles of its then 51%-owned Rockies Express-East
pipeline segment. This segment extends from Audrain County,
Missouri to the Lebanon Hub in Warren County, Ohio. On November 12, 2009,
Kinder Morgan Energy Partners completed and placed into service the
remainder of Rockies Express-East, consisting of approximately 195-miles
of 42-inch diameter pipe extending to a terminus near the town of
Clarington in Monroe County, Ohio.
On November 14, 2009, Rockies Express-East
experienced a pipeline girth weld failure downstream of its
Chandlersville, Ohio compressor station (approximately 60 miles upstream
from the system terminus at Clarington). Rockies Express
declared a force majeure on its contractual obligations to provide service
east of the Chandlersville compressor station, in order to repair and
inspect the affected segment. Reservation charges under certain
shipper service contracts were credited to shippers, in part, during this
force majeure outage.
Following coordination with the United States
Department of Transportation Pipeline and Hazardous Materials Safety
Administration, Kinder Morgan Energy Partners developed a Return to
Service Plan. The pipeline was repaired and the affected
segment returned to reduced capacity on January 27, 2010. The
restoration of service at reduced capacity was sufficient to meet current
contractual obligations and the reservation fees under shipper service
contracts were billed at the level in effect prior to the force majeure
event. On February 6, 2010, the force majeure was lifted and
the segment was returned to pre-failure capacity. On February
17, 2010, the United States Department of Transportation Pipeline and
Hazardous Materials Safety Administration issued a Corrective Action Order
that incorporates the Return to Service Plan. Rockies
Express-East has completed implementation of the majority of the
requirements of the Return to Service Plan and the Corrective Action
Order.
The 639-mile, Rockies Express-East pipeline
segment is the third and final phase of the Rockies Express
Pipeline. It permits natural gas delivery to pipelines and
local distribution companies providing service to the midwestern and
eastern U.S. markets. The interconnecting interstate pipelines
include Missouri Gas Pipeline, Natural Gas Pipeline Company of America LLC
(a 20% owned equity investee of Kinder Morgan, Inc. and referred to in
this report as NGPL), Midwestern Gas Transmission, Trunkline, Panhandle
Eastern Pipe Line, ANR, Columbia Gas, Dominion Transmission, Tennessee
Gas, Texas Eastern, and Texas Gas Transmission. The local
distribution companies include Ameren, Vectren, and Dominion East
Ohio. Now fully operational, the 1,679-mile Rockies Express
Pipeline has the capacity to transport up to 1.8 billion cubic feet of
natural gas per day. Effective December 1, 2009, Kinder Morgan
Energy Partners’ ownership interest in the Rockies Express Pipeline was
reduced to 50% and ConocoPhillips’ interest was increased to 25% (from
24%). Sempra Pipelines and Storage owns the remaining 25%
interest.
Binding firm commitments from creditworthy
shippers have been secured for nearly all of the capacity on the Rockies
Express Pipeline, including a compression expansion on the Rockies
Express-Entrega segment. The first leg of this expansion
extends from Meeker, Colorado to Wamsutter, Wyoming, and began service in
December 2009. The second leg of the expansion will extend from
Wamsutter to the Cheyenne Hub in Colorado and is expected to be completed
in July 2010. The Rockies Express Pipeline is one of the
largest natural gas pipeline systems ever constructed in North America,
and the current estimate of total construction costs on the entire
project, including expansions, is approximately $6.8
billion;
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▪
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On
September 30, 2009, the FERC issued authority to Kinder Morgan Energy
Partners’ subsidiary, Kinder Morgan Interstate Gas Transmission LLC, the
right to construct and operate $14 million in capital improvements to
increase the withdrawal capability of its Huntsman natural gas storage
facility. Incremental storage capacity arising from the
expansion project is contracted under a firm service agreement for a
five-year term. The service for these new facilities commenced
on February 1, 2010;
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▪
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Effective
October 1, 2009, Kinder Morgan Energy Partners acquired the natural gas
treating business from Crosstex Energy, L.P. and Crosstex Energy, Inc. for
an aggregate consideration of $270.7 million. The acquired
assets primarily consist of approximately 290 natural gas amine-treating
and dew-point control plants and related equipment that are used to remove impurities
and liquids from natural gas in order to meet pipeline quality
specifications. The assets are predominantly located in
Texas and Louisiana, with additional facilities located in Mississippi,
Oklahoma,
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Arkansas
and Kansas. The acquisition makes Kinder Morgan Energy Partners
the largest contract provider of natural gas treating services in the U.S.
and complements and expands the existing natural gas treating operations
currently being offered by its Texas intrastate natural gas pipeline
group;
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▪
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On
October 22, 2009, Kinder Morgan Energy Partners announced that it had
received the Continuing Excellence Award for its participation in the
United States Environmental Protection Agency’s Natural Gas STAR
program. The Natural Gas STAR Program is a flexible, voluntary
partnership that encourages oil and natural gas companies—both
domestically and abroad—to adopt cost-effective technologies and practices
that improve operational efficiency and reduce emissions of
methane.
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The
Continuing Excellence Award recognizes a partner’s outstanding performance
over multiple years in reducing methane emissions, identifying and
implementing new emission-reducing technologies and practices, and
supporting the overall objectives of the Natural Gas STAR
program. In 2008, Kinder Morgan Energy Partners implemented
several technologies and operational practices that resulted in methane
emission reductions of 3,469,719 thousand cubic feet. These
reductions were achieved through the installation of new electric motor
driven compressors and gas turbines, using compressors to pump down
pipeline sections prior to maintenance activities, implementation of
directed inspection and maintenance programs and other methane emission
reduction practices;
|
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▪
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Effective
November 1, 2009, Kinder Morgan Energy Partners acquired a 40% ownership
interest in Endeavor Gathering LLC, the natural gas gathering and
compression business of GMX Resources Inc., for an aggregate consideration
of $36.0 million. Endeavor Gathering LLC provides natural gas
gathering service to GMX Resources’ exploration and production activities
in its Cotton Valley Sands and Haynesville/Bossier Shale horizontal well
developments located in East Texas. GMX Resources operates and
owns the remaining 60% interest in Endeavor Gathering LLC. The
acquisition complements Kinder Morgan Energy Partners’ existing natural
gas gathering and transportation business located in the state of
Texas;
|
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▪
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On
November 13, 2009, Kinder Morgan Energy Partners and Copano Energy, L.L.C.
announced that they have entered into a letter of intent for a joint
venture to provide natural gas gathering, transportation and processing
services to natural gas producers in the Eagle Ford Shale formation in
south Texas. Kinder Morgan Energy Partners will own 50% of the
equity in the project and Copano will own the remaining 50%
interest. As a first phase, the joint venture will construct an
approximately 22-mile, 24-inch diameter, natural gas gathering pipeline
and enter into new commercial arrangements with both Kinder Morgan Energy
Partners and Copano. The natural gas pipeline will originate in
LaSalle County, Texas and will terminate in Duval County,
Texas. It will have an initial capacity of 350 million cubic
feet per day and is expected to be completed in the third quarter of 2010;
and
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▪
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On
December 17, 2009, the FERC approved and issued Fayetteville Express
Pipeline LLC’s certificate application, authorizing construction of its
previously announced Fayetteville Express Pipeline. Kinder
Morgan Energy Partners own a 50% interest in Fayetteville Express Pipeline
LLC and Energy Transfer Partners L.P. owns the remaining
interest. As of February 2010, development continues on the
construction of the Fayetteville Express Pipeline, a 187-mile, 42-inch
diameter, natural gas pipeline that will provide shippers in the Arkansas
Fayetteville Shale area with takeaway natural gas capacity and further
access to growing markets. The pipeline will extend from Conway
County, Arkansas to a terminus located in Panola County, Mississippi, and
construction is expected to begin before the end of the first quarter of
2010.
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The
pipeline will have an initial capacity of two billion cubic feet per day,
and has currently secured binding commitments for at least ten years
totaling 1.85 billion cubic feet per day of capacity. Pending
necessary regulatory approvals, the pipeline is expected to be in service
by late 2010 or early 2011. Currently, it is estimated that the
Fayetteville Express Pipeline project will cost approximately $1.2 billion
to complete.
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CO2–KMP
|
▪
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In
July 2009, Kinder Morgan Energy Partners announced that it would invest
approximately $180 million over the next several years to further expand
its carbon dioxide operations in the eastern Permian Basin area of
Texas. The expansion will involve the installation of a
91-mile, 10-inch carbon dioxide distribution pipeline, and the development
of a new carbon dioxide flood in the Katz field. It is
anticipated that the carbon dioxide pipeline will be placed in service in
early 2011 and initial carbon dioxide injections
into the Katz field will commence shortly
thereafter.
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Terminals–KMP
|
▪
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In
the second quarter of 2009, Kinder Morgan Energy Partners completed an
approximately C$45.6 million expansion project at its Vancouver Wharves
bulk marine terminal located in British Columbia, Canada. The
project added 250,000 barrels of liquids petroleum storage capacity and
expanded copper, zinc, and lead bulk-handling operations at the
facility;
|
Items 1 and
2. Business
and Properties. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
▪
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Effective
April 23, 2009, Kinder Morgan Energy Partners acquired certain marine
vessels from Megafleet Towing Co., Inc. for an aggregate consideration of
$21.7 million. Kinder Morgan Energy Partners’ consideration
included $18.0 million in cash and an obligation to pay additional cash
consideration on April 23, 2014 (five years from the acquisition date)
contingent upon the purchased assets providing an agreed-upon amount of
earnings, as defined by the purchase and sale agreement, during the five
year period. The acquired assets primarily consist of nine
marine vessels that provide towing and harbor boat services along the Gulf
coast, the intracoastal waterway and the Houston Ship
Channel;
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|
▪
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In
May 2009, Kinder Morgan Energy Partners completed an approximately $12.8
million expansion at its Cora, Illinois coal terminal. The
expansion project increased terminal storage capacity by approximately
250,000 tons (to 1.25 million tons) and expanded maximum throughput at the
terminal to approximately 13 million tons
annually;
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|
▪
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On
July 15, 2009, Kinder Morgan Energy Partners announced that it had entered
into an agreement with a major oil company and will invest approximately
$60 million to construct one million barrels of new petroleum and ethanol
storage tank capacity at its liquids terminal located in Carteret, New
Jersey. The project is expected to be completed in the first
quarter of 2011;
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|
▪
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In
the fourth quarter of 2009, Kinder Morgan Energy Partners brought
approximately 450,000 barrels of new liquids storage capacity into service
at its Galena Park and Pasadena, Texas liquids terminals, which are
located on the Houston Ship Channel. The incremental tank
capacity is supported by multi-year customer agreements. For
the full year 2009, approximately 1.85 million barrels of combined liquids
storage capacity at these two terminals was added;
and
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|
▪
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Effective
January 15, 2010, Kinder Morgan Energy Partners acquired three unit train
ethanol handling terminals from U.S Development Group (“USD”)for an
aggregate consideration of $197.4 million, consisting of $115.7 million in
cash and $81.7 million in common units. The three train
terminals are located in Linden, New Jersey, Baltimore, Maryland, and
Dallas, Texas.
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As part of the transaction, Kinder Morgan Energy Partners
announced the formation of a joint venture with USD to optimize and
coordinate customer access to the three acquired terminals, other ethanol
terminal assets already owned and operated by Kinder Morgan Energy
Partners, and other terminal projects currently under development by both
parties. The joint agreement will combine USD’s expertise in
designing, developing and operating ethanol terminals with Kinder Morgan
Energy Partners’ ethanol terminal assets and pipeline assets to create a
nationwide distribution network of ethanol handling facilities connected
by rail, marine, truck and pipeline, capable of meeting the growing U.S.
demand for biofuels. With the new terminal joint venture and
other projects completed or underway (including projects in the Products
Pipelines–KMP business segment) Kinder Morgan Energy Partners expects to
handle in excess of 250,000 barrels of ethanol per day in 2010;
and |
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On
March 5, 2010, Kinder Morgan Energy Partners acquired four terminals from
Slay Industries for approximately $98 million in cash. The
facilities include (i) a marine terminal located in Sauget, Illinois, (ii)
a transload liquid operation located in Muscatine, Iowa, (iii) a liquid
bulk terminal located in St. Louis, Missouri and (iv) a warehousing
distribution center located in St. Louis. All of the acquired
terminals have long-term contracts with large credit worthy
shippers. As part of the transaction, Kinder Morgan Energy
Partners and Slay Industries entered into joint venture agreements at both
the Kellogg Dock coal bulk terminal, located in Modoc, Illinois, and at
the newly created North Cahokia terminal, located in Sauget and which has
approximately 175 acres to develop. All of the assets in Sauget
have access to the Mississippi River and five rail
carriers.
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Kinder
Morgan Energy Partners’ Debt and Equity Offerings, Swap Agreements and Debt
Retirements
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On
January 12, 2009, Kinder Morgan Energy Partners terminated an existing
fixed-to-variable interest rate swap agreement having a notional principal
amount of $300 million. Kinder Morgan Energy Partners received
proceeds of $144.4 million from the early termination of this swap
agreement, and it used the proceeds to reduce the borrowings under its
bank credit facility;
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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;
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In
2009, Kinder Morgan Energy Partners issued a combined 22,942,447 common
units, described following. The net proceeds received from the
issuance of these common units were used to reduce the borrowings under
its bank credit facility:
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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On
January 16, 2009, Kinder Morgan Energy Partners entered into an equity
distribution agreement with UBS Securities LLC as sales agent, and
according to the provisions of this agreement, it issued 5,488,947 of its
common units during 2009. After commissions, net proceeds of
$281.2 million were received from the issuance of these common
units;
On March 27, 2009,
Kinder Morgan Energy Partners completed a public offering of 5,666,000 of
its common units at a price of $46.95 per unit, less commissions and
underwriting expenses;
On July 6, 2009,
Kinder Morgan Energy Partners completed a public offering of 6,612,500 of
its common units at a price of $51.50 per unit, less commissions and
underwriting expenses; and
On December 4, 2009,
Kinder Morgan Energy Partners completed a public offering of 5,175,000 of
its common units at a price of $57.15 per unit, less commissions and
underwriting expenses; and
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In
2009, Kinder Morgan Energy Partners completed two separate public
offerings of senior notes, described following. The net
proceeds received from the issuance of these notes were used to reduce the
borrowings under its bank credit
facility:
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On
May 14, 2009, Kinder Morgan Energy Partners issued a total of $1 billion
in principal amount of senior notes, consisting of $300 million of 5.625%
notes due February 15, 2015 and $700 million of 6.850% notes due February
15, 2020; and
On
September 16, 2009, Kinder Morgan Energy Partners issued a total of $1
billion in principal amount of senior notes, consisting of $400 million of
5.80% notes due March 1, 2021 and $600 million of 6.50% notes due
September 1, 2039.
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On
November 23, 2009, Kinder Morgan Energy Partners announced that it expects
to declare cash distributions of $4.40 per unit for 2010, a 4.8% increase
over its cash distributions of $4.20 per unit for 2009. Kinder
Morgan Energy Partners’ expected growth in distributions in 2010 assumes
an average West Texas Intermediate (“WTI”) crude oil price of
approximately $84 per barrel in
2010.
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Although
the majority of the cash generated by Kinder Morgan Energy Partners’
assets is fee based and is not sensitive to commodity prices, theCO2–KMP
business segment is exposed to commodity price risk related to the price
volatility of crude oil and natural gas liquids. Kinder Morgan
Energy Partners hedges the majority of its crude oil production, but does
have exposure to unhedged volumes, the majority of which are natural gas
liquids volumes. For 2010, Kinder Morgan Energy Partners
expects that every $1 change in the average WTI crude oil price per barrel
will impact its CO2–KMP
segment’s cash flows by approximately $6 million (or less than 0.2% of its
combined business segments’ anticipated earnings before depreciation,
depletion and amortization expenses). This sensitivity to the
average WTI price is very similar to what was experienced in
2009. Kinder Morgan Energy Partners’ 2010 cash distribution
expectations do not take into account any capital costs associated with
financing any payment it may be required to make of reparations sought by
shippers on its West Coast Products Pipelines’ interstate pipelines. Any
resolution of claims of shippers on Kinder Morgan Energy Partners West
Coast Products Pipelines’ interstate pipelines that requires it to pay
reparations, absent other changes, could mean it may not generate
sufficient cash from operations to cover its expected cash distributions.
There are some items that could be adjusted—such as reductions in
operating, general and administrative expenses and/or sustaining capital
expenditures—to somewhat enhance cash from operations. However,
cumulative excess coverage may be reduced and/or we, as indirect owner of
Kinder Morgan Energy Partners’ general partner, may decide to forego part
of our incentive distribution in order for Kinder Morgan Energy Partners
to meet its distribution forecast. Cumulative excess coverage is
cash from operations (as described under Item 7. “Management's Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources—Noncontrolling Interests Distributions to Kinder
Morgan Energy Partners’ Common Unit Holders”) generated since the
inception in excess of cash distributions paid.
Also
on that date, Kinder Morgan Energy Partners announced that for the year
2010, Kinder Morgan Energy Partners anticipates that (i) its business
segments will generate approximately $3.4 billion in earnings before all
non-cash depreciation, depletion and amortization expenses, including
amortization of excess cost of equity investments, (ii) it will distribute
approximately $1.35 billon to its limited partners and (iii) it will
invest approximately $1.5 billion for its capital expansion program
(including small acquisitions).
Kinder
Morgan Energy Partners anticipates 2010 expansion investment will help
drive earnings and cash flow growth in 2010 and beyond, and estimates that
approximately $400 million of the equity required for its 2010 investment
program will be funded by cash retained as a function of Kinder Morgan
Management dividends. In 2009,
Kinder
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Morgan Energy Partners’ capital expansion program was
approximately $3.3 billion—including both sustaining and discretionary
capital spending, equity contributions (net of distributions) to its
equity investees, and acquisition cash
expenditures. |
(b) Financial Information
About Segments
For
financial information on our seven reportable business segments, see Note 15 of
the accompanying Notes to Consolidated Financial Statements.
(c) Narrative Description of
Business
The
objective of our business strategy is to grow our portfolio of businesses
by:
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focusing
on stable, fee-based energy transportation and storage assets that are the
core of the energy infrastructure of growing markets within North
America;
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increasing
utilization of our existing assets while controlling costs, operating
safely, and employing environmentally sound operating
practices;
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leveraging
economies of scale from incremental acquisitions and expansions of assets
that fit within our strategy and are accretive to cash flow;
and
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maximizing
the benefits of our financial structure to create and return value to our
stockholder.
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It
is our intention to carry out the above business strategy, modified as necessary
to reflect changing economic conditions and other
circumstances. However, as discussed under Item 1A. “Risk Factors”
below, there are factors that could affect our ability to carry out our strategy
or affect its level of success even if carried out.
We
(primarily through Kinder Morgan Energy Partners) regularly consider and enter
into discussions regarding potential acquisitions and are currently
contemplating potential acquisitions. Any such transaction would be
subject to negotiation of mutually agreeable terms and conditions, receipt of
fairness opinions and approval of the parties’ respective boards of
directors. While there are currently no unannounced purchase
agreements for the acquisition of any material business or assets, such
transactions can be effected quickly, may occur at any time and may be
significant in size relative to our existing assets or operations.
We
own and manage a diversified portfolio of energy transportation and storage
assets. Our operations are conducted through our seven reportable
business segments, the first five of which are also business segments of Kinder
Morgan Energy Partners. These segments are as follows:
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Products
Pipelines–KMP—which consists of approximately 8,400 miles of refined
petroleum products pipelines that deliver gasoline, diesel fuel, jet fuel
and natural gas liquids to various markets; plus approximately 60
associated product terminals and petroleum pipeline transmix processing
facilities serving customers across the United
States;
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Natural
Gas Pipelines–KMP—which consists of approximately 15,000 miles of natural
gas transmission pipelines and gathering lines, plus natural gas storage,
treating and processing facilities, through which natural gas is gathered,
transported, stored, treated, processed and
sold;
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CO2–KMP—which
produces, markets and transports, through approximately 1,400 miles of
pipelines, carbon dioxide to oil fields that use carbon dioxide to
increase production of oil; owns interests in and/or operates ten oil
fields in West Texas; and owns and operates a 450-mile crude oil pipeline
system in West Texas;
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Terminals–KMP—which
consists of approximately 120 owned or operated liquids and bulk terminal
facilities and more than 32 rail transloading and materials handling
facilities located throughout the United States and portions of Canada,
which together transload, store and deliver a wide variety of bulk,
petroleum, petrochemical and other liquids products for customers across
the United States and Canada;
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Kinder
Morgan Canada–KMP—which consists of approximately 800 miles of common
carrier pipelines, originating at Edmonton, Alberta, for the
transportation of crude oil and refined petroleum to the interior of
British Columbia and to marketing terminals and refineries located in the
greater Vancouver, British Columbia area and Puget Sound in Washington
State, along with five associated product terminals. It also
includes a one-third interest in an approximately 1,700-mile integrated
crude oil pipeline connecting Canadian and United States producers to
refineries in the U.S. Rocky Mountain and Midwest regions, and a 25-mile
aviation turbine fuel pipeline serving the Vancouver International
Airport;
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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NGPL
PipeCo LLC—consists of our 20% interest in NGPL PipeCo LLC, the owner of
Natural Gas Pipeline Company of America and certain affiliates,
collectively referred to as Natural Gas Pipeline Company of America or
NGPL, a major interstate natural gas pipeline and storage system, which we
operate. Prior to February 15, 2008, we owned 100% of NGPL;
and
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Power—consists
of two natural gas-fired electric generation
facilities.
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The
Products Pipelines–KMP segment consists of Kinder Morgan Energy Partners’
refined petroleum products and natural gas liquids pipelines and associated
terminals, Southeast terminals and transmix processing facilities.
West
Coast Products Pipelines
West
Coast Products Pipelines operations include SFPP, L.P. operations (sometimes
referred to in this report as Pacific operations), Calnev Pipeline operations
and West Coast Terminals operations. The assets include interstate
common carrier pipelines regulated by the FERC, intrastate pipelines in the
state of California regulated by the California Public Utilities Commission, and
certain non rate-regulated operations and terminal facilities.
SFPP,
L.P. operations serve six western states with approximately 2,500 miles of
refined petroleum products pipelines and related terminal facilities that
provide refined products to major population centers in the United States,
including California; Las Vegas and Reno, Nevada; and the Phoenix-Tucson,
Arizona corridor. In 2009, the SFPP mainline pipeline system
transported approximately 1,078,800 barrels per day of refined products, with
the product mix being approximately 61% gasoline, 22% diesel fuel, and 17% jet
fuel. In 2008, the SFPP pipeline system delivered approximately
1,122,600 barrels per day of refined petroleum products.
The
Calnev Pipeline consists of two parallel 248-mile, 14-inch and 8-inch diameter
pipelines that run from Kinder Morgan Energy Partners’ facilities at Colton,
California to Las Vegas, Nevada. The pipeline serves the Mojave
Desert through deliveries to a terminal at Barstow, California and two nearby
major railroad yards. It also serves Nellis Air Force Base, located
in Las Vegas, and also includes approximately 55 miles of pipeline serving
Edwards Air Force Base. In 2009, the Calnev pipeline system transported
approximately 120,400 barrels per day of refined products, with the product mix
being approximately 45% gasoline, 28% diesel fuel, and 27% jet
fuel. In 2008, the Calnev pipeline system delivered approximately
130,700 barrels per day of refined petroleum products.
The
West Coast Products Pipelines operations include 15 truck-loading terminals (13
on SFPP, L.P. and two on Calnev) with an aggregate usable tankage capacity of
approximately 14.8 million barrels. The truck terminals provide
services including short-term product storage, truck loading, vapor handling,
additive injection, dye injection and ethanol blending.
The
West Coast Terminals are fee-based terminals located in the Seattle, Portland,
San Francisco and Los Angeles areas along the west coast of the United States
with a combined total capacity of approximately 8.5 million barrels of storage
for both petroleum products and chemicals.
Markets. Combined,
the West Coast Products Pipelines operations’ pipelines transport approximately
1.2 million barrels per day of refined petroleum products, providing pipeline
service to approximately 31 customer-owned terminals, 11 commercial airports and
15 military bases. Currently, the West
Coast Products Pipelines operations’ pipelines serve approximately 74 shippers
in the refined petroleum products market; the largest customers being major
petroleum companies, independent refiners, and the United States
military.
A
substantial portion of the product volume transported is
gasoline. Demand for gasoline, and in turn the volumes transported,
depends on such factors as prevailing economic conditions, government
specifications and regulations, vehicular use and purchase patterns and
demographic changes in the markets served. Certain product volumes
can also experience seasonal variations and, consequently, overall volumes may
be lower during the first and fourth quarters of each year.
Supply. The
majority of refined products supplied to the West Coast Product Pipelines
operations’ pipeline system come from the major refining centers around Los
Angeles, San Francisco, West Texas and Puget Sound, as well as from waterborne
terminals and connecting pipelines located near these refining
centers.
Competition. The
two most significant competitors of the West Coast Products Pipelines
operations’ pipeline system are proprietary pipelines owned and operated by
major oil companies in the area where the pipeline system delivers products and
also refineries with terminals that have trucking arrangements within its market
areas. Kinder Morgan Energy Partners believes that high capital
costs, tariff regulation, and environmental and right-of-way permitting
considerations make it unlikely that a competing pipeline system comparable in
size and scope to the West Coast Products Pipelines operations will be built in
the foreseeable future. However, the possibility of individual
pipelines such as the Holly pipeline to Las Vegas, Nevada, being constructed or
expanded to serve specific markets is a continuing competitive
factor.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
|
The
use of trucks for product distribution from either shipper-owned proprietary
terminals or from their refining centers continues to compete for short haul
movements by pipeline. The West Coast Products Pipelines terminal
operations compete with terminals owned by its shippers and by third party
terminal operators in California, Arizona and Nevada. Competitors
include Shell Oil Products U.S., BP, Wilmington Liquid Bulk Terminals (Vopak),
NuStar, and Chevron. Kinder Morgan Energy Partners’ cannot predict
with any certainty whether the use of short haul trucking will decrease or
increase in the future.
Plantation
Pipe Line Company
Kinder
Morgan Energy Partners owns approximately 51% of Plantation Pipe Line Company,
the sole owner of the approximately 3,100-mile refined petroleum products
Plantation pipeline system serving the southeastern United
States. Kinder Morgan Energy Partners operates the system pursuant to
agreements with Plantation and its wholly-owned subsidiary, Plantation Services
LLC. The Plantation pipeline system serves as a common carrier of
refined petroleum products to various metropolitan areas, including Birmingham,
Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C.
area. An affiliate of ExxonMobil Corporation owns the remaining 49%
ownership interest, and ExxonMobil is the largest shipper on the Plantation
system both in terms of volumes and revenues.
In
2009, Plantation delivered approximately 487,000 barrels per day of refined
petroleum products. These delivered volumes were comprised of
gasoline (63%), diesel/heating oil (22%) and jet fuel (15%). In 2008,
Plantation delivered approximately 480,000 barrels per day of refined petroleum
products.
Markets. Plantation
ships products for approximately 30 companies to terminals throughout the
southeastern United States. Plantation’s principal customers are Gulf
Coast refining and marketing companies, fuel wholesalers, and the United States
Department of Defense. During 2009, Plantation’s top seven shippers
represented approximately 87% of total system volumes.
The
eight states in which Plantation operates represent a collective pipeline demand
of approximately two million barrels per day of refined petroleum
products. Plantation currently has direct access to about 1.5 million
barrels per day of this overall market. The remaining 0.5 million
barrels per day of demand lies in markets (e.g., Nashville, Tennessee; North
Augusta, South Carolina; Bainbridge, Georgia; and Selma, North Carolina)
currently served by another pipeline company. Plantation also
delivers jet fuel to the Atlanta, Georgia; Charlotte, North Carolina; and
Washington, D.C. airports (Ronald Reagan National and Dulles).
Supply. Products
shipped on Plantation originate at various Gulf Coast refineries from which
major integrated oil companies and independent refineries and wholesalers ship
refined petroleum products. Plantation is directly connected to and
supplied by a total of ten major refineries representing approximately 2.5
million barrels per day of refining capacity.
Competition. Plantation
competes primarily with the Colonial pipeline system, which also runs from Gulf
Coast refineries throughout the southeastern United States and extends into the
northeastern United States.
Central
Florida Pipeline
The
Central Florida pipeline system consists of (i) a 110-mile, 16-inch diameter
pipeline that transports gasoline and ethanol, and (ii) an 85-mile, 10-inch
diameter pipeline that transports diesel fuel and jet fuel from Tampa to
Orlando. In addition to being connected to Kinder Morgan Energy
Partners’ Tampa terminal, the pipeline system is connected to terminals owned
and operated by TransMontaigne, Citgo, BP, and Marathon
Petroleum. The 10-inch diameter pipeline is connected to Kinder
Morgan Energy Partners’ Taft, Florida terminal (located near Orlando), has an
intermediate delivery point at Intercession City, Florida, and is also the sole
pipeline supplying jet fuel to the Orlando International Airport in Orlando,
Florida. In 2009, the pipeline system transported approximately
107,100 barrels per day of refined products, with the product mix being
approximately 69% gasoline and ethanol, 12% diesel fuel, and 19% jet
fuel. In 2008, the Central Florida pipeline system delivered
approximately 106,700 barrels per day of refined petroleum
products.
Kinder
Morgan Energy Partners also owns and operates liquids terminals in Tampa and
Taft, Florida. The Tampa terminal contains approximately 1.5 million
barrels of storage capacity and is connected to two ship dock facilities in the
Port of Tampa. The Tampa terminal provides storage for gasoline,
ethanol, diesel fuel and jet fuel for further movement into either trucks or
into the Central Florida pipeline system. The Tampa terminal also
provides storage and truck rack blending services for bio-diesel. The
Taft terminal contains approximately 0.7 million barrels of storage capacity,
for gasoline, ethanol, and diesel fuel for further movement into
trucks.
Markets. The total refined
petroleum products demand for the Central Florida region of the state, which
includes the Tampa and Orlando markets, is estimated to be approximately 375,000
barrels per day, or 45% of the consumption of refined products in the state, and
gasoline is, by far, the largest component of that demand. Kinder
Morgan Energy Partners distributes approximately 150,000 barrels of refined
petroleum products per day, including the Tampa terminal truck
Items 1 and
2. Business
and Properties. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
loadings. The
balance of the market is supplied primarily by trucking firms and marine
transportation firms. Most of the jet fuel used at Orlando
International Airport is moved through Kinder Morgan Energy Partners’ Tampa
terminal and the Central Florida pipeline system. The market in
Central Florida is seasonal and heavily influenced by tourism, with demand peaks
in March and April during spring break and again in the summer vacation
season.
Supply. The vast
majority of refined petroleum products consumed in Florida is supplied via
marine vessels from major refining centers in the Gulf Coast of Louisiana and
Mississippi and refineries in the Caribbean basin. A lesser amount of
refined petroleum products is supplied by refineries in Alabama and by Texas
Gulf Coast refineries via marine vessels and through pipeline networks that
extend to Bainbridge, Georgia. The supply into Florida is generally
transported by ocean-going vessels to the larger metropolitan ports, such as
Tampa, Port Everglades near Miami, and Jacksonville. Individual
markets are then supplied from terminals at these ports and other smaller ports,
predominately by trucks, except the Central Florida region, which is served by a
combination of trucks and pipelines.
Competition. With
respect to the Central Florida pipeline system, the most significant competitors
are trucking firms and marine transportation firms. Trucking
transportation is more competitive in serving markets close to the marine
terminals on the east and west coasts of Florida. Kinder Morgan
Energy Partners is utilizing tariff incentives to attract volumes to the
pipeline that might otherwise enter the Orlando market area by truck from Tampa
or by marine vessel into Cape Canaveral. Kinder Morgan Energy
Partners believes it is unlikely that a new pipeline system comparable in size
and scope to the Central Florida pipeline system will be constructed, due to the
high cost of pipeline construction, tariff regulation and environmental and
right-of-way permitting in Florida. However, the possibility of such
a pipeline or a smaller capacity pipeline being built is a continuing
competitive factor.
With
respect to terminal operations at Tampa, the most significant competitors are
proprietary terminals owned and operated by major oil companies, such as the
Marathon Petroleum, BP and Citgo terminals located along the Port of Tampa, and
the Chevron and Motiva terminals located in Port Tampa. These
terminals generally support the storage requirements of their parent or
affiliated companies’ refining and marketing operations and provide a mechanism
for an oil company to enter into exchange contracts with third parties to serve
its storage needs in markets where the oil company may not have terminal
assets.
Cochin
Pipeline System
The
Cochin pipeline system consists of an approximately 1,900-mile, 12-inch diameter
multi-product pipeline operating between Fort Saskatchewan, Alberta and Windsor,
Ontario, along with five terminals. The pipeline operates on a
batched basis and has an estimated system capacity of approximately 70,000
barrels per day. It includes 31 pump stations spaced at 60 mile
intervals and five United States propane terminals. Underground
storage is available at Fort Saskatchewan, Alberta and Windsor, Ontario through
third parties. In 2009 and 2008, the pipeline system transported
approximately 29,300 and 30,800 barrels per day of natural gas liquids,
respectively.
Markets. The
pipeline traverses three provinces in Canada and seven states in the United
States and can transport propane, butane and natural gas liquids to the
midwestern United States and eastern Canadian petrochemical and fuel
markets. Current operations involve only the transportation of
propane on Cochin.
Supply. Injection into the
system can occur from BP, Provident, Keyera or Dow facilities with connections
at Fort Saskatchewan, Alberta, and from Spectra at interconnects at Regina and
Richardson, Saskatchewan.
Competition. The
pipeline competes with railcars and Enbridge Energy Partners, L.P. for natural
gas liquids long-haul business from Fort Saskatchewan, Alberta and Windsor,
Ontario. The pipeline’s primary competition in the Chicago natural
gas liquids market comes from the combination of the Alliance pipeline system,
which brings unprocessed gas into the United States from Canada, and Aux Sable,
which processes and markets the natural gas liquids in the Chicago
market.
Cypress
Pipeline
The
Cypress pipeline is an interstate common carrier natural gas liquids pipeline
originating at storage facilities in Mont Belvieu, Texas and extending 104 miles
east to a connection with Westlake Chemical Corporation, a major petrochemical
producer in the Lake Charles, Louisiana area. Mont Belvieu, located
approximately 20 miles east of Houston, is the largest hub for natural gas
liquids gathering, transportation, fractionation and storage in the United
States. In 2009 and 2008, the pipeline system transported
approximately 43,400 and 43,900 barrels per day of natural gas liquids,
respectively. On July 14, 2009, Kinder Morgan Energy Partners
received notice from Westlake Petrochemicals LLC, a wholly-owned subsidiary of
Westlake Chemical Corporation, that it was exercising its option to purchase a
50% ownership interest in the Cypress Pipeline; however, it is expected that the
transaction will close no earlier than the end of the first quarter of
2010.
Markets. The
pipeline was built to service Westlake under a 20-year ship-or-pay agreement
that expires in 2011. The contract requires a minimum volume of
30,000 barrels per day.
Items 1 and
2. Business
and Properties. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Supply. The
Cypress pipeline originates in Mont Belvieu where it is able to receive ethane
and ethane/propane mix from local storage facilities. Mont Belvieu
has facilities to fractionate natural gas liquids received from several
pipelines into ethane and other components. Additionally, pipeline
systems that transport natural gas liquids from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma and the Mid-Continent Region supply ethane and
ethane/propane mix to Mont Belvieu.
Competition. The
pipeline’s primary competition into the Lake Charles market comes from Louisiana
onshore and offshore natural gas liquids.
Southeast
Terminals
The
Southeast terminal operations consist of 24 high-quality, liquid petroleum
products terminals located along the Plantation/Colonial pipeline corridor in
the Southeastern United States. The terminals are owned and operated
by Kinder Morgan Energy Partners’ subsidiary, Kinder Morgan Southeast Terminals
LLC and its consolidated affiliate, Guilford County Terminal Company,
LLC. Combined, the Southeast terminals have a total storage capacity
of approximately 8.2 million barrels. In 2009 and 2008, these terminals
transferred approximately 348,000 and 351,000 barrels of refined products per
day, respectively.
Markets. The
acquisition and marketing activities of the Southeast terminal operations are
focused on the Southeastern United States from Mississippi through Virginia,
including Tennessee. The primary function involves the receipt of
petroleum products from common carrier pipelines, short-term storage in terminal
tankage, and subsequent loading onto tank trucks. During 2009, the
Southeast terminal operations continued to expand their ethanol blending and
storage services into several conventional gasoline markets. The new
ethanol blending facilities added in 2009 are located in Collins, Mississippi;
Knoxville, Tennessee; Charlotte and Greensboro, North Carolina; and Roanoke,
Virginia. Longer term storage is available at many of the
terminals. Combined, the Southeast terminal operations have a
physical presence in markets representing almost 80% of the pipeline-supplied
demand in the Southeast and offer a competitive alternative to marketers seeking
relationships with independent truck terminal service providers.
Supply. Product
supply is predominately from Plantation and Colonial pipelines with a number of
terminals connected to both pipelines. To the maximum extent
practicable, Kinder Morgan Energy Partners endeavors to connect its Southeast
terminals to both of the Plantation and Colonial pipeline systems. In addition
to pipeline supply, Kinder Morgan Energy Partners is also able to take marine
receipts at both Kinder Morgan Energy Partners’ Richmond and Chesapeake,
Virginia terminals.
Competition. Most
of the refined petroleum products terminals in this region are owned by large
oil companies (BP, Motiva, Citgo, Marathon, and Chevron) who use these assets to
support their own proprietary market demands as well as product exchange
activity. These oil companies are not generally seeking third party
throughput customers. Magellan Midstream Partners, L.P. and
TransMontaigne Product Services Inc. represent the other significant independent
terminal operators in this region.
Transmix
Operations
The
Transmix operations include the processing of petroleum pipeline transmix, a
blend of dissimilar refined petroleum products that have become co-mingled in
the pipeline transportation process. During pipeline transportation,
different products are transported through the pipelines abutting each other,
and generate a volume of different mixed products called transmix. At
transmix processing facilities, Kinder Morgan Energy Partners processes and
separates pipeline transmix into pipeline-quality gasoline and light distillate
products at six separate processing facilities located in Colton, California;
Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; Wood
River, Illinois; and Greensboro, North Carolina. Combined, transmix
facilities processed approximately 10.0 million and 10.4 million barrels of
transmix in 2009 and 2008, respectively.
Markets. The Gulf
and East Coast refined petroleum products distribution system, particularly the
Mid-Atlantic region, is the target market for the East Coast transmix processing
operations. The Mid-Continent area and the New York Harbor are the
target markets for Kinder Morgan Energy Partners’ Illinois and Pennsylvania
assets, respectively. West Coast transmix processing operations
support the markets served by Kinder Morgan Energy Partners’ Pacific operations
in Southern California.
Supply. Transmix
generated by Plantation, Colonial, Explorer, Sun, Enterprise, and Kinder Morgan
Energy Partners’ Pacific operations provide the vast majority of the
supply. These suppliers are committed to the use of the transmix
facilities under long-term contracts. Individual shippers and
terminal operators provide additional supply. Shell acquires transmix
for processing at Indianola, Richmond and Wood River; Colton is supplied by
pipeline shippers of Kinder Morgan Energy Partners’ Pacific operations; Dorsey
Junction is supplied by Colonial Pipeline Company; and Greensboro is supplied by
the Plantation pipeline.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Competition. Placid
Refining is Kinder Morgan Energy Partners’ main competitor in the Gulf Coast
area. There are various processors in the Mid-Continent area who
compete with Kinder Morgan Energy Partners’ transmix facilities, primarily
ConocoPhillips, Gladieux Refining and Williams Energy
Services. Motiva Enterprises’ transmix facility located near Linden,
New Jersey is the principal competition for New York Harbor transmix supply and
for Kinder Morgan Energy Partners’ Indianola facility. A number of
smaller organizations operate transmix processing facilities in the western and
southwestern United States. These operations compete for supply that
is envisioned as the basis for growth in the west and southwest regions of the
United States. Kinder Morgan Energy Partners’ Colton processing
facility also competes with major oil company refineries in
California.
Natural Gas
Pipelines–KMP
The
Natural Gas Pipelines segment contains both interstate and intrastate
pipelines. Its primary businesses consist of natural gas sales,
transportation, storage, gathering, processing and treating. Within
this segment, Kinder Morgan Energy Partners owns approximately 15,000 miles of
natural gas pipelines and associated storage and supply lines that are
strategically located at the center of the North American pipeline
grid. Kinder Morgan Energy Partners’ transportation network provides
access to the major gas supply areas in the western United States, Texas and the
Midwest, as well as major consumer markets.
Texas
Intrastate Natural Gas Pipeline Group and Kinder Morgan Treating,
L.P.
Texas
Intrastate Natural Gas Pipeline Group
The
Texas intrastate natural gas pipeline group, which operates primarily along the
Texas Gulf Coast, consists of the following four natural gas pipeline systems:
(i) Kinder Morgan Texas Pipeline, (ii) Kinder Morgan Tejas Pipeline, (iii)
Mier-Monterrey Mexico Pipeline and (iv) Kinder Morgan North Texas
Pipeline.
The
two largest systems in the group are the Kinder Morgan Texas Pipeline and the
Kinder Morgan Tejas Pipeline. These pipelines essentially operate as
a single pipeline system, providing customers and suppliers with improved
flexibility and reliability. The combined system includes
approximately 6,000 miles of intrastate natural gas pipelines with a peak
transport and sales capacity of approximately 5.2 billion cubic feet per day of
natural gas and approximately 145 billion cubic feet of on-system natural gas
storage capacity including 11 billion cubic feet contracted from a third
party. In addition, the combined system, through owned assets and
contractual arrangements with third parties, has the capability to process 685
million cubic feet per day of natural gas for liquids extraction and to treat
approximately 180 million cubic feet per day of natural gas for carbon dioxide
removal.
Collectively,
the combined system primarily serves the Texas Gulf Coast by selling,
transporting, processing and treating gas from multiple onshore and offshore
supply sources to serve the Houston/Beaumont/Port Arthur/Austin industrial
markets, local gas distribution utilities, electric utilities and merchant power
generation markets. It serves as a buyer and seller of natural gas,
as well as a transporter of natural gas. The purchases and sales of
natural gas are primarily priced with reference to market prices in the
consuming region of its system. The difference between the purchase
and sale prices is the rough equivalent of a transportation fee and fuel
costs.
Included
in the operations of the Kinder Morgan Tejas system is the Kinder Morgan Border
Pipeline system. Kinder Morgan Border Pipeline owns and operates an
approximately 102-mile, 24-inch diameter pipeline that extends from a point of
interconnection with the pipeline facilities of Pemex Gas Y Petroquimica Basica
at the International Border between the United States and Mexico in Hidalgo
County, Texas, to a point of interconnection with other intrastate pipeline
facilities of Kinder Morgan Tejas located at King Ranch, Kleburg County,
Texas. The pipeline has a capacity of approximately 300 million cubic
feet of natural gas per day and is capable of importing this volume of Mexican
gas into the United States or exporting this volume of gas to
Mexico.
The
Mier-Monterrey Pipeline consists of a 95-mile natural gas pipeline that
stretches from the International Border between the United States and Mexico in
Starr County, Texas, to Monterrey, Mexico and can transport up to 375 million
cubic feet per day. The pipeline connects to a 1,000-megawatt power
plant complex and to the Pemex natural gas transportation system. The
Mier-Monterrey Pipeline has entered into a long-term contract (expiring in 2018)
with Pemex, which has subscribed for all of the pipeline’s
capacity.
The
Kinder Morgan North Texas Pipeline consists of an 82-mile pipeline that
transports natural gas from an interconnect with the facilities of NGPL in Lamar
County, Texas to a 1,750-megawatt electric generating facility located in
Forney, Texas, 15 miles east of Dallas, Texas. It has the capacity to
transport 325 million cubic feet per day of natural gas and is fully subscribed
under a long-term contract that expires in 2032. The system is
bi-directional, permitting deliveries of additional supply from the Barnett
Shale area to NGPL’s pipeline as well as power plants in the area.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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The
Texas intrastate natural gas pipeline group also owns and operates various
gathering systems in southern and eastern Texas. These systems
aggregate natural gas supplies into the Texas intrastate natural gas pipeline
group’s main transmission pipelines, and in certain cases, aggregate natural gas
that must be processed or treated at its own or third-party
facilities. The Texas intrastate natural gas pipeline group owns
plants that can process up to 135 million cubic feet per day of natural gas for
liquids extraction, and has contractual rights to process approximately 550
million cubic feet per day of natural gas at third-party owned
facilities. The Texas intrastate natural gas pipeline group also
shares in gas processing margins on gas processed at certain third-party owned
facilities. Additionally, the Texas intrastate natural gas pipeline
group owns and operates three natural gas treating plants that provide carbon
dioxide and/or hydrogen sulfide removal. The Texas intrastate natural
gas pipeline group can treat up to 85 million cubic feet per day of natural gas
for carbon dioxide removal at its plant in Fandango Complex in Zapata County,
Texas, 50 million cubic feet per day of natural gas at its Indian Rock Plant in
Upshur County, Texas and approximately 45 million cubic feet per day of natural
gas at its Thompsonville Facility located in Jim Hogg County,
Texas.
The
North Dayton natural gas storage facility, located in Liberty County, Texas, has
two existing storage caverns providing approximately 6.1 billion cubic feet of
total capacity, consisting of 4.0 billion cubic feet of working capacity and 2.1
billion cubic feet of cushion gas. The Texas intrastate natural gas
pipeline group has entered into a long-term storage capacity and transportation
agreement with NRG Energy, Inc. covering two billion cubic feet of natural gas
working capacity that expires in March 2017. In June 2006, the Texas
intrastate natural gas pipeline group announced an expansion project that will
significantly increase natural gas storage capacity at the North Dayton
facility. The project is now expected to cost between $100 million
and $105 million and involves the development of a new underground storage
cavern that will add an estimated 7.0 billion cubic feet of incremental working
natural gas storage capacity. The additional capacity is expected to
be available in the third quarter of 2010.
The
Texas intrastate natural gas pipeline group also owns the West Clear Lake
natural gas storage facility located in Harris County, Texas, and it leases both
a salt dome storage facility located near Markham, Texas in Matagorda County,
and two salt dome caverns located in Brazoria County, Texas. Pursuant
to a long term contract that expires in 2012, Shell Energy North America (US),
L.P. operates and controls the 96 billion cubic feet of natural gas working
capacity at the West Clear Lake facility, and the Texas intrastate natural gas
pipeline group provides transportation service into and out of the
facility. The Texas intrastate natural gas pipeline group leases the
natural gas storage capacity at the Markham facility from Texas Brine Company,
LLC according to the provisions of an operating lease that expires in March
2013, and it can, at its sole option, extend the term of this lease for two
additional ten-year periods. The facility consists of five salt dome
caverns with approximately 25.0 billion cubic feet of working natural gas
capacity and up to 1.1 billion cubic feet per day of peak
deliverability. The Texas intrastate natural gas pipeline group
leases the two caverns located in Brazoria County, Texas (known as the Stratton
Ridge facilities) from Ineos USA, LLC. The Stratton Ridge facilities
have a combined working natural gas capacity of 1.4 billion cubic feet and a
peak day deliverability of 150 million cubic feet per day. In
addition to the aforementioned storage facilities, the Texas intrastate natural
gas pipeline group contracts for storage services from third parties, which it
then sells to customers on its pipeline system.
Additionally,
effective November 1, 2009, the Texas intrastate natural gas pipeline group
acquired a 40% equity ownership interest in Endeavor Gathering LLC, as discussed
above in “—(a) General Development of Business—Recent Developments—Natural Gas
Pipelines–KMP.”
Markets. Texas is
one of the largest natural gas consuming states in the country. The
natural gas demand profile in the Texas intrastate natural gas pipeline group’s
market area is primarily composed of industrial (including on-site cogeneration
facilities), merchant and utility power, and local natural gas distribution
consumption. The industrial demand is primarily year-round
load. Merchant and utility power demand peaks in the summer months
and is complemented by local natural gas distribution demand that peaks in the
winter months. As new merchant gas fired generation has come online
and displaced traditional utility generation, the Texas intrastate natural gas
pipeline group has successfully attached many of these new generation facilities
to its natural gas pipeline systems in order to maintain and grow its share of
natural gas supply for power generation.
The
Texas intrastate natural gas pipeline group serves the Mexico market through
interconnection with the facilities of Pemex at the United States-Mexico border
near Arguellas, Mexico and its Mier-Monterrey Mexico pipeline. In
2009, deliveries through the existing interconnection near Arguellas fluctuated
from zero to approximately 194 million cubic feet per day of natural
gas. Deliveries to Monterrey also ranged from zero to 309 million
cubic feet per day. The Texas intrastate natural gas pipeline group
primarily provides transport service to these markets on a fee for service
basis, including a significant demand component, which is paid regardless of
actual throughput. Revenues earned from its activities in Mexico are
paid in U.S. dollar equivalent.
Supply. The Texas intrastate
natural gas pipeline group purchases its natural gas directly from producers
attached to its system in South Texas, East Texas, West Texas and along the
Texas Gulf Coast. In addition, the Texas intrastate natural gas
pipeline group also purchases gas at interconnects with third-party interstate
and intrastate pipelines. While the Texas
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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intrastate
natural gas group does not produce gas, it does maintain an active well
connection program in order to offset natural declines in production along its
system and to secure supplies for additional demand in its market
area. This intrastate system has access to both onshore and offshore
sources of supply and liquefied natural gas from the Freeport LNG terminal near
Freeport, Texas and from the Golden Pass Terminal currently under development by
ExxonMobil south of Beaumont, Texas.
Competition. The Texas
intrastate natural gas market is highly competitive, with many markets connected
to multiple pipeline companies. The Texas intrastate natural gas
pipeline group competes with interstate and intrastate pipelines, and their
shippers, for attachments to new markets and supplies and for transportation,
processing and treating services.
Kinder
Morgan Treating L.P.
Kinder
Morgan Energy Partners’ subsidiary, Kinder Morgan Treating, L.P., owns and
operates (or leases to producers for operation) treating plants that remove
impurities (carbon dioxide, hydrogen sulfide, and hydrocarbon liquids) from
natural gas before it is delivered into gathering systems and transmission
pipelines to ensure that it meets pipeline quality
specifications. Its primary treating assets include approximately 225
natural gas amine-treating plants and approximately 56 dew point control
plants.
The
amine treating process involves a continuous circulation of a liquid chemical
called amine that physically contacts with the natural gas. Amine has
a chemical affinity for hydrogen sulfide and carbon dioxide that allows it to
remove these impurities from the gas. After mixing, gas and reacted
amine are separated and the impurities are removed from the amine by heating.
Treating plants are sized by the amine circulation capacity in terms of gallons
per minute.
Dew
point control is complementary to the treating business, as pipeline companies
enforce gas quality specifications to lower the dew point of the gas they
receive and transport. A higher relative dew point can sometimes
cause liquid hydrocarbons to condense in the pipeline and cause operating
problems and gas quality issues to the downstream
markets. Hydrocarbon dew point plants, which consist of skid mounted
processing equipment, remove these hydrocarbons. Typically these
plants use a Joules-Thompson expansion process to lower the temperature of the
gas stream and collect the liquids before they enter the downstream
pipeline. As of December 31, 2009, Kinder Morgan Treating had
approximately 200 treating and dew point control plants in
operation.
Supply. Kinder Morgan
Treating believes it has the largest natural gas treating fleet operation in the
United States. Natural gas from certain formations in the Texas Gulf
Coast, as well as other locations, is high in carbon dioxide, which generally
needs to be removed before introduction of the gas into transportation
pipelines. Many of the active plants are treating natural gas from the Wilcox
and Edwards formations in the Texas Gulf Coast, both of which are deep
formations that are high in carbon dioxide. Typically, a fixed monthly rental
fee is charged, plus in those instances where Kinder Morgan Treating operates
the equipment, a fixed monthly operating fee.
Markets. Many of
the shale reservoirs being developed today have concentrations of carbon dioxide
above the normal pipeline quality specifications of 2.0%. The
Haynesville Shale rock formation in northwest Louisiana and East Texas is
experiencing robust development, and Kinder Morgan Treating believes that its
treating business strategy is well suited to the producers in the Haynesville
Shale.
Competition. These natural
gas treating operations face competition from manufacturers of new treating and
dew point control plants and from a number of regional operators that provide
similar plants and operations. Kinder Morgan Treating also faces
competition from vendors of used equipment that occasionally operate plants for
producers.
In
addition, Kinder Morgan Treating may lose business to natural gas gatherers who
have underutilized treating or processing capacity. It may also lose
wellhead treating opportunities to blending, which is a pipeline company’s
ability to waive quality specifications and allow producers to deliver their
contaminated natural gas untreated. This is generally referred to as blending
because of the receiving company’s ability to blend this natural gas with
cleaner natural gas in the pipeline such that the resulting natural gas meets
pipeline specification.
Western
Interstate Natural Gas Pipeline Group
The
Western interstate natural gas pipeline group, which operates primarily along
the Rocky Mountain region of the Western portion of the United States, consists
of the following three natural gas pipeline systems: (i) Kinder Morgan
Interstate Gas Transmission Pipeline, (ii) TransColorado Pipeline and (iii)
Kinder Morgan Energy Partners’50% ownership interest in the Rockies Express
Pipeline.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Kinder
Morgan Interstate Gas Transmission LLC
Kinder
Morgan Energy Partners’ subsidiary, Kinder Morgan Interstate Gas Transmission
LLC (“KMIGT”) owns approximately 5,100 miles of transmission lines in Wyoming,
Colorado, Kansas, Missouri and Nebraska. The KMIGT pipeline system is
powered by 28 transmission and storage compressor stations, which have
approximately 160,000 horsepower. KMIGT also owns the Huntsman
natural gas storage facility, located in Cheyenne County, Nebraska, which has
approximately 11 billion cubic feet of firm capacity commitments and provides
for withdrawal of up to 179 million cubic feet of natural gas per
day.
Under
transportation agreements and FERC tariff provisions, KMIGT offers its customers
firm and interruptible transportation and storage services, including no-notice
service and park and loan services. For these services, KMIGT charges
rates which include the retention of fuel and gas lost and unaccounted for
in-kind. Under KMIGT’s tariffs, firm transportation and storage
customers pay reservation charges each month plus a commodity charge based on
the actual transported or stored volumes. In contrast, interruptible
transportation and storage customers pay a commodity charge based upon actual
transported and/or stored volumes. Under the no-notice service,
customers pay a fee for the right to use a combination of firm storage and firm
transportation to effect deliveries of natural gas up to a specified volume
without making specific nominations. KMIGT also has the authority to
make gas purchases and sales, as needed for system operations, pursuant to its
currently effective FERC gas tariff.
KMIGT
also offers its Cheyenne Market Center service, which provides nominated storage
and transportation service between its Huntsman storage field and multiple
interconnecting pipelines at the Cheyenne Hub, located in Weld County,
Colorado. This service is fully subscribed through May
2014.
Markets. Markets
served by the KMIGT pipeline system provide a stable customer base with
expansion opportunities due to the system’s access to Rocky Mountain supply
sources. Markets served by the system are comprised mainly of local
natural gas distribution companies and interconnecting interstate pipelines in
the mid-continent area. End-users of the local natural gas
distribution companies typically include residential, commercial, industrial and
agricultural customers. The pipelines interconnecting with the KMIGT
system in turn deliver gas into multiple markets including some of the largest
population centers in the Midwest. Natural gas demand to power pumps
for crop irrigation during the summer from time-to-time exceeds heating season
demand and provides KMIGT relatively consistent volumes throughout the
year. KMIGT has seen a significant increase in demand from ethanol
producers, and has expanded its system to meet the demands from the ethanol
producing community. Additionally, the KMIGT pipeline system includes
the Colorado Lateral, which is a 41-mile, 12-inch pipeline extending from the
Cheyenne Hub southward to the Greeley, Colorado area. The Colorado
Lateral serves Atmos Energy under a long-term firm transportation contract, and
KMIGT is currently marketing additional capacity along its route.
Supply. As of December 31,
2009, approximately 13%, by volume, of KMIGT’s firm contracts expire within one
year and 45% expire between one and five years. Over 96% of the
system’s total firm transport capacity is currently subscribed, with 68% of KMIGT’s transport
business in 2009 being conducted with its top ten shippers.
Competition. KMIGT
competes with other interstate and intrastate gas pipelines transporting gas
from the supply sources in the Rocky Mountain and Hugoton Basins to
mid-continent pipelines and market centers.
TransColorado
Gas Transmission Company LLC
Kinder
Morgan Energy Partners’ subsidiary, TransColorado Gas Transmission Company LLC,
referred to in this report as TransColorado, owns a 300-mile interstate natural
gas pipeline that extends from approximately 20 miles southwest of Meeker,
Colorado to Bloomfield, New Mexico. It has multiple points of
interconnection with various interstate and intrastate pipelines, gathering
systems, and local distribution companies. The TransColorado pipeline
system is powered by eight compressor stations having an aggregate of
approximately 40,000 horsepower.
The
TransColorado system has the ability to flow gas south or north. It
receives gas from one coal seam natural gas treating plant, located in the San
Juan Basin of Colorado, and from pipeline, processing plant and gathering system
interconnections within the Paradox and Piceance Basins of western
Colorado. Gas flowing south through the pipeline system flows into
the El Paso, Transwestern and Questar Southern Trail pipeline systems, and gas
moving north through the pipeline flows into the Colorado Interstate, Wyoming
Interstate and Questar pipeline systems at the Greasewood Hub, and into the
Rockies Express pipeline system at the Meeker Hub. TransColorado
provides transportation services to third-party natural gas producers,
marketers, gathering companies, local distribution companies and other
shippers.
Pursuant
to transportation agreements and FERC tariff provisions, TransColorado offers
its customers firm and interruptible transportation and interruptible park and
loan services. The underlying reservation and commodity charges are
assessed pursuant to a maximum recourse rate structure, which does not vary
based on the distance gas is transported.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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TransColorado
has the authority to negotiate rates with customers if it has first offered
service to those customers under its reservation and commodity charge rate
structure.
Markets. The
TransColorado system acts principally as a feeder pipeline system from the
developing natural gas supply basins on the Western Slope of Colorado into the
interstate natural gas pipelines that lead away from the Blanco Hub area of New
Mexico and the interstate natural gas pipelines that lead away eastward from
northwestern Colorado and southwestern Wyoming. TransColorado is one
of the largest transporters of natural gas from the Western Slope supply basins
of Colorado and provides a competitively attractive outlet for that developing
natural gas resource. In 2009 and 2008, TransColorado transported an
average of approximately 617 million and 675 million cubic feet per day of
natural gas from these supply basins, respectively.
Supply. During 2009, 97% of
TransColorado’s transport business was with processors or producers or their own
marketing affiliates, and 3% was with marketing companies and various gas
marketers. Approximately 69% of TransColorado’s transport business in
2009 was conducted with its three largest customers. Nearly all of
TransColorado’s long-haul southbound pipeline capacity is committed under firm
transportation contracts that extend at least through year-end
2010. As of December 31, 2009, approximately 26% by volume of
TransColorado’s firm transportation contracts expire within one year, and 23%
expire between one and five years; however, TransColorado is actively pursuing
contract extensions and/or replacement contracts to increase firm subscription
levels beyond 2010.
Competition. TransColorado
competes with other transporters of natural gas in each of the natural gas
supply basins it serves. These competitors include both interstate
and intrastate natural gas pipelines and natural gas gathering
systems. TransColorado’s shippers compete for market share with
shippers drawing upon gas production facilities within the New Mexico portion of
the San Juan Basin. TransColorado has phased its past construction
and expansion efforts to coincide with the ability of the interstate pipeline
grid at Blanco, New Mexico and at the north end of its system to accommodate
greater natural gas volumes.
Historically,
the competition faced by TransColorado with respect to its natural gas
transportation services has generally been based upon the price differential
between the San Juan and Rocky Mountain Basins. New pipelines
servicing these producing basins and a reduction of rigs drilling in this area
for gas have had the effect of reducing that price differential.
Rockies
Express Pipeline
Kinder
Morgan Energy Partners operates and currently owns 50% of the 1,679-mile Rockies
Express natural gas pipeline system, one of the largest natural gas pipelines
ever constructed in North America. The entire 1,679-mile system is
powered by 18 compressor stations totaling approximately 412,000 horsepower, and
the system is capable of transporting 1.8 billion cubic feet per day of natural
gas. Kinder Morgan Energy Partners’ ownership is through its 50%
equity interest in Rockies Express Pipeline LLC, the sole owner of the Rockies
Express pipeline system and referred to in this report as Rockies
Express. Now fully complete, the Rockies Express system has binding
firm commitments secured for nearly all of the 1.8 billion cubic feet per day of
pipeline capacity. Kinder Morgan Energy Partners’ investment in
Rockies Express is accounted under the equity method of accounting, and Sempra
Pipelines & Storage (25%), a unit of Sempra Energy, and ConocoPhillips (25%)
hold the remaining ownership interests in Rockies Express.
Markets. Rockies
Express is capable of delivering gas to multiple markets along its pipeline
system, primarily through interconnects with other interstate pipeline companies
and direct connects to local distribution companies. The system’s
Zone 1 encompasses receipts and deliveries of natural gas west of the Cheyenne
Hub, located in Northern Colorado near Cheyenne, Wyoming. Through the
Zone 1 facilities, the Rockies Express system can deliver gas to the
TransColorado pipeline system in northwestern Colorado, which can in turn
transport the gas further south for delivery into the San Juan Basin
area. In Zone 1, the Rockies Express system can also deliver gas into
western Wyoming through leased capacity on the Overthrust Pipeline Company
system, or through its interconnections with Colorado Interstate Gas Company and
Wyoming Interstate Company in southern Wyoming. In addition, through
the system’s Zone 1 facilities, shippers have the ability to deliver natural gas
to points at the Cheyenne Hub, which could be used in markets along the Front
Range of Colorado, or could be transported further east through the system’s
Zone 2 (Rockies Express-West pipeline segment) and Zone 3 (Rockies Express-East
pipeline segment) facilities into other pipeline systems.
The
Rockies Express system’s Rockies Express-West facilities extend from the
Cheyenne Hub to an interconnect with Panhandle Eastern Pipeline Company in
Audrain County, Missouri. Through the Rockies Express-West
facilities, the system facilitates the delivery of natural gas into the
Midcontinent area of the Unites States through various interconnects with other
major interstate pipelines in Nebraska (Northern Natural Gas Pipeline and NGPL),
Kansas (ANR Pipeline), and Missouri (Panhandle Eastern Pipeline), and through a
connection with Kinder Morgan Energy Partners’ subsidiary, KMIGT.
The
Rockies Express system’s Rockies Express-East facilities extend eastward from
the terminus of the Rockies Express-West line. The Rockies
Express-East facilities permit natural gas delivery to pipelines and local
distribution companies providing service to the midwestern and eastern U.S.
markets. The interconnecting interstate pipelines include Missouri
Gas
Items 1 and
2. Business
and Properties. (continued)
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Morgan, Inc. Form 10-K
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Pipeline,
NGPL, Midwestern Gas Transmission, Trunkline, Panhandle Eastern Pipeline, ANR,
Columbia Gas, Dominion Transmission, Tennessee Gas, Texas Eastern and Texas Gas
Transmission. The local distribution companies include Ameren and
Vectren.
Supply. The
Rockies Express pipeline system directly accesses major gas supply basins in
western Colorado and western Wyoming. In western Colorado, the system
has access to gas supply from the Uinta and Piceance Basins in eastern Utah and
western Colorado. In western Wyoming, the system accesses the Green
River Basin through its facilities that are leased from
Overthrust. With its connections to numerous other pipeline systems
along its route, the Rockies Express system has access to almost all of the
major gas supply basins in Wyoming, Colorado and eastern Utah.
Competition. Capacity
on the Rockies Express system is nearly fully contracted under ten year firm
service agreements with producers from the Rocky Mountain supply
basin. These agreements provide the pipeline with fixed monthly
reservation revenues for the primary term of such contracts. Although
there are other pipeline competitors providing transportation from Rocky
Mountain supply basins, the Rockies Express system was designed and constructed
to realize economies of scale and offers its shippers competitive fuel rates and
variable costs to transport gas supplies from the Rockies to Midwestern and
Eastern markets. Other pipelines accessing the Rocky Mountain gas
supply basins include Questar Pipeline Company, Wyoming Interstate, Colorado
Interstate Gas Company, Kern River Gas Pipeline Company, Northwest Pipeline, and
the proposed Ruby Pipeline, which filed in January 2009 for FERC
authority to build a pipeline from Opal, Wyoming to Malin, Oregon, and which has
a planned in-service date of March 2011.
Central
Interstate Natural Gas Pipeline Group
The
Central interstate natural gas pipeline group, which operates primarily in the
mid-continent portion of the United States, consists of the following four
natural gas pipeline systems: (i) the Trailblazer Pipeline, (ii) the Kinder
Morgan Louisiana Pipeline, (iii) a 50% ownership interest in the Midcontinent
Express Pipeline and (iv) a 50% ownership interest in the Fayetteville Express
Pipeline.
Trailblazer
Pipeline Company LLC
Kinder
Morgan Energy Partners’ subsidiary, Trailblazer Pipeline Company LLC,
(“Trailblazer”), owns the 436-mile Trailblazer natural gas pipeline
system. Trailblazer’s pipeline originates at an interconnection with
Wyoming Interstate Company Ltd.’s pipeline system near Rockport, Colorado and
runs through southeastern Wyoming to a terminus near Beatrice, Nebraska where it
interconnects with NGPL’s and Northern Natural Gas Company’s pipeline
systems. We manage, maintain and operate the Trailblazer system for
Kinder Morgan Energy Partners, for which we are reimbursed at
cost. Trailblazer offers its customers firm and interruptible
transportation.
Markets. Significant
growth in Rocky Mountain natural gas supplies has prompted a need for additional
pipeline transportation service. The Trailblazer system has a
certificated capacity of 846 million cubic feet per day of natural
gas.
Supply. As of
December 31, 2009, none of Trailblazer’s firm contracts, by volume, expire
before one year and 53%, by volume, expire within one to five
years. Affiliated entities have contracted for less than 1% of the
total firm transportation capacity. All of the system’s firm
transport capacity is currently subscribed.
Competition. The main
competition that Trailblazer currently faces is that the gas supply in the Rocky
Mountain area is transported on competing pipelines to the west or
east. El Paso’s Cheyenne Plains Pipeline can transport approximately
730 million cubic feet per day of natural gas from Weld County, Colorado to
Greensburg, Kansas, and the Rockies Express Pipeline (discussed above) can
transport 1.8 billion cubic feet per day of natural gas from the Rocky Mountain
area to Midwest markets. These two systems compete with Trailblazer
for natural gas pipeline transportation demand from the Rocky Mountain
area. Additional competition could come from other proposed pipeline
projects. No assurance can be given that additional competing
pipelines will not be developed in the future.
Kinder
Morgan Louisiana Pipeline
Kinder
Morgan Energy Partners’ subsidiary, Kinder Morgan Louisiana Pipeline LLC, owns
the Kinder Morgan Louisiana natural gas pipeline system. The pipeline
system provides approximately 3.2 billion cubic feet per day of take-away
natural gas capacity from the Cheniere Sabine Pass liquefied natural gas
terminal located in Cameron Parish, Louisiana. The system capacity is
fully supported by 20 year take-or-pay customer commitments with Chevron and
Total that expire in 2029.
The
Kinder Morgan Louisiana pipeline system consists of two segments:
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a
132-mile, 42-inch diameter pipeline with firm capacity of approximately
2.0 billion cubic feet per day of natural gas that extends from the Sabine
Pass terminal to a point of interconnection with an existing Columbia Gulf
Transmission line in Evangeline Parish, Louisiana (an offshoot consists of
approximately 2.3 miles of 24-inch diameter pipeline
with
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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firm
peak day capacity of approximately 300 million cubic feet per day
extending away from the 42-inch diameter line to the Florida Gas
Transmission Company compressor station in Acadia Parish, Louisiana);
and
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a
1-mile, 36-inch diameter pipeline with firm capacity of approximately 1.2
billion cubic feet per day that extends from the Sabine Pass terminal and
connects to NGPL’s natural gas
pipeline.
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Kinder
Morgan Energy Partners commenced limited natural gas transportation service on
the Kinder Morgan Louisiana pipeline system in April 2009, and construction was
fully completed and transportation service on the system’s remaining portions
began in full on June 21, 2009.
Midcontinent
Express Pipeline LLC
Kinder
Morgan Energy Partners owns a 50% interest in Midcontinent Express Pipeline LLC,
the sole owner of the approximate 500-mile Midcontinent Express natural gas
pipeline system, and accounts for its investment under the equity method of
accounting. Energy Transfer Partners, L.P. owns the remaining 50%
interest in Midcontinent Express Pipeline LLC.
The
Midcontinent Express pipeline system originates near Bennington, Oklahoma and
extends eastward through Texas, Louisiana, and Mississippi, and terminates at an
interconnection with the Transco Pipeline near Butler, Alabama. The
Midcontinent Express transmission system commenced interim service for Zone 1 of
its pipeline system on April 10, 2009, with deliveries to NGPL, and natural gas
service to all Zone 1 delivery points occurred by May 21, 2009. On
August 1, 2009, Zone 2, the system’s remaining portion was placed into
service. Now fully operational, it has the capability to transport up
to 1.4 billion cubic feet per day of natural gas, and the pipeline capacity is
fully subscribed with long-term binding commitments from creditworthy
shippers.
Fayetteville
Express Pipeline LLC
Fayetteville
Express Pipeline LLC is currently developing the Fayetteville Express natural
gas pipeline system. Kinder Morgan Energy Partners owns a 50%
interest in Fayetteville Express Pipeline LLC, and accounts for its investment
under the equity method of accounting. Energy Transfer Partners L.P.
owns the remaining interest and will operate the Fayetteville Express pipeline
system, which when completed, will consist of a 187-mile, 42-inch diameter
pipeline originating in Conway County, Arkansas, continuing eastward through
White County, Arkansas, and terminating at an interconnect with Trunkline Gas
Company’s pipeline in Panola County, Mississippi. The system will
also interconnect with NGPL’s pipeline in White County, Arkansas, Texas Gas
Transmission’s pipeline in Coahoma County, Mississippi, and ANR Pipeline
Company’s pipeline in Quitman County, Mississippi, and will parallel existing
pipeline or electric transmission right-of-ways where possible to minimize
impact to the environment, communities and landowners.
The
Fayetteville Express pipeline system will have an initial capacity of 2.0
billion cubic feet of natural gas per day. Pending necessary
regulatory approvals, the approximate $1.2 billion pipeline project is expected
to be in service by early 2011. Fayetteville Express Pipeline LLC has
secured binding 10-year commitments totaling approximately 1.85 billion cubic
feet per day. On December 17, 2009, the FERC approved and issued the
pipeline’s certificate application authorizing construction, and pending the
FERC’s approval of Fayetteville Express’ implementation plan, construction of
the pipeline is expected to begin before the end of the first quarter of
2010. The pipeline is expected to be in service by late 2010 or early
2011.
Upstream
Kinder
Morgan Energy Partners’ Natural Gas Pipelines’ upstream operations consists of
the Casper and Douglas natural gas processing operations and a 49% ownership
interest in the Red Cedar Gas Gathering Company.
Casper
and Douglas Natural Gas Processing Systems
Kinder
Morgan Energy Partners owns and operates the Casper and Douglas, Wyoming natural
gas processing plants, which have the capacity to process up to 185 million
cubic feet per day of natural gas depending on raw gas quality.
Markets. Casper
and Douglas are processing plants servicing gas streams flowing into the KMIGT
pipeline system. Natural gas liquids processed by the Casper plant
are sold into local markets consisting primarily of retail propane dealers and
oil refiners. Natural gas liquids processed by the Douglas plant are
sold to ConocoPhillips via their Powder River natural gas liquids pipeline for
either ultimate consumption at the Borger refinery or for further disposition to
the natural gas liquids trading hubs located in Conway, Kansas and Mont Belvieu,
Texas.
Competition. Other regional
facilities in the Greater Powder River Basin include (i) the Hilight plant,
which has a processing capacity of approximately 80 million cubic feet per day
and is owned and operated by Anadarko, (ii) the Sage
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Creek
plant, which has a processing capacity of approximately 50 million cubic feet
per day and is owned and operated by Merit Energy and (iii) the Rawlins plant,
which has a processing capacity of approximately 230 million cubic feet per day
and is owned and operated by El Paso Corporation. Casper and Douglas,
however, are the only plants which provide straddle processing of natural gas
flowing into the KMIGT pipeline system.
West
Frenchie Draw Treater
In
the first quarter of 2009 Kinder Morgan Energy Partners placed into service a
new carbon dioxide/sulfur treating facility in the West Frenchie Draw field of
the Wind River Basin of Wyoming. This is a 50 million cubic feet per
day treating facility which has full capacity dedication through 2014 with two
of the area’s major natural gas producers - Encana and ExxonMobil. It treats a
natural gas stream which contains approximately 4% carbon dioxide down to
KMIGT’s pipeline specification of 2%. The facility’s only outlet
feeds into KMIGT.
Red
Cedar Gathering Company
Kinder
Morgan Energy Partners owns a 49% equity interest in the Red Cedar Gathering
Company (“Red Cedar”), a joint venture organized in August 1994 and referred to
in this report as Red Cedar. The remaining 51% interest in Red Cedar
is owned by the Southern Ute Indian Tribe. Red Cedar owns and
operates natural gas gathering, compression and treating facilities in the
Ignacio Blanco Field in La Plata County, Colorado. The Ignacio Blanco
Field lies within the Colorado portion of the San Juan Basin, most of which is
located within the exterior boundaries of the Southern Ute Indian Tribe
Reservation.
Red
Cedar gathers coal seam and conventional natural gas at wellheads and several
central delivery points, for treating, compression and delivery into any one of
three major interstate natural gas pipeline systems and an intrastate
pipeline. Red Cedar’s gas gathering system currently consists of
approximately 743 miles of gathering pipeline connecting more than 1,200
producing wells, 96,250 horsepower of compression at 23 field compressor
stations and two carbon dioxide treating plants. The capacity and
throughput of the Red Cedar gathering system is approximately 750 million cubic
feet per day of natural gas.
Red
Cedar also owns Coyote Gas Treating, LLC. The sole asset owned by
Coyote Gas Treating, LLC is a 175 million cubic feet per day natural gas
treating facility located in La Plata County, Colorado. The inlet gas
stream treated by this plant contains an average carbon dioxide content of
between 12% and 13%, and the plant treats the gas down to a carbon dioxide
concentration of 2% in order to meet interstate natural gas pipeline quality
specifications. It then compresses the natural gas into Kinder Morgan
Energy Partners’ TransColorado pipeline system for transport to the Blanco, New
Mexico-San Juan Basin Hub.
The
CO2–KMP
segment consists of Kinder Morgan CO2 Company,
L.P. and its consolidated affiliates, (“KMCO2”). Carbon
dioxide is used in enhanced oil recovery projects as a flooding medium for
recovering crude oil from mature oil fields. The carbon dioxide
pipelines and related assets allow Kinder Morgan Energy Partners to market a
complete package of carbon dioxide supply, transportation and technical
expertise to the customer. The CO2–KMP
business segment produces, transports and markets carbon dioxide for use in
enhanced oil recovery operations. KMCO2 also holds
ownership interests in several oil-producing fields and owns a crude oil
pipeline, all located in the Permian Basin region of West Texas.
Oil
Producing Activities
KMCO2 also holds
ownership interests in oil-producing fields, including (i) an approximate 97%
working interest in the SACROC unit; (ii) an approximate 50% working interest in
the Yates unit; (iii) an approximate 21% net profits interest in the H.T. Boyd
unit; (iv) an approximate 65% working interest in the Claytonville unit; (v) an
approximate 96% working interest in the Katz CB Long unit; (vi) a 100% working
interest in the Katz SW River unit; (vii) a 100% working interest in the Katz
East River unit; and (viii) lesser interests in the Sharon Ridge unit, the
Reinecke unit and the MidCross unit, all of which are located in the Permian
Basin of West Texas.
The
SACROC unit is one of the largest and oldest oil fields in the United States
using carbon dioxide flooding technology. The field is comprised of
approximately 56,000 acres located in the Permian Basin in Scurry County,
Texas. SACROC was discovered in 1948 and has produced over 1.32
billion barrels of oil since discovery. It is estimated that SACROC
originally held approximately 2.7 billion barrels of oil. Kinder
Morgan Energy Partners has expanded the development of the carbon dioxide
project initiated by the previous owners and increased production over the last
several years. The Yates unit is also one of the largest oil fields
ever discovered in the United States. It is estimated that it
originally held more than five billion barrels of oil, of which about 29% has
been produced. The field, discovered in 1926, is comprised of
approximately 26,000 acres located about 90 miles south of Midland,
Texas.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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In
2009, the average purchased carbon dioxide injection rate at SACROC was 253
million cubic feet per day, down from an average of 259 million cubic feet per
day in 2008. The average oil production rate for 2009 was
approximately 30,100 barrels of oil per day, up from an average of approximately
28,000 barrels of oil per day during 2008. The average natural gas
liquids production rate (net of the processing plant share) for 2009 was
approximately 6,500 barrels per day, an increase from an average of
approximately 5,500 barrels per day during 2008.
Kinder
Morgan Energy Partners’ plan has been to increase the production rate and
ultimate oil recovery from Yates by combining horizontal drilling with carbon
dioxide injection to ensure a relatively steady production profile over the next
several years. Kinder Morgan Energy Partners has been implementing
its plan and during 2009, the Yates unit produced approximately 26,500 barrels
of oil per day, down from an average of approximately 27,600 barrels of oil per
day during 2008. Unlike the operations at SACROC, where carbon
dioxide and water are used to drive oil to the producing wells, carbon dioxide
is used at Yates in order to enhance the gravity drainage process, as well as to
maintain reservoir pressure. The differences in geology and reservoir
mechanics between the two fields mean that substantially less capital will be
needed to develop the reserves at Yates than is required at SACROC.
Kinder
Morgan Energy Partners also operates and owns an approximate 65% gross working
interest in the Claytonville oil field unit located in Fisher County,
Texas. The Claytonville unit is located nearly 30 miles east of the
SACROC unit in the Permian Basin of West Texas, and the unit produced 218
barrels of oil per day during 2009, down from an average of 235 barrels of oil
per day during 2008. Kinder Morgan Energy Partners is presently
evaluating operating and subsurface technical data from the Claytonville unit to
further assess redevelopment opportunities including carbon dioxide flood
operations.
Kinder
Morgan Energy Partners also operates and owns working interests in the Katz CB
Long unit, the Katz Southwest River unit and Katz East River
unit. The Katz field is located in the Permian Basin area of West
Texas and during 2009, the field produced 380 barrels of oil per day, down from
an average of 425 barrels of oil per day during 2008. In July 2009,
Kinder Morgan Energy Partners announced it would invest approximately $183
million over the next several years to further expand its operations in the
eastern Permian Basin of Texas. The expansion will involve the installation of a
91-mile 10-inch carbon dioxide distribution pipeline, and the development of a
new carbon dioxide flood in the Katz field. It is anticipated that the carbon
dioxide pipeline will be placed in service in early 2011 and initial carbon
dioxide injections into the Katz field will commence shortly
thereafter.
See
Note 20 of the accompanying Notes to Consolidated Financial Statements for
additional information with respect to operating statistics and supplemental
information on oil and gas producing activities.
Gas
and Gasoline Plant Interests
Kinder
Morgan Energy Partners operates and owns an approximate 22% working interest
plus an additional 28% net profits interest in the Snyder gasoline
plant. It also operates and owns a 51% ownership interest in the
Diamond M gas plant and a 100% ownership interest in the North Snyder plant, all
of which are located in the Permian Basin of West Texas. The Snyder
gasoline plant processes gas produced from the SACROC unit and neighboring
carbon dioxide projects, specifically the Sharon Ridge and Cogdell units, all of
which are located in the Permian Basin area of West Texas. The
Diamond M and the North Snyder plants contract with the Snyder plant to process
gas. Production of natural gas liquids at the Snyder gasoline plant
during December 2009 was approximately 14,500 barrels per day, compared to
13,900 barrels per day in December 2008.
Carbon
Dioxide Reserves
Kinder
Morgan Energy Partners owns approximately 45% of, and operate, the McElmo Dome
unit in Colorado, which contains more than ten trillion cubic feet of
recoverable carbon dioxide. Deliverability and compression capacity
exceeds 1,300 million cubic feet per day. The McElmo Dome unit
produces approximately 1,200 million cubic feet per day.
Kinder
Morgan Energy Partners also owns approximately 11% of the Bravo Dome unit in New
Mexico, which contains more than one trillion cubic feet of recoverable carbon
dioxide and produces approximately 300 million cubic feet per day, and an
approximately 87% ownership interest in the Doe Canyon Deep unit in Colorado,
which contains more than 1.5 trillion cubic feet of carbon dioxide and produces
approximately 110 million cubic feet per day.
Markets. The
principal market for carbon dioxide is for injection into mature oil fields in
the Permian Basin, where industry demand is expected to remain strong for the
next several years. Kinder Morgan Energy Partners is exploring
additional potential markets, including enhanced oil recovery targets in
California, Wyoming, Oklahoma, the Gulf Coast, Mexico, and Canada, and coal bed
methane production in the San Juan Basin of New Mexico.
Competition. The
primary competitors for the sale of carbon dioxide include suppliers that have
an ownership interest in McElmo Dome, Bravo Dome and Sheep Mountain carbon
dioxide reserves, and PetroSource Energy Company, L.P., and its
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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parent
SandRidge Energy, Inc., which produce waste carbon dioxide from natural gas
production in the Val Verde Basin and the Pinion field areas of West
Texas. There is no assurance that new carbon dioxide sources will not
be discovered or developed, which could compete with us, or that new
methodologies for enhanced oil recovery will not replace carbon dioxide
flooding.
Carbon
Dioxide Pipelines
As
a result of Kinder Morgan Energy Partners’ 50% ownership interest in Cortez
Pipeline Company, it owns a 50% equity interest in, and operates, the
approximate 500-mile Cortez pipeline. The pipeline carries carbon
dioxide from the McElmo Dome and Doe Canyon source fields near Cortez, Colorado
to the Denver City, Texas hub. The Cortez pipeline currently
transports over 1,200 million cubic feet of carbon dioxide per day, including
approximately 99% of the carbon dioxide transported downstream on Kinder Morgan
Energy Partners’ Central Basin pipeline and its Centerline pipeline (discussed
following). The tariffs charged by Cortez Pipeline are not
regulated.
The
Central Basin pipeline consists of approximately 143 miles of mainline pipe and
177 miles of lateral supply lines located in the Permian Basin between Denver
City, Texas and McCamey, Texas. The pipeline has an ultimate
throughput capacity of 700 million cubic feet per day. At its
origination point in Denver City, the Central Basin pipeline interconnects with
all three major carbon dioxide supply pipelines from Colorado and New Mexico,
namely the Cortez pipeline (operated by KMCO2) and the
Bravo and Sheep Mountain pipelines (operated by Oxy Permian). Central
Basin’s mainline terminates near McCamey, where it interconnects with the Canyon
Reef Carriers pipeline and the Pecos pipeline. The tariffs charged by
the Central Basin pipeline are not regulated.
Kinder
Morgan Energy Partners’ Centerline pipeline consists of approximately 113 miles
of pipe located in the Permian Basin between Denver City, Texas and Snyder,
Texas. The pipeline has a capacity of 300 million cubic feet per
day. The tariffs charged by the Centerline pipeline are not
regulated.
Kinder
Morgan Energy Partners owns a 13% undivided interest in the 218-mile, Bravo
pipeline, which delivers carbon dioxide from the Bravo Dome source field in
northeast New Mexico to the Denver City hub and has a capacity of more than 350
million cubic feet per day. Tariffs on the Bravo pipeline are not
regulated.
In
addition, Kinder Morgan Energy Partners owns approximately 98% of the Canyon
Reef Carriers pipeline and approximately 69% of the Pecos
pipeline. The Canyon Reef Carriers pipeline extends 139 miles from
McCamey, Texas, to the SACROC unit. The pipeline has a capacity of
approximately 270 million cubic feet per day and makes deliveries to the SACROC,
Sharon Ridge, Cogdell and Reinecke units. The Pecos pipeline is a
25-mile pipeline that runs from McCamey to Iraan, Texas. It has a
capacity of approximately 120 million cubic feet per day of carbon dioxide and
makes deliveries to the Yates unit. The tariffs charged on the Canyon
Reef Carriers and Pecos pipelines are not regulated.
Markets. The principal market
for transportation on Kinder Morgan Energy Partners’ carbon dioxide pipelines is
to customers, including ourselves, using carbon dioxide for enhanced recovery
operations in mature oil fields in the Permian Basin, where industry demand is
expected to remain strong for the next several years.
Competition. Kinder
Morgan Energy Partners ownership interests in the Central Basin, Cortez and
Bravo pipelines are in direct competition with other carbon dioxide
pipelines. Kinder Morgan Energy Partners also competes with other
interest owners in McElmo Dome, Doe Canyon and Bravo Dome for transportation of
carbon dioxide to the Denver City, Texas market area.
Crude
Oil Pipeline
The
Kinder Morgan Wink Pipeline is a 450-mile Texas intrastate crude oil pipeline
system consisting of three mainline sections, two gathering systems and numerous
truck delivery stations. The segment that runs from Wink to El Paso
has a total capacity of 130,000 barrels of crude oil per day. The
pipeline allows Kinder Morgan Energy Partners to better manage crude oil
deliveries from its oil field interests in West Texas, and it has entered into a
long-term throughput agreement with Western Refining Company, L.P. to transport
crude oil into Western’s 120,000 barrel per day refinery in El
Paso. The 20-inch pipeline segment transported approximately 117,000
barrels of oil per day in 2009 and approximately 118,000 barrels of oil
per day in 2008. The Kinder Morgan Wink Pipeline is regulated by both
the FERC and the Texas Railroad Commission.
The
Terminals–KMP segment includes the operations of Kinder Morgan Energy Partners’
petroleum, chemical and other liquids terminal facilities (other than those
included in its Products Pipelines segment) and all of its coal, petroleum coke,
fertilizer, steel, ores and dry-bulk material services, including all transload,
engineering, conveying and other in-plant services. Combined, the
segment is composed of approximately 121 owned or operated
liquids and bulk terminal facilities, and more than 33 rail transloading and
materials handling facilities located throughout the United States, Canada, and
the
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Netherlands.
Liquids
Terminals
The
liquids terminals operations primarily store refined petroleum products,
petrochemicals, industrial chemicals and vegetable oil products in aboveground
storage tanks and transfer products to and from pipelines, vessels, tank trucks,
tank barges, and tank railcars. Combined, the liquids terminals
facilities possess liquids storage capacity of approximately 56.4 million
barrels, and in 2009 and 2008, these terminals handled approximately 604 million
barrels and 597 million barrels, respectively, of petroleum, chemicals and
vegetable oil products.
Kinder
Morgan Energy Partners’ major liquids terminal assets include the
following:
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the
Houston, Texas terminal complex located in Pasadena and Galena Park,
Texas, along the Houston Ship Channel. Recognized as a
distribution hub for Houston’s refineries situated on or near the Houston
Ship Channel, the Pasadena and Galena Park terminals are the western Gulf
Coast refining community’s central interchange point. The
complex has approximately 26.2 million barrels of capacity and is
connected via pipeline to 14 refineries, four petrochemical plants and ten
major outbound pipelines. Combined, the Pasadena and Galena
Park terminals brought an incremental 1.85 million barrels of liquids
storage capacity online during 2009 (including incremental truck loading
capacity) as refinery outputs along the Gulf Coast have continued to
increase. Since Kinder Morgan Energy Partners’ acquisition of the terminal
complex in January 2001, it has upgraded its pipeline manifold connection
with the Colonial Pipeline system; added pipeline connections to new
refineries and an additional cross-channel pipeline to increase the
connectivity between the two terminals and constructed an additional
loading bay at its fully automated truck loading rack located at its
Pasadena terminal. In addition, the facilities have five ship
docks and seven barge docks for inbound and outbound movement of
products. The terminals are served by the Union Pacific
railroad;
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three
liquids facilities in the New York Harbor area: one in Carteret, New
Jersey; one in Perth Amboy, New Jersey; and one on Staten Island, New
York. Kinder Morgan Energy Partners’ two New Jersey facilities
offer viable alternatives for moving petroleum products between the
refineries and terminals throughout the New York Harbor and both are New
York Mercantile Exchange delivery points for gasoline and heating
oil. Both facilities are connected to the Intra Harbor Transfer
Service, an operation that offers direct outbound pipeline connections
that allow product to be moved from over 20 harbor delivery points to
destinations north and west of New York City.
The
Carteret facility is located along the Arthur Kill River just south of New
York City and has a capacity of approximately 7.8 million barrels of
petroleum and petrochemical products. Since its acquisition of
the terminal in January 2001, Kinder Morgan Energy Partners has added more
than 1.5 million barrels of new storage capacity and completed the
construction of a 16-inch diameter pipeline that connects to the Buckeye
pipeline system, a major products pipeline serving the East
Coast. In the second quarter of 2009, Kinder Morgan Energy
Partners announced a major expansion to the facility, which will add over
one million barrels of new liquids capacity for a large petroleum
customer. Kinder Morgan Energy Partners expects the expansion
to come on-line in the first quarter of 2011. Kinder Morgan Energy
Partners’ Carteret facility has two ship docks and four barge
docks. It is connected to the Colonial, Buckeye, Sun and Harbor
pipeline systems, and the CSX and Norfolk Southern railroads service the
facility.
The
Perth Amboy facility is also located along the Arthur Kill River and has a
capacity of approximately 3.5 million barrels of petroleum and
petrochemical products. The Perth Amboy terminal provides
chemical and petroleum storage and handling, as well as dry-bulk handling
of salt and aggregates. In addition to providing product
movement via vessel, truck and rail, Perth Amboy has direct access to the
Buckeye and Colonial pipelines. The facility has one ship dock and one
barge dock, and is connected to the CSX and Norfolk Southern
railroads.
The
Kinder Morgan Staten Island terminal is located on Staten Island, New
York. The facility is bounded to the north and west by the
Arthur Kill River and covers approximately 200 acres, of which 120 acres
are used for site operations. The terminal has a storage
capacity of approximately 3.0 million barrels for gasoline, diesel fuel
and fuel oil. The facility also maintains and operates an above
ground piping network to transfer petroleum products throughout the
operating portion of the site, and since the acquisition of the terminal
in July 2005, Kinder Morgan Energy Partners has constructed ship and barge
berths at the facility that accommodate tanker
vessels;
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two
liquids terminal facilities in the Chicago area: one facility located in
Argo, Illinois, approximately 14 miles southwest of downtown Chicago and
situated along the Chicago sanitary and ship channel; and the other
located in the Port of Chicago along the Calumet River. The
Argo facility is a large petroleum product and ethanol blending facility
and a major break bulk facility for large chemical manufacturers and
distributors. It has approximately 2.7 million barrels of
tankage capacity and three barge docks. The facility is
connected to the Enterprise and Westshore pipelines, and has a direct
connection to Midway Airport. The Canadian National railroad
services this facility.
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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The
Port of Chicago facility handles a wide variety of liquid chemicals with a
working capacity of approximately 796,000 barrels. The facility
provides access to a full slate of transportation options, including a
deep water barge/ship berth on Lake Calumet, and offers services including
truck loading and off-loading, iso-container handling and
drumming. There are two ship docks and four barge docks, and
the facility is served by the Norfolk Southern
railroad;
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the
Port of New Orleans facility, located in Harvey, Louisiana. The
New Orleans facility handles a variety of liquids products such as
chemicals, vegetable oils, animal fats, alcohols and oil field products,
and also provides ancillary services including drumming, packaging,
warehousing, and cold storage services. It has approximately
3.0 million barrels of tankage capacity, three ship docks, and one barge
dock. The Union Pacific railroad provides rail service and the
terminal can be accessed by vessel, barge, tank truck, or rail;
and
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the
Kinder Morgan North 40 terminal, located near Edmonton, Alberta,
Canada. Kinder Morgan Energy Partners constructed and placed
into service its North 40 terminal, which is a crude oil tank farm that
serves as a premier blending and storage hub for Canadian crude
oil. The facility has storage for approximately 2.15 million
barrels of crude oil and has access to more than 20 incoming pipelines and
several major outbound systems, including a connection with Kinder Morgan
Energy Partners’ Trans Mountain pipeline system. The entire
capacity of this terminal is contracted under long-term
contracts.
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Competition. Kinder Morgan
Energy Partners is one of the largest independent operators of liquids terminals
in North America. Kinder Morgan Energy Partners’ primary competitors
are IMTT, Magellan, Morgan Stanley, NuStar, Oil Tanking, Enterprise, and
Vopak.
Bulk
Terminals
Kinder
Morgan Energy Partners’ bulk terminal operations primarily involve dry-bulk
material handling services; however, it also provides conveyor manufacturing and
installation, engineering and design services, and in-plant services covering
material handling, conveying, maintenance and repair, truck-railcar-marine
transloading, railcar switching and miscellaneous marine
services. Combined, Kinder Morgan Energy Partners’ dry-bulk and
material transloading facilities handled approximately 78 million tons and 105
million tons of coal, petroleum coke, fertilizers, steel, ores and other
dry-bulk materials in 2009 and 2008, respectively. Kinder Morgan
Energy Partners owns or operates approximately 95 dry-bulk terminals in the
United States, Canada and the Netherlands.
Kinder
Morgan Energy Partners’ major bulk terminal assets include the
following:
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the
Vancouver Wharves bulk marine terminal, located at the entrance to the
Port of Vancouver, British Columbia, Canada. Kinder Morgan
Energy Partners owns certain bulk terminal buildings and equipment and
operates the terminal under a 40-year agreement. The facility
consists of five vessel berths situated on a 139-acre site, extensive rail
infrastructure, dry-bulk and liquid storage, and material handling
systems, rail track and transloading systems, and a
shiploader. The terminal can handle over 3.5 million tons of
cargo annually. In the second quarter of 2009, Kinder Morgan
Energy Partners completed a terminal expansion that brought on-line an
additional 225,000 barrels of liquids capacity. Vancouver
Wharves has access to three major rail carriers connecting to shippers in
western and central Canada and the U.S. Pacific
Northwest. Vancouver Wharves offers a variety of inbound,
outbound and value-added services for mineral concentrates, wood products,
agri-products and sulfur;
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approximately
32 petroleum coke or coal terminals Kinder Morgan Energy Partners operates
or owns. Kinder Morgan Energy Partners is the largest
independent handler of petroleum coke in the U.S., in terms of volume, and
in 2009, it handled approximately 12.9 million tons of petroleum coke, as
compared to approximately 14.8 million tons in 2008. Petroleum
coke is a by-product of the crude oil refining process and has
characteristics similar to coal. It is used in domestic utility
and industrial steam generation facilities and by the steel industry in
the manufacture of ferro alloys and carbon and graphite
products. A portion of the petroleum coke handled is imported
from or exported to foreign markets. Most of Kinder Morgan
Energy Partners’ customers are large integrated oil companies that choose
to outsource the storage and loading of petroleum coke for a
fee. All of Kinder Morgan Energy Partners’ petroleum coke
assets are located in the state of Texas, and include facilities at the
Port of Houston, the Port of Beaumont and the TGS Deepwater Terminal
located on the Houston Ship Channel. These facilities also
provide handling and storage services for a variety of other bulk
materials.
In 2009, Kinder Morgan Energy Partners also
handled approximately 27.8 million tons of coal, as compared to
approximately 34.3 million tons of coal handled in 2008. Coal
continues to be the fuel of choice for electric generation plants,
accounting for more than 50% of U.S. electric generation
feedstock. Current domestic supplies are predicted to last for
several hundred years and most coal transloaded through Kinder Morgan
Energy Partners’ coal terminals is destined for use in coal-fired electric
generation facilities. Kinder Morgan Energy Partners’ Cora coal
terminal is a high-speed, rail-to-barge coal transfer and storage facility
located on approximately 480 acres of land along the upper Mississippi
River near Rockwood, Illinois. The terminal sits on the
mainline of the Union Pacific
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Railroad
and is strategically positioned to receive coal shipments from the western
United States. The majority of the coal arrives at the terminal
by rail from the Powder River Basin in Wyoming, and the coal is then
transferred out on barges to power plants along the Ohio and Mississippi
rivers, although small quantities are shipped overseas. The
Cora terminal can receive and dump coal from trains and can load barges at
the same time, has ground capacity to store a total of 1.25 million tons
of coal, and maximum throughput at the terminal is approximately 13
million tons annually. This coal storage and transfer capacity
provides customers the flexibility to coordinate their supplies of coal
with the demand at power plants.
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The
Grand Rivers, Kentucky terminal is a coal transloading and storage
facility located along the Tennessee River just above the Kentucky
Dam. The terminal is operated on land under easements with an
initial expiration of July 2014 and has current annual throughput capacity
of approximately 12 million tons with a storage capacity of approximately
one million tons. The Grand Rivers Terminal provides easy
access to the Ohio-Mississippi River network and the Tennessee-Tombigbee
River system. The Paducah & Louisville Railroad, a short
line railroad, serves Grand Rivers with connections to seven Class I rail
lines including the Union Pacific, CSX, and Burlington Northern Santa
Fe.
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The
Cora and Grand Rivers terminals handle low sulfur coal originating in
Wyoming, Colorado, and Utah, as well as coal that originates in the mines
of southern Illinois and western Kentucky. However, since many
shippers, particularly in the East, are using western coal or a mixture of
western coal and other coals as a means of meeting environmental
restrictions, Kinder Morgan Energy Partners anticipates that growth in
volume through the two terminals will be primarily due to increased use of
western low sulfur coal originating in Wyoming, Colorado and
Utah;
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Kinder
Morgan Energy Partners’ approximately 47 ferro alloys terminals located at
strategic locations throughout the United States, which transload and
handle steel, ferro chrome, ferro manganese, ferro silicon, silicon metal
and many other alloys and ores. Kinder Morgan Energy Partners’
value-added services include canning, drumming, bagging and filling boxes
and supersacks, and its handling methods and integrity eliminates product
degradation and assures accurate inventory control. Combined,
these facilities handled approximately 15.7 million tons and 30.8 million
tons of ores/metals in 2009 and 2008, respectively. The 49%
decrease in year-to-year volumes was primarily due to the difficult
economic environment during 2009, and while the operating results of the
metal handling terminals are affected by a number of business-specific
factors, the primary drivers for Kinder Morgan Energy Partners’ ores/metal
volumes are general economic conditions in North America, Europe and
China, and the levels of worldwide steel production and
consumption.
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In
addition to steel handling activities done at the Vancouver Wharves bulk
marine terminal, Kinder Morgan Energy Partners handles numerous types of
steel and bulk commodities at two deepwater port facilities, the
Chesapeake bulk terminal facility, located on Chesapeake Bay in Sparrows
Point, Maryland, and the Berkley facility, located in Huger, South
Carolina. The Chesapeake terminal offers stevedoring services,
storage, and rail, ground, or water transportation for products such as
coal, petroleum coke, iron and steel slag, and other mineral
products. It offers both warehouse storage and approximately
100 acres of open storage. The facility is serviced by the
Norfolk Southern and CSX railroads and offers storage services to and from
vessels, barges, tank trucks or rail cars. The Berkley facility
provides dedicated storage to Nucor Corporation (a large domestic steel
company with significant operations in the Southeast region of the U.S.)
for finished steel, scrap, hot briquetted iron, and direct reduced iron
along the Cooper River. The facility also provides scrap
handling and processing services and can unload barges, vessels and
railcars.
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The
Kinder Morgan Texas terminal is a 30-acre site, which provides 50,000
square feet of climate-controlled, covered storage, and provides another
100,000 square feet of leased covered storage located on the Houston Ship
Channel. The facility can handle coils, pipe, and other
finished steel products. The facility also has 55 rail spots
and performs rail loading and unloading
services.
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Kinder
Morgan Energy Partners’ river steel facilities include facilities on the
Mississippi, Ohio, Tennessee, Missouri, and Arkansas rivers, and on other
smaller inland waterways. The Hickman and Barfield terminals
are located near Blytheville, Arkansas and provide storage and handling
services on the Mississippi river, primarily for Nucor. Both
facilities can service barge, truck, and perform rail loading and
unloading. Kinder Morgan Energy Partners’ Industry facility is
located along the Ohio River in Industry, Pennsylvania, and it provides
435,000 square feet of covered warehouse space and 200,000 square feet of
open storage. This facility primarily handles ferro alloy
products and provides value-added ancillary services such as screening,
processing, and packaging of alloy products. The Decatur,
Alabama facility is located along the Tennessee River and provides
dedicated storage to Nucor as well as scrap handling and charge bucket
handling.
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In
September 2007, Kinder Morgan Energy Partners acquired five steel handling
facilities from Marine Terminals, Inc. (including those described above
that are primarily dedicated to servicing Nucor’s steel plants), and as
part of the asset purchase, Kinder Morgan Energy Partners entered into a
service contract with Nucor. It is estimated
that
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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approximately
95% of the projected revenues and profits of these five facilities will be
generated from this contract with Nucor;
and
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the
Pier IX terminal located on a 30-acre storage site in Newport News,
Virginia. The terminal has the capacity to transload
approximately 12 million tons of bulk products per year, and for coal,
offers storage capacity of 1.4 million tons, blending services and rail to
storage or direct transfer to ship. For other dry bulk
products, the terminal offers ship to storage to rail or
truck. The Pier IX Terminal exports coal to foreign markets,
serves power plants on the eastern seaboard of the United States, and
imports cement pursuant to a long-term contract. The Pier IX
Terminal is served by the CSX Railroad, which transports coal from central
Appalachian and other eastern coal basins. Cement imported to
the Pier IX Terminal primarily originates in
Europe;
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Competition. Kinder
Morgan Energy Partners’ bulk terminals compete with numerous independent
terminal operators, other terminals owned by oil companies, stevedoring
companies, and other industrials opting not to outsource terminal
services. Many of Kinder Morgan Energy Partners’ bulk terminals were
constructed pursuant to long-term contracts for specific
customers. As a result, Kinder Morgan Energy Partners believes other
terminal operators would face a significant disadvantage in competing for this
business.
Materials
Services (rail transloading)
Kinder
Morgan Energy Partners’ materials services operations include rail or truck
transloading operations conducted at 33 owned and non-owned
facilities. The Burlington Northern Santa Fe, CSX, Norfolk Southern,
Union Pacific, Kansas City Southern and A&W railroads provide rail service
for these terminal facilities. Approximately 50% of the products
handled are liquids, including an entire spectrum of liquid chemicals, and 50%
are dry-bulk products. Many of the facilities are equipped for
bi-modal operation (rail-to-truck, and truck-to-rail) or connect via pipeline to
storage facilities. Several facilities provide railcar storage
services. Kinder Morgan Energy Partners also designs and builds
transloading facilities, performs inventory management services, and provides
value-added services such as blending, heating and sparging. In 2009
and 2008, Kinder Morgan Energy Partners’ materials services operations handled
approximately 227,000 and 348,000 railcars, respectively.
Competition. Kinder
Morgan Energy Partners’ material services operations compete with a variety of
national transload and terminal operators across the United States, including
Savage Services, Watco and Bulk Plus Logistics. Additionally, single
or multi-site terminal operators are often entrenched in the network of Class 1
rail carriers.
The
Kinder Morgan Canada–KMP business segment includes the Trans Mountain pipeline
system, the ownership of a one-third interest in the Express pipeline system,
and the 25-mile Jet Fuel pipeline system.
Trans
Mountain Pipeline System
The
Trans Mountain common carrier pipeline system originates at Edmonton, Alberta
and transports crude oil and refined petroleum to destinations in the interior
and on the west coast of British Columbia. A connecting pipeline
owned by Kinder Morgan Energy Partners delivers petroleum to refineries in the
state of Washington.
Trans
Mountain’s pipeline is 715 miles in length. The capacity of the line at Edmonton
ranges from 300,000 barrels per day when heavy crude represents 20% of the total
throughput (which is a historically normal heavy crude percentage) to 400,000
barrels per day with no heavy crude.
Trans
Mountain also operates a 5.3 mile spur line from its Sumas Pump Station to the
U.S. – Canada international border where it connects with a 63-mile pipeline
system owned and operated by Kinder Morgan Energy Partners. The
pipeline system in Washington State has a sustainable throughput capacity of
approximately 135,000 barrels per day when heavy crude represents approximately
25% of throughput and connects to four refineries located in northwestern
Washington State. The volumes of petroleum shipped to Washington State fluctuate
in response to the price levels of Canadian crude oil in relation to petroleum
produced in Alaska and other offshore sources.
In
2009, deliveries on Trans Mountain averaged 280,507 barrels per
day. This was an increase of 18% from average 2008 deliveries of
237,172 barrels per day. Shipments of refined petroleum also
represent a significant portion of Trans Mountain’s
throughput. In 2009 and 2008, combined
shipments of refined petroleum and iso-octane represented 20% of pipeline
throughput.
The
crude oil and refined petroleum transported through Trans Mountain’s pipeline
system originates in Alberta and British Columbia. The refined and partially
refined petroleum transported to Kamloops, British Columbia and
Vancouver
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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originates
from oil refineries located in Edmonton. Petroleum products delivered
through Trans Mountain’s pipeline system are used in markets in British
Columbia, Washington State and elsewhere.
Overall,
Alberta crude oil supply has been increasing steadily over the past few years as
a result of significant oil sands development with projects led by firms
including Royal Dutch Shell, Suncor Energy and Syncrude Canada. Notwithstanding
current economic factors and some announced project delays, further development
is expected to continue into the future with expansions to existing oil sands
production facilities as well as with new projects. In its moderate
growth case, the Canadian Association of Petroleum Producers forecasts Western
Canadian crude oil production to increase by over 1.4 million barrels per day by
2015. While recently expanded pipeline capacity to the United States
results in excess capacity currently, the long-term increase in supply will
require additional export capacity from Western Canada to both U.S. and offshore
markets later this decade. This long-term supply growth and
increasing global demand supports Kinder Morgan Energy Partners’ view that the
demand for transportation services provided by Trans Mountain’s pipeline will
remain strong for the foreseeable future.
Competition. Trans Mountain’s
pipeline to the West Coast of North America is one of several pipeline
alternatives for Western Canadian petroleum production. This
pipeline, like all of Kinder Morgan Energy Partners’ petroleum pipelines,
competes against other pipeline companies who could be in a position to offer
different tolling structures.
Express
and Jet Fuel Pipeline Systems
Kinder
Morgan Energy Partners owns a one-third ownership interest in the Express
pipeline system and a long-term investment in a debt security issued by Express
US Holdings LP (the obligor), the partnership that maintains ownership of the
U.S. portion of the Express pipeline system. Kinder Morgan Energy
Partners operates the Express pipeline system and accounts for its 33 1/3%
investment under the equity method of accounting. The Express
pipeline system is a batch-mode, common-carrier, crude oil pipeline system
comprised of the Express Pipeline and the Platte Pipeline, collectively referred
to in this report as the Express pipeline system. The approximate
1,700-mile integrated oil transportation pipeline connects Canadian and United
States producers to refineries located in the U.S. Rocky Mountain and Midwest
regions.
The
Express Pipeline is a 780-mile, 24-inch diameter pipeline that begins at the
crude oil pipeline hub at Hardisty, Alberta and terminates at the Casper,
Wyoming facilities of the Platte Pipeline. At the Hardisty, Canada
oil hub, the Express Pipeline receives a variety of light, medium and heavy
crude oil produced in Western Canada, and makes deliveries to markets in
Montana, Wyoming, Utah and Colorado. The Express Pipeline has a
design capacity of 280,000 barrels per day. Receipts at Hardisty
averaged 208,246 barrels per day in 2009, as compared to 196,160 barrels per day
in 2008.
The
Platte Pipeline is a 926-mile, 20-inch diameter pipeline that runs from the
crude oil pipeline hub at Casper, Wyoming to refineries and interconnecting
pipelines in the Wood River, Illinois area, and includes related pumping and
storage facilities (including tanks). The Platte Pipeline transports crude oil
shipped on the Express Pipeline and crude oil produced from the U.S. Rocky
Mountain area to markets located in Kansas and Illinois, and to other
interconnecting carriers in those areas. The Platte Pipeline has a
current capacity of approximately 150,000 barrels per day downstream of Casper,
Wyoming and approximately 140,000 barrels per day downstream of Guernsey,
Wyoming. Platte deliveries averaged 137,810 barrels per day during 2009, as
compared to 133,637 barrels per day during 2008.
The
current Express pipeline system rate structure is a combination of committed
rates and uncommitted rates. The committed rates apply to those shippers who
have signed long-term (10 or 15 year) contracts with the Express pipeline system
to transport crude oil on a ship-or-pay basis. As of December 31,
2009, Express had total firm commitments of approximately 231,000 barrels per
day, or 83% of its total capacity. These contracts expire in 2012,
2014 and 2015 in amounts of 40%, 11% and 32% of total capacity,
respectively. The remaining contracts provide for committed tolls for
transportation on the Express pipeline system, and can be increased each year by
up to 2%. The capacity in excess of 231,000 barrels per day is made
available to shippers as uncommitted capacity.
Kinder
Morgan Energy Partners also owns and operates the approximate 25-mile aviation
turbine fuel pipeline that serves the Vancouver International Airport, located
in Vancouver, British Columbia, Canada. The turbine fuel pipeline is
referred to in this report as the Jet Fuel pipeline system. In
addition to its receiving and storage facilities located at the Westridge Marine
terminal, located in the Port of Vancouver, the Jet Fuel pipeline system’s
operations include a terminal at the Vancouver airport that consists of five jet
fuel storage tanks with an overall volume of 15,000 barrels.
Competition. The
Express pipeline system to the U.S. Rocky Mountains and Midwest is one of
several pipeline alternatives for Western Canadian petroleum production, and
throughput on the Express pipeline system may decline if (i) overall petroleum
production in Alberta declines, (ii) demand in the U.S. Rocky Mountains
decreases, (iii) new pipelines are built; or (iv) tolls become uncompetitive
compared to alternatives. The Express pipeline system competes
against other pipeline providers who could be in a position to establish and
offer lower tolls.
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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In
February 2008, we completed the sale of an 80% ownership interest in NGPL PipeCo
LLC for approximately $5.9 billion. We account for our 20% ownership interest as
an equity method investment. We continue to operate NGPL’s assets pursuant to a
15-year operating agreement. NGPL owns and operates approximately 9,200 miles of
interstate natural gas pipelines, storage fields, field system lines and related
facilities, consisting primarily of two major interconnected natural gas
transmission pipelines terminating in the Chicago, Illinois metropolitan area.
NGPL’s Amarillo Line originates in the West Texas and New Mexico producing areas
and is comprised of approximately 4,400 miles of mainline and various
small-diameter pipelines. Its other major pipeline, the Gulf Coast Line,
originates in the Gulf Coast areas of Texas and Louisiana and consists of
approximately 4,100 miles of mainline and various small-diameter pipelines.
These two main pipelines are connected at points in Texas and Oklahoma by NGPL’s
approximately 800-mile Amarillo/Gulf Coast pipeline. NGPL’s system has 813
points of interconnection with 34 interstate pipelines, 34 intrastate pipelines,
38 local distribution companies, 32 end users including power plants and a
number of gas producers, thereby providing significant flexibility in the
receipt and delivery of natural gas.
NGPL
is one of the nation’s largest natural gas storage operators with approximately
600 billion cubic feet of total natural gas storage capacity, approximately 258
billion cubic feet of working gas capacity and over 4.3 billion cubic feet per
day of peak deliverability from its storage facilities, which are located in
major supply areas and near the markets it serves. NGPL owns and operates 13
underground storage reservoirs in eight field locations in four states. These
storage assets complement its pipeline facilities and allow it to optimize
pipeline deliveries and meet peak delivery requirements in its principal
markets.
Competition. NGPL
competes with other transporters of natural gas in virtually all of the markets
it serves and, in particular, in the Chicago area, which is the northern
terminus of NGPL’s two major pipeline segments and its largest market. These
competitors include both interstate and intrastate natural gas pipelines that
transport U.S. produced natural gas along with the Alliance Pipeline, which
transports Canada-produced natural gas, into the Chicago area. The Vector
Pipeline provides the ability to transport Chicago area natural gas supplies to
additional markets that are farther north and farther east. The overall impact
of the considerable pipeline capacity into the Chicago area, combined with
limited take-away capacity and the demand in the area creates a situation that
is competitive and dynamic with respect to the impact on individual transporters
such as NGPL. From time to time, other pipelines are proposed that would compete
with NGPL. We cannot predict whether or when any such pipeline might be built,
nor its impact on NGPL’s operations or profitability.
NGPL Section 5
Proceeding. On November 19, 2009, NGPL was notified by the
FERC of a proceeding against it pursuant to section 5 of the Natural Gas Act
(the “Order”). The proceeding will set the matter for hearing and
determine whether NGPL’s current rates, which were approved by the FERC in
NGPL’s last rate case settlement, remain just and reasonable. The
FERC made no findings in its Order as to what would constitute just and
reasonable rates or a reasonable return for NGPL. A proceeding under section 5
of the Natural Gas Act is prospective in nature. A change in rates
charged customers by NGPL would likely occur only after the FERC has issued a
final order. According to the procedural schedule adopted in the
case, an initial Administrative Law Judge decision is due by November 15,
2010. The final FERC decision will be based on the record developed
before the Administrative Law Judge.
In
January 2008, we sold our interests in three natural gas-fired power plants in
Colorado. Our remaining Power operations consist of (i) an ownership interest in
and operations of a 550-megawatt natural gas-fired electricity generation
facility in Michigan (“Triton Power”) and (ii) operating and maintaining a
105-megawatt natural gas-fired power plant in Snyder, Texas, under a cost
reimbursement agreement with the CO2–KMP
business segment. During 2009, most of Power’s revenues represented operating
revenues from Triton Power.
Upon
the adoption of Accounting Standards Update No. 2009-17, which amended the
codification’s “Consolidation” topic, on January 1, 2010, Triton Power
operations will no longer be consolidated into our financial statements, but be
treated as an equity investment, resulting in decreases to revenues, operating
expenses and noncontrolling interests with no impact to net income attributable
to Kinder Morgan, Inc. See Note 18 of the accompanying Notes to Consolidated
Financial Statements for
“Recent Accounting Pronouncements.”
Our
Michigan facility competes with other commercial wholesale generators
interconnected to the Midwest Independent System Operator grid. The
principal impact of this competition on our Michigan facility is the level of
dispatch of the plant and the related, but minor, effect on
profitability.
Our
total revenues are derived from a wide customer base. For each of the years
ended December 31, 2009 and 2008, and seven months ended December 31, 2007 and
five months ended May 31, 2007, no revenues from transactions with a single
external customer accounted for 10% or more of our total consolidated
revenues. Kinder Morgan Energy Partners’ Texas
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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intrastate
natural gas pipeline group buys and sells significant volumes of natural gas
within the state of Texas and, to a far lesser extent, the CO2–KMP
business segment also sells natural gas. Combined, total revenues
from the sales of natural gas from the Natural Gas Pipelines–KMP, CO2–KMP and
NGPL (from January 1, 2007 to February 14, 2008) business segments for the year
ended December 31, 2009 and 2008, seven months ended December 31, 2007 and five
months ended May 31, 2007 accounted for 44.8%, 63.7%, 56.7% and 58.4%,
respectively, of our total consolidated revenues.
As
a result of Kinder Morgan Energy Partners’ Texas intrastate group selling
natural gas in the same price environment in which it is purchased, both our
total consolidated revenues and our total consolidated purchases (cost of sales)
increase considerably due to the inclusion of the cost of gas in both financial
statement line items. However, these higher revenues and higher
purchased gas costs do not necessarily translate into increased margins, in
comparison to those situations in which a fee is charged to transport gas owned
by others. To the extent possible, Kinder Morgan Energy Partners’
attempts to balance the pricing and timing of its natural gas purchases to its
natural gas sales, and these contracts are often settled in terms of an index
price for both purchases and sales. We do not believe that a loss of
revenues from any single customer would have a material adverse effect on our
business, financial position, results of operations or cash flows.
Interstate
Common Carrier Refined Petroleum Products and Oil Pipeline Rate Regulation –
U.S. Operations
Some
of our U.S. refined petroleum products and crude oil pipelines are interstate
common carrier pipelines, subject to regulation by the FERC under the Interstate
Commerce Act, or ICA. The ICA requires that we maintain our tariffs
on file with the FERC. Those tariffs set forth the rates we charge
for providing transportation services on our interstate common carrier pipelines
as well as the rules and regulations governing these services. The
ICA requires, among other things, that such rates on interstate common carrier
pipelines be “just and reasonable” and nondiscriminatory. The ICA
permits interested persons to challenge newly proposed or changed rates and
authorizes the FERC to suspend the effectiveness of such rates for a period of
up to seven months and to investigate such rates. If, upon completion
of an investigation, the FERC finds that the new or changed rate is unlawful, it
is authorized to require the carrier to refund the revenues in excess of the
prior tariff collected during the pendency of the investigation. The
FERC may also investigate, upon complaint or on its own motion, rates that are
already in effect and may order a carrier to change its rates
prospectively. Upon an appropriate showing, a shipper may obtain
reparations for damages sustained during the two years prior to the filing of a
complaint.
On
October 24, 1992, Congress passed the Energy Policy Act of 1992. The
Energy Policy Act deemed petroleum products pipeline tariff rates that were in
effect for the 365-day period ending on the date of enactment or that were in
effect on the 365th day preceding enactment and had not been subject to
complaint, protest or investigation during the 365-day period to be just and
reasonable or “grandfathered” under the ICA. The Energy Policy Act
also limited the circumstances under which a complaint can be made against such
grandfathered rates. The rates Kinder Morgan Energy Partners charged for
transportation service on its Cypress Pipeline were not suspended or subject to
protest or complaint during the relevant 365-day period established by the
Energy Policy Act. For this reason, we believe these rates should be
grandfathered under the Energy Policy Act. Certain rates on Kinder
Morgan Energy Partners’ Pacific operations pipeline system were subject to
protest during the 365-day period established by the Energy Policy
Act. Accordingly, certain of the Pacific pipelines’ rates have been,
and continue to be, subject to complaints with the FERC, as is more fully
described in Note 16 of the accompanying Notes to Consolidated Financial
Statements.
Petroleum
products pipelines may change their rates within prescribed ceiling levels that
are tied to an inflation index. Shippers may protest rate increases
made within the ceiling levels, but such protests must show that the portion of
the rate increase resulting from application of the index is substantially in
excess of the pipeline’s increase in costs from the previous year. A
pipeline must, as a general rule, utilize the indexing methodology to change its
rates. The FERC, however, uses cost-of-service ratemaking,
market-based rates and settlement rates as alternatives to the indexing approach
in certain specified circumstances.
Common
Carrier Pipeline Rate Regulation – Canadian Operations
The
Canadian portion of Kinder Morgan Energy Partners’ crude oil and refined
petroleum products pipeline systems is under the regulatory jurisdiction of
Canada’s National Energy Board (“NEB”). The National Energy Board Act
gives the NEB power to authorize pipeline construction and to establish tolls
and conditions of service.
Trans Mountain. In
the fourth quarter of 2006, Kinder Morgan Energy Partners’ subsidiary Trans
Mountain Pipeline L.P. completed negotiations with the Canadian Association of
Petroleum Producers and principal shippers for a new incentive toll settlement
for its Trans Mountain Pipeline to be effective for the period starting January
1, 2006 and ending December 31, 2010. The 2006 toll settlement
incorporates an incentive toll mechanism that is intended to provide Trans
Mountain with the opportunity to earn a return on equity greater than that
calculated using the formula established by the NEB. In return for
this opportunity, Trans Mountain has agreed to assume certain risks and provide
cost certainty in certain areas. Part of the
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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incentive
toll mechanism specifies that Trans Mountain is allowed to keep 75% of the net
revenue generated by throughput in excess of 92.5% of the capacity of the
pipeline.
The
2006 incentive toll settlement provides for base tolls which will remain in
effect for the five-year period, unless recalculated or adjusted in certain
specified circumstances. The toll settlement also governs the
financial arrangements for two expansion projects which were completed during
2007 and 2008. Combined, the projects cost approximately C$765
million and added 75,000 barrels per day of incremental capacity to the system,
increasing pipeline capacity to approximately 300,000 barrels per
day. The toll charged for the portion of Trans Mountain’s pipeline
system located in the United States falls under the jurisdiction of the
FERC. See “—Interstate Common Carrier Refined Petroleum Products and
Oil Pipeline Rate Regulation – U.S. Operations” preceding.
Express Pipeline
System. The Canadian segment of the Express Pipeline is
regulated by the NEB as a Group 2 pipeline, which results in rates and terms of
service being regulated on a complaint basis only. Express committed
rates are subject to a 2% inflation adjustment April 1 of each
year. The U.S. segment of the Express Pipeline and the Platte
Pipeline are regulated by the FERC. See “—Interstate Common Carrier
Refined Petroleum Products and Oil Pipeline Rate Regulation – U.S.
Operations.” Additionally, movements on the Platte Pipeline within
the state of Wyoming are regulated by the Wyoming Public Service Commission,
which regulates the tariffs and terms of service of public utilities that
operate in the state of Wyoming. The Wyoming Public Service
Commission standards applicable to rates are similar to those of the FERC and
the NEB.
Interstate
Natural Gas Transportation and Storage Regulation
Posted
tariff rates set the general range of maximum and minimum rates we charge
shippers on our interstate natural gas pipelines. Within that range,
each pipeline is permitted to charge discounted rates to meet competition, so
long as such discounts are offered to all similarly situated shippers and
granted without undue discrimination. Apart from discounted rates
offered within the range of tariff maximums and minimums, the pipeline is
permitted to offer negotiated rates where the pipeline and shippers want rate
certainty, irrespective of changes that may occur to the range of tariff-based
maximum and minimum rate levels. Accordingly, there are a variety of
rates that different shippers may pay. For example, some shippers may
pay a negotiated rate that is different than the posted tariff rate and some may
pay the posted maximum tariff rate or a discounted rate that is limited by the
posted maximum and minimum tariff rates. Most of the rates Kinder
Morgan Energy Partners charges shippers on its greenfield projects, like the
Rockies Express or Midcontinent Express pipelines, are pursuant to negotiated
rate long-term transportation agreements. As such, negotiated rates
provide certainty to the pipeline and the shipper of a fixed rate during the
term of the transportation agreement, regardless of changes to the posted tariff
rates. While rates may vary by shipper and circumstance, the terms
and conditions of pipeline transportation and storage services are not generally
negotiable.
The
FERC regulates the rates, terms and conditions of service, construction and
abandonment of facilities by companies performing interstate natural gas
transportation and storage services under the Natural Gas Act. To a
lesser extent, the FERC regulates interstate transportation rates, terms and
conditions of service under the Natural Gas Policy Act of
1978. Beginning in the mid-1980’s, the FERC initiated a number of
regulatory changes intended to create a more competitive environment in the
natural gas marketplace. Among the most important of these changes
were:
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the
Energy Policy Act of 2005 (2005), which, among other things, amended the
Natural Gas Act to prohibit market manipulation by any entity, directed
the FERC to facilitate market transparency in the market for sale or
transportation of physical natural gas in interstate commerce, and
significantly increased the penalties for violations of the Natural Gas
Act, the Natural Gas Policy Act of 1978, or FERC rules, regulations or
orders thereunder;
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Order
No. 436 (1985) which required open-access, nondiscriminatory
transportation of natural gas;
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Order
No. 497 (1988) which set forth new standards and guidelines imposing
certain constraints on the interaction between interstate natural gas
pipelines and their marketing affiliates and imposing certain disclosure
requirements regarding that
interaction;
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Order
No. 636 (1992) which required interstate natural gas pipelines that
perform open-access transportation under blanket certificates to
“unbundle” or separate their traditional merchant sales services from
their transportation and storage services and to provide comparable
transportation and storage services with respect to all natural gas
supplies.
Natural gas pipelines must now separately
state the applicable rates for each unbundled service they provide (i.e.,
for the natural gas commodity, transportation and
storage). Order No. 636 contains a number of procedures
designed to increase competition in the interstate natural gas industry,
including (i) requiring the unbundling of sales services from other
services, (ii) permitting holders of firm capacity on interstate natural
gas pipelines to release all or a part of their capacity for resale by the
pipeline and (iii) providing for the issuance of blanket sales
certificates to interstate
pipelines
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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for
unbundled services. Order No. 636 has been affirmed in all material
respects upon judicial review, and our own FERC orders approving our unbundling
plans are final and not subject to any pending judicial review; and
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·
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Order
No. 717 (2008 and 2009) which revised the FERC standards of conduct for
natural gas and electric transmission providers by eliminating Order No.
2004’s concept of energy affiliates and corporate separation in favor of
an employee functional approach as used in Order No. 497.
On
November 25, 2003, the FERC issued Order No. 2004, adopting revised
standards of conduct that apply uniformly to interstate natural gas
pipelines and public utilities. In light of the changing
structure of the energy industry, these standards of conduct govern
relationships between regulated interstate natural gas pipelines and all
of their energy affiliates. These standards were designed to
(i) eliminate the loophole in the previous regulations that did not cover
an interstate natural gas pipeline’s relationship with energy affiliates
that are not marketers, (ii) prevent interstate natural gas pipelines from
giving an undue preference to any of their energy affiliates and (iii)
ensure that transmission is provided on a nondiscriminatory
basis. In addition, unlike the prior regulations, these
requirements applied even if the energy affiliate was not a customer of
its affiliated interstate pipeline. However, on November 17,
2006, the United States Court of Appeals for the District of Columbia
Circuit vacated FERC Order No. 2004 as applied to natural gas pipelines,
and remanded these same orders back to the FERC.
On
October 16, 2008, the FERC issued a Final Rule in Order No.
717. According to the provisions of Order No. 717, a
transmission provider is prohibited from disclosing to a marketing
function employee non-public information about the transmission system or
a transmission customer. The final rule also retains the
long-standing no-conduit rule, which prohibits a transmission function
provider from disclosing non-public information to marketing function
employees by using a third party conduit. Additionally, the final
rule requires that a transmission provider provide annual training on the
Standards of Conduct to all transmission function employees, marketing
function employees, officers, directors, supervisory employees, and any
other employees likely to become privy to transmission function
information. This rule became effective November 26,
2008.
On
October 15, 2009, the FERC issued Order No. 717-A, an order on rehearing
and clarification regarding FERC’s Affiliate Rule—Standards of Conduct,
and on November 16, 2009, the FERC issued Order No. 717-B, an order
clarifying what employees should be considered marketing function
employees. In both orders, the FERC clarified a lengthy list of
issues relating to: the applicability, the definition of transmission
function and transmission function employees, the definition of marketing
function and marketing function employees, the definition of transmission
function information, independent functioning, transparency, training, and
North American Energy Standards Board business practice
standards. The FERC generally reaffirmed its determinations in
Order No. 717, but granted rehearing on and clarified certain
provisions. Order Nos. 717-A and 717-B aim to make the
Standards of Conduct clearer and aim to refocus the rules on the areas
where there is the greatest potential for abuse. The rehearing
and clarification granted in Order No. 717-A are not anticipated to have a
material impact on the operation of our interstate
pipelines.
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California
Public Utilities Commission Rate Regulation
The
intrastate common carrier operations of Kinder Morgan Energy Partners’ Pacific
operations pipelines in California are subject to regulation by the California
Public Utilities Commission (“CPUC”), under a “depreciated book plant”
methodology, which is based on an original cost measure of
investment. Intrastate tariffs filed by Kinder Morgan Energy Partners
with the CPUC have been established on the basis of revenues, expenses and
investments allocated as applicable to the California intrastate portion of the
Pacific operations’ business. Tariff rates with respect to intrastate
pipeline service in California are subject to challenge by complaint by
interested parties or by independent action of the CPUC. A variety of
factors can affect the rates of return permitted by the CPUC, and certain other
issues similar to those which have arisen with respect to Kinder Morgan Energy
Partners’ FERC regulated rates could also arise with respect to its intrastate
rates. Certain of the Pacific operations’ pipeline rates have been,
and continue to be, subject to complaints with the CPUC, as is more fully
described in Note 16 of the accompanying Notes to Consolidated Financial
Statements.
Texas
Railroad Commission Rate Regulation
The
intrastate operations of our natural gas and crude oil pipelines in Texas are
subject to certain regulation with respect to such intrastate transportation by
the Texas Railroad Commission. The Texas Railroad Commission has the
authority to regulate our transportation rates, though it generally has not
investigated the rates or practices of our intrastate pipelines in the absence
of shipper complaints.
Safety
Regulation
Our
interstate pipelines are subject to regulation by the United States Department
of Transportation (“U.S. DOT”), and our intrastate pipelines and other
operations are subject to comparable state regulations with respect to their
design,
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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installation,
testing, construction, operation, replacement and
management. Comparable regulation exists in some states in which we
conduct pipeline operations. In addition, our truck and terminal
loading facilities are subject to U.S. DOT regulations dealing with the
transportation of hazardous materials by motor vehicles and railcars, and we are
also subject to the requirements of the Federal Occupational Safety and Health
Act and other comparable federal and state statutes that address employee health
and safety.
The
Pipeline Safety Improvement Act of 2002 provides guidelines in the areas of
testing, education, training and communication. The Pipeline Safety
Act requires pipeline companies to perform integrity tests on natural gas
transmission pipelines that exist in high population density areas that are
designated as high consequence areas. Testing consists of hydrostatic
testing, internal magnetic flux or ultrasonic testing, or direct assessment of
the piping. In addition to the pipeline integrity tests, pipeline
companies must implement a qualification program to make certain that employees
are properly trained. A similar integrity management rule exists for
refined petroleum products pipelines.
In
general, we expect to increase expenditures in the future to comply with higher
industry and regulatory safety standards; however we cannot accurately estimate
such increases in expenditures at this time.
State
and Local Regulation
Our
activities are subject to various state and local laws and regulations, as well
as orders of regulatory bodies, governing a wide variety of matters, including
marketing, production, pricing, pollution, protection of the environment, human
health and safety.
Our
business operations are subject to federal, state, provincial and local laws and
regulations relating to environmental protection, pollution and human health and
safety in the United States and Canada. For example, if an accidental
leak, release or spill of liquid petroleum products, chemicals or other
hazardous substances occurs at or from our pipelines, or at or from our storage
or other facilities, we may experience significant operational disruptions, and
we may have to pay a significant amount to clean up the leak, release or spill,
pay for government penalties, address natural resource damages, compensate for
human exposure or property damage, install costly pollution control equipment or
a combination of these and other measures. The resulting costs and
liabilities could materially and negatively affect our business, financial
condition, results of operations and cash flows. In addition,
emission controls required under federal, state and provincial environmental
laws could require significant capital expenditures at our
facilities.
Environmental
and human health and safety laws and regulations are subject to
change. The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may be perceived to affect the
environment, wildlife, natural resources and human health. Also,
there can be no assurance as to the amount or timing of future expenditures for
environmental regulation compliance or remediation, and actual future
expenditures may be different from the amounts we currently
anticipate. Revised or additional regulations that result in
increased compliance costs or additional operating restrictions, particularly if
those costs are not fully recoverable from our customers, could have a material
adverse effect on our business, financial position, results of operations and
cash flows.
In
accordance with generally accepted accounting principles, we accrue liabilities
for environmental matters when it is probable that obligations have been
incurred and the amounts can be reasonably estimated. This policy
applies to assets or businesses currently owned or previously
disposed. We have accrued liabilities for probable environmental
remediation obligations at various sites, including multiparty sites where the
U.S. Environmental Protection Agency (“U.S. EPA”), or similar state agency has
identified us as one of the potentially responsible parties. The
involvement of other financially responsible companies at these multiparty sites
could increase or mitigate our actual joint and several liability
exposures. Although no assurance can be given, we believe that the
ultimate resolution of these environmental matters will not have a material
adverse effect on our business, financial position or results of
operations. We have accrued an environmental reserve in the amount of
$86.3 million as of December 31, 2009. Our reserve estimates range in
value from approximately $86.3 million to approximately $143.7 million, and we
recorded our liability equal to the low end of the range, as we did not identify
any amounts within the range as a better estimate of the
liability. For additional information related to environmental
matters, see Note 16 of the accompanying Notes to Consolidated Financial
Statements.
Hazardous
and Non-Hazardous Waste
We
generate both hazardous and non-hazardous wastes that are subject to the
requirements of the Federal Resource Conservation and Recovery Act and
comparable state statutes. From time to time, state regulators and
the U.S. EPA, consider the adoption of stricter disposal standards for
non-hazardous waste. Furthermore, it is possible that some wastes
that are currently classified as non-hazardous, which could include wastes
currently generated during our pipeline or liquids or bulk terminal operations,
may in the future be designated as hazardous wastes. Hazardous wastes
are subject to more rigorous and costly handling and disposal requirements than
non-hazardous wastes. Such changes in the regulations
may
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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result
in additional capital expenditures or operating expenses for us.
Superfund
The
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)
in this report and commonly known as the Superfund law, and analogous state laws
impose joint and several liability, without regard to fault or the legality of
the original conduct, on certain classes of potentially responsible persons for
releases of hazardous substances into the environment. These persons
include the owner or operator of a site and companies that disposed or arranged
for the disposal of the hazardous substances found at the site.
CERCLA
authorizes the U.S. EPA and, in some cases, third parties to take actions in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur, in
addition to compensation for natural resource damages, if
any. Although petroleum is excluded from CERCLA’s definition of a
hazardous substance, in the course of our ordinary operations, we have and will
generate materials that may fall within the definition of a hazardous
substance. By operation of law, if we are determined to be a
potentially responsible person, we may be responsible under CERCLA for all or
part of the costs required to clean up sites at which such materials are
present, in addition to compensation for natural resource damages, if
any.
Clean
Air Act
Our
operations are subject to the Clean Air Act, its implementing regulations, and
analogous state statutes and regulations. We believe that the
operations of our pipelines, storage facilities and terminals are in substantial
compliance with such statutes. The Clean Air Act regulations contain
lengthy, complex provisions that may result in the imposition over the next
several years of certain pollution control requirements with respect to air
emissions from the operations of our pipelines, treating facilities, storage
facilities and terminals. Depending on the nature of those
requirements and any additional requirements that may be imposed by state and
local regulatory authorities, we may be required to incur certain capital and
operating expenditures over the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals and addressing other air emission-related issues. At this
time, we are unable to fully estimate the effect on earnings or operations or
the amount and timing of such required capital expenditures; however, we do not
believe that we will be materially adversely affected by any such
requirements.
Clean
Water Act
Our
operations can result in the discharge of pollutants. The Federal
Water Pollution Control Act of 1972, as amended, also known as the Clean Water
Act, and analogous state laws impose restrictions and controls regarding the
discharge of pollutants into state waters or waters of the United
States. The discharge of pollutants into regulated waters is
prohibited, except in accordance with the terms of a permit issued by applicable
federal or state authorities. The Oil Pollution Act was enacted in
1990 and amends provisions of the Clean Water Act pertaining to prevention and
response to oil spills. Spill prevention control and countermeasure
requirements of the Clean Water Act and some state laws require containment and
similar structures to help prevent contamination of navigable waters in the
event of an overflow or release.
Climate
Change
Studies
have suggested that emissions of certain gases, commonly referred to as
greenhouse gases, may be contributing to warming of the Earth’s
atmosphere. Methane, a primary component of natural gas, and carbon
dioxide, which is naturally occurring and also a byproduct of burning of natural
gas, are examples of greenhouse gases. The U.S. Congress is actively
considering legislation to reduce emissions of greenhouse gases. On
June 26, 2009, the U.S. House of Representatives passed the “American Clean
Energy and Security Act of 2009 (“ACESA”), which would establish an economy-wide
cap-and-trade program to reduce U.S. emissions of “greenhouse gases” including
carbon dioxide and methane. The U.S. Senate is working on its own legislation
for restricting domestic greenhouse gas emissions, and President Obama has
indicated his support of legislation to reduce greenhouse gas emissions through
an emission allowance system. It is not possible at this time to predict when
the Senate may act on climate change legislation or how any bill passed by the
Senate would be reconciled with ACESA. The U.S. EPA separately announced on
December 7, 2009, its findings that emissions of carbon dioxide, methane and
other “greenhouse gases” present an endangerment to human health and the
environment. These findings by the U.S. EPA may allow the agency to proceed with
the adoption and implementation of regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean Air Act. In
addition, on September 22, 2009, the U.S EPA issued a final rule requiring the
reporting of greenhouse gas emissions in the United States beginning in 2011 for
emissions occurring in 2010 from specified large greenhouse gas emission
sources, fractionated natural gas liquids, and the production of naturally
occurring carbon dioxide, like Kinder Morgan Energy Partners’ McElmo Dome carbon
dioxide field, even when such production is not emitted to the
atmosphere.
Because
our operations, including our compressor stations and gas processing plants in
the Natural Gas Pipelines–KMP segment, emit various types of greenhouse gases,
primarily methane and carbon dioxide, such legislation or regulation
could
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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increase
our costs related to operating and maintaining our facilities and require us to
install new emission controls on our facilities, acquire allowances for our
greenhouse gas emissions, pay taxes related to our greenhouse gas emissions and
administer and manage a greenhouse gas emissions program. We are not able at
this time to estimate such increased costs; however, they could be significant.
While we may be able to include some or all of such increased costs in the rates
charged by our natural gas pipelines, such recovery of costs is uncertain in all
cases and may depend on events beyond our control including the outcome of
future rate proceedings before the FERC and the provisions of any final
legislation or other regulations. Any of the foregoing could have adverse
effects on our business, financial position, results of operations and
prospects.
Some
climatic models indicate that global warming is likely to result in sea level
rise, increased intensity of hurricanes and tropical storms, and increased
frequency of extreme precipitation and flooding. We may experience
increased insurance premiums and deductibles, or a decrease in available
coverage, for our assets in areas subject to severe weather. To the
extent these phenomena occur, they could damage our physical assets, especially
operations located in low-lying areas near coasts and river banks, and
facilities situated in hurricane-prone regions. However, the timing
and location of these climate change impacts is not known with any certainty
and, in any event, these impacts are expected to manifest themselves over a long
time horizon. Thus, we are not in a position to say whether the
physical impacts of climate change pose a material risk to our business,
financial position, results of operations or prospects.
Because
natural gas emits less greenhouse gas emissions per unit of energy than
competing fossil fuels, cap-and-trade legislation or U.S. EPA regulatory
initiatives could stimulate demand for natural gas by increasing the relative
cost of fuels such as coal and oil. In addition, we anticipate that
greenhouse gas regulations will increase demand for carbon sequestration
technologies, such as the techniques we have successfully demonstrated in our
enhanced oil recovery operations within the CO2-KMP
segment. However, these positive effects on our markets may be offset
if these same regulations also cause the cost of natural gas to increase
relative to competing non-fossil fuels. Although the magnitude and
direction of these impacts cannot now be predicted, greenhouse gas regulations
could have material adverse effects on our business, financial position, results
of operations and prospects.
Department
of Homeland Security
In
Section 550 of the Homeland Security Appropriations Act of 2007, the U.S.
Congress gave the Department of Homeland Security (“DHS”), regulatory authority
over security at certain high-risk chemical facilities. Pursuant to
its congressional mandate, on April 9, 2007, the DHS promulgated the Chemical
Facility Anti-Terrorism Standards and required all high-risk chemical and
industrial facilities, including oil and gas facilities, to comply with the
regulatory requirements of these standards.
This
process includes completing security vulnerability assessments, developing site
security plans, and implementing protective measures necessary to meet
DHS-defined risk-based performance standards. The DHS has not
provided final notice to all facilities that DHS determines to be high risk and
subject to the rule. Therefore, neither the extent to which our
facilities may be subject to coverage by the rules nor the associated costs to
comply can currently be determined, but it is possible that such costs could be
substantial.
We
employed 7,931 full-time people at December 31, 2009, including employees of our
indirect subsidiary KMGP Services Company, Inc., who are dedicated to the
operations of Kinder Morgan Energy Partners, and employees of Kinder Morgan
Canada Inc. Approximately 890 full-time hourly personnel at certain terminals
and pipelines are represented by labor unions under collective bargaining
agreements that expire between 2010 and 2014. We, KMGP Services
Company, Inc., and Kinder Morgan Canada Inc. each consider relations
with our employees to be good. For more information on our related party
transactions, see Note 11 of the accompanying Notes to Consolidated Financial
Statements.
KMGP
Services Company, Inc., a subsidiary of Kinder Morgan G.P., Inc., provides
employees and Kinder Morgan Services LLC, a subsidiary of Kinder Morgan
Management, provides centralized payroll and employee benefits services to
Kinder Morgan Management, Kinder Morgan Energy Partners and Kinder Morgan Energy
Partners’ operating partnerships and subsidiaries (collectively, “the Group”).
Employees of KMGP Services Company, Inc. are assigned to work for one or more
members of the Group. The direct costs of compensation, benefits expenses,
employer taxes and other employer expenses for these employees are allocated and
charged by Kinder Morgan Services LLC to the appropriate members of the Group,
and the members of the Group reimburse their allocated shares of these direct
costs. No profit or margin is charged by Kinder Morgan Services LLC to the
members of the Group. Our human resources department provides the administrative
support necessary to implement these payroll and benefits services, and the
related administrative costs are allocated to members of the Group in accordance
with existing expense allocation procedures. The effect of these arrangements is
that each member of the Group bears the direct compensation and employee
benefits costs of its assigned or partially assigned employees, as the case may
be, while also bearing its allocable share of administrative costs. Pursuant to
its limited
Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
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partnership
agreement, Kinder Morgan Energy Partners provides reimbursement for its share of
these administrative costs and such reimbursements are accounted for as
described above. Kinder Morgan Energy Partners reimburses Kinder Morgan
Management with respect to the costs incurred or allocated to Kinder Morgan
Management in accordance with Kinder Morgan Energy Partners’ limited partnership
agreement, the Delegation of Control Agreement among Kinder Morgan G.P., Inc.,
Kinder Morgan Management, Kinder Morgan Energy Partners and others, and Kinder
Morgan Management’s limited liability company agreement.
Our
named executive officers and other employees that provide management or services
to both us and the Group are employed by us. Additionally, other of our
employees assist Kinder Morgan Energy Partners in the operation of its Natural
Gas Pipeline assets. These employees’ expenses are allocated without a profit
component between us and the appropriate members of the Group.
We
believe that we have generally satisfactory title to the properties we own and
use in our businesses, subject to liens on the assets of Kinder Morgan, Inc. and
its subsidiaries (excluding Kinder Morgan Energy Partners and its subsidiaries)
incurred in connection with the financing of the Going Private transaction,
liens for current taxes, liens incident to minor encumbrances, and easements and
restrictions that do not materially detract from the value of such property or
the interests in those properties or the use of such properties in our
businesses. We generally do not own the land on which our pipelines are
constructed. Instead, we obtain the right to construct and operate the pipelines
on other people’s land for a period of time. Substantially all of our pipelines
are constructed on rights-of-way granted by the apparent record owners of such
property. In many instances, lands over which rights-of-way have been obtained
are subject to prior liens that have not been subordinated to the right-of-way
grants. In some cases, not all of the apparent record owners have joined in the
right-of-way grants, but in substantially all such cases, signatures of the
owners of majority interests have been obtained. Permits have been obtained from
public authorities to cross over or under, or to lay facilities in or along,
water courses, county roads, municipal streets and state highways. In
some instances, such permits are revocable at the election of the grantor, or,
the pipeline may be required to move its facilities at its own expense. Permits
have also been obtained from railroad companies to cross over or under lands or
rights-of-way, many of which are also revocable at the grantor’s election. Some
such permits require annual or other periodic payments. In a few minor cases,
property for pipeline purposes was purchased in fee.
Our
terminals, storage facilities, processing plants, regulator and compressor
stations, offices and related facilities are located on real property owned or
leased by us. In some cases, the real property we lease is on federal, state,
provincial or local government land.
(D)
Financial Information about Geographic Areas
For
geographic information concerning our assets and operations, see Note 15 of the
accompanying Notes to Consolidated Financial Statements.
(E)
Available Information
We
make available free of charge on or through our internet website, at
www.kindermorgan.com, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. The
information contained on or connected to our internet website is not
incorporated by reference into this Form 10-K and should not be considered part
of this or any other report that we file with or furnish to the Securities and
Exchange Commission.
You
should carefully consider the risks described below, in addition to the other
information contained in this document. Realization of any of the following
risks could have a material adverse effect on our business, financial condition,
cash flows and results of operations.
Risks
Related to Our Business
Our
business is subject to extensive regulation that affects our operations and
costs.
Our
assets and operations are subject to regulation by federal, state, provincial
and local authorities, including regulation by the FERC, and by various
authorities under federal, state, provincial and local environmental, human
health and safety and pipeline safety laws. Regulation affects almost every
aspect of our business, including, among other things, our ability to determine
terms and rates for our interstate pipeline services, to make acquisitions or to
build extensions of existing facilities. The costs of complying with such laws
and regulations are already significant, and additional or more stringent
regulation could have a material adverse impact on our business, financial
condition and results of operations.
Item
1A. Risk
Factors. (continued)
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Kinder
Morgan, Inc. Form 10-K
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In
addition, regulators have taken actions designed to enhance market forces in the
gas pipeline industry, which have led to increased competition. In a number of
U.S. markets, natural gas interstate pipelines face competitive pressure from a
number of new industry participants, such as alternative suppliers, as well as
traditional pipeline competitors. Increased competition driven by
regulatory changes could have a material impact on business in our markets and
therefore adversely affect our financial condition and results of
operations.
Pending
Federal Energy Regulatory Commission (“FERC”) and California Public Utilities
Commission proceedings seek substantial refunds and reductions in tariff rates
on some of Kinder Morgan Energy Partners’ pipelines. An additional FERC
proceeding to determine whether current rates are just and reasonable is pending
against NGPL. If the proceedings are determined adversely to Kinder Morgan
Energy Partners or NGPL, they could have a material adverse impact on
us.
Regulators
and shippers on our pipelines have rights to challenge the rates we charge under
certain circumstances prescribed by applicable regulations. Some shippers on
Kinder Morgan Energy Partners’ pipelines have filed complaints with the FERC and
CPUC that seek substantial refunds for alleged overcharges during the years in
question and prospective reductions in the tariff rates on Kinder Morgan Energy
Partners’ Pacific operations’ pipeline system. The FERC has also notified NGPL
of a proceeding against it to determine whether NGPL’s current rates remain just
and reasonable. We may face challenges, similar to those described in Notes 16
and 17 of the accompanying Notes to Consolidated Financial Statements, to the
rates we receive on our pipelines in the future. Any successful challenge could
adversely and materially affect our future earnings and cash flows.
Rulemaking
and oversight, as well as changes in regulations, by the regulatory agencies
having jurisdiction over our operations could adversely impact our income and
operations.
Our
pipelines and storage facilities are subject to regulation and oversight by
federal, state and local regulatory authorities, such as the FERC, NEB and CPUC
and regulatory actions taken by these agencies have the potential to adversely
affect our profitability. Regulation extends to such matters as (i)
rates, operating terms and conditions of service, (ii) the types of services we
may offer to our customers, (iii) the contracts for service entered into with
our customers, (iv) the certification and construction of new facilities, (v)
the integrity, safety and security of facilities and operations, (vi) the
acquisition, extension, disposition or abandonment of services or facilities,
(vii) reporting and information posting requirements, (viii) the maintenance of
accounts and records and (ix) relationships with affiliated companies involved
in various aspects of the natural gas and energy businesses.
New
laws or regulations or different interpretations of existing laws or
regulations, including unexpected policy changes, applicable to our assets could
have a material adverse impact on our business, financial condition and results
of operations.
Increased
regulatory requirements relating to the integrity of our pipelines will require
us to spend additional money to comply with these requirements.
Through
our regulated pipeline subsidiaries, we are subject to extensive laws and
regulations related to pipeline integrity. There are, for example, federal
guidelines for the U.S. DOT and pipeline companies in the areas of testing,
education, training and communication. Compliance with laws and regulations
requires significant expenditures. We have increased our capital expenditures to
address these matters and expect to significantly increase these expenditures in
the foreseeable future. Additional laws and regulations that may be enacted in
the future or a new interpretation of existing laws and regulations could
significantly increase the amount of these expenditures.
Environmental,
health and safety laws and regulations could expose us to significant
costs and liabilities.
Our
operations are subject to federal, state, provincial and local laws, regulations
and potential liabilities arising under or relating to the protection or
preservation of the environment, natural resources and human health and safety.
Such laws and regulations affect many aspects of our present and future
operations, and generally require us to obtain and comply with various
environmental registrations, licenses, permits, inspections and other approvals.
Liability under such laws and regulations may be incurred without regard to
fault, including, for example, under CERCLA, the Resource Conservation and
Recovery Act, the Clean Water Act and analogous state laws for the remediation
of contaminated areas. Private parties, including the owners of properties
through which our pipelines pass may also have the right to pursue legal actions
to enforce compliance as well as to seek damages for non-compliance with such
laws and regulations or for personal injury or property damage. Our insurance
may not cover all environmental risks and costs and/or may not provide
sufficient coverage in the event an environmental claim is made against
us.
Failure
to comply with these laws and regulations may also expose us to civil, criminal
and administrative fines, penalties and/or interruptions in our operations that
could influence our business, financial position, results of operations and
prospects. For example, if an accidental leak, release or spill of liquid
petroleum products, chemicals or other hazardous substances occurs at or from
our pipelines or our storage or other facilities, we may experience significant
operational disruptions and we may have to pay a significant amount to clean up
the leak, release or spill, pay for government penalties,
Item
1A. Risk
Factors. (continued)
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Kinder
Morgan, Inc. Form 10-K
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address
natural resource damage, compensate for human exposure or property damage,
install costly pollution control equipment or a combination of these and other
measures. The resulting costs and liabilities could materially and negatively
affect our level of earnings and cash flows. In addition, emission controls
required under the Federal Clean Air Act and other similar federal, state and
provincial laws could require significant capital expenditures at our
facilities.
We
own and/or operate numerous properties that have been used for many years in
connection with our business activities. While we have utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other hazardous substances may have been released at or from properties
owned, operated or used by us or our predecessors, or at or from properties
where our or our predecessors’ wastes have been taken for disposal. In addition,
many of these properties have been owned and/or operated by third parties whose
management, handling and disposal of hydrocarbons or other hazardous substances
were not under our control. These properties and the hazardous substances
released and wastes disposed on them may be subject to laws in the United States
such as CERCLA, which impose joint and several liability without regard to fault
or the legality of the original conduct. Under the regulatory schemes of the
various Canadian provinces, such as British Columbia’s Environmental Management
Act, Canada has similar laws with respect to properties owned, operated or used
by us or our predecessors. Under such laws and implementing regulations, we
could be required to remove or remediate previously disposed wastes or property
contamination, including contamination caused by prior owners or operators.
Imposition of such liability schemes could have a material adverse impact on our
operations and financial position.
In
addition, our oil and gas development and production activities are subject to
numerous federal, state and local laws and regulations relating to environmental
quality and pollution control. These laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuance of a
given operation. Specifically, these activities are subject to laws and
regulations regarding the acquisition of permits before drilling, restrictions
on drilling activities in restricted areas, emissions into the environment,
water discharges, and storage and disposition of wastes. In addition,
legislation has been enacted that requires well and facility sites to be
abandoned and reclaimed to the satisfaction of state authorities.
Further,
we cannot ensure that such existing laws and regulations will not be revised or
that new laws or regulations will not be adopted or become applicable to us.
There can be no assurance as to the amount or timing of future expenditures for
environmental compliance or remediation, and actual future expenditures may be
different from the amounts we currently anticipate. Revised or additional
regulations that result in increased compliance costs or additional operating
restrictions, particularly if those costs are not fully recoverable from our
customers, could have a material adverse effect on our business, financial
position, results of operations and prospects.
Climate
change regulation at the federal, state, provincial or regional levels could
result in increased operating and capital costs for us.
Methane,
a primary component of natural gas, and carbon dioxide, a byproduct of the
burning of natural gas, are examples of greenhouse gases. The U.S. Congress is
considering legislation to reduce emissions of greenhouse gases. In addition,
the U.S. EPA announced on December 7, 2009, its findings that emissions of
carbon dioxide, methane and other “greenhouse gases” present an endangerment to
human health and the environment. These findings by the U.S. EPA may allow the
agency to proceed with the adoption and implementation of regulations that would
restrict emissions of greenhouse gases under existing provisions of the federal
Clean Air Act. In addition, the U.S. EPA has issued a final rule requiring the
reporting of greenhouse gas emissions in the United States beginning in 2011 for
emissions occurring in 2010 from specified large greenhouse gas emission
sources, fractionated natural gas liquids, and the production of naturally
occurring carbon dioxide, like Kinder Morgan Energy Partners’ McElmo Dome carbon
dioxide field, even when such production is not emitted to the
atmosphere.
Because
our operations, including our compressor stations and natural gas processing
plants in the Natural Gas Pipelines–KMP and NGPL segments, emit various types of
greenhouse gases, primarily methane and carbon dioxide, such new legislation or
regulation could increase our costs related to operating and maintaining our
facilities and require us to install new emission controls on our facilities,
acquire allowances for our greenhouse gas emissions, pay taxes related to our
greenhouse gas emissions and administer and manage a greenhouse gas emissions
program. We are not able at this time to estimate such increased costs; however,
they could be significant. While we may be able to include some or all of such
increased costs in the rates charged by our natural gas pipelines, such recovery
of costs is uncertain in all cases and may depend on events beyond our control
including the outcome of future rate proceedings before FERC and the provisions
of any final legislation or other regulations. Any of the foregoing could have
adverse effects on our business, financial position, results of operations and
prospects.
New
regulations issued by the Department of Homeland Security could result in
increased operating and capital costs for us.
Item
1A. Risk
Factors. (continued)
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Kinder
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The
Department of Homeland Security Appropriation Act of 2007 requires the DHS to
issue regulations establishing risk-based performance standards for the security
of chemical and industrial facilities, including oil and gas facilities that are
deemed to present “high levels of security risk.” The DHS has issued
rules that establish chemicals of interest and their respective threshold
quantities that will trigger compliance with these standards. Covered
facilities that are determined by the DHS to pose a high level of security risk
will be required to prepare and submit security vulnerability assessments and
site security plans as well as comply with other regulatory requirements,
including those regarding inspections, audits, recordkeeping and protection of
chemical-terrorism vulnerability information. We have not yet
determined the extent of the costs to bring our facilities into compliance, but
it is possible that such costs could be substantial.
Cost
overruns and delays on our expansion and new build projects could adversely
affect our business.
Kinder
Morgan Energy Partners currently has several major expansion and new build
projects planned or underway, including the Fayetteville Express Pipeline which
is expected to cost $1.2 billion. A variety of factors outside our
control, such as weather, natural disasters and difficulties in obtaining
permits and rights-of-way or other regulatory approvals, as well as the
performance by third party contractors has resulted in, and may continue to
result in, increased costs or delays in construction. Cost overruns
or delays in completing a project could have a material adverse effect on our
return on investment, results of operations and cash flows.
Our rapid growth may cause
difficulties integrating and constructing new operations, and we may not be able
to achieve the expected benefits from any future
acquisitions.
Part
of our business strategy includes acquiring additional businesses, expanding
existing assets, or constructing new facilities. If we do not
successfully integrate acquisitions, expansions, or newly constructed
facilities, we may not realize anticipated operating advantages and cost
savings. The integration of companies that have previously operated
separately involves a number of risks, including (i) demands on management
related to the increase in our size after an acquisition, an expansion, or a
completed construction project, (ii) the diversion of our management’s attention
from the management of daily operations, (iii) difficulties in implementing or
unanticipated costs of accounting, estimating, reporting and other systems, (iv)
difficulties in the assimilation and retention of necessary employees and (v)
potential adverse effects on operating results.
We
may not be able to maintain the levels of operating efficiency that acquired
companies have achieved or might achieve separately. Successful
integration of each acquisition, expansion, or construction project will depend
upon our ability to manage those operations and to eliminate redundant and
excess costs. Because of difficulties in combining and expanding
operations, we may not be able to achieve the cost savings and other
size-related benefits that we hoped to achieve after these acquisitions, which
would harm our financial condition and results of operations.
Our
acquisition strategy and expansion programs require access to new capital.
Tightened capital markets or more expensive capital would impair our ability to
grow.
Part
of our business strategy includes acquiring additional businesses and expanding
our assets. We may need to raise debt and equity to finance these acquisitions
and expansions. Limitations on our access to capital will impair our ability to
execute this strategy. We normally fund acquisitions and expansions with
short-term debt and repay such debt through the issuance of equity and long-term
debt. An inability to access the capital markets may result in a substantial
increase in our leverage and have a detrimental impact on our credit
profile.
Energy
commodity transportation and storage activities involve numerous risks that may
result in accidents or otherwise adversely affect operations.
There
are a variety of hazards and operating risks inherent to natural gas
transmission and storage activities, and refined petroleum products and carbon
dioxide transportation activities—such as leaks, explosions and mechanical
problems that could result in substantial financial losses. In addition, these
risks could result in loss of human life, significant damage to property,
environmental pollution and impairment of operations, any of which also could
result in substantial losses. For pipeline and storage assets located near
populated areas, including residential areas, commercial business centers,
industrial sites and other public gathering areas, the level of damage resulting
from these risks could be greater. If losses in excess of our insurance coverage
were to occur, they could have a material adverse effect on our business,
financial condition and results of operations.
The
development of oil and gas properties involves risks that may result in a total
loss of investment.
The
business of developing and operating oil and gas properties involves a high
degree of business and financial risk that even a combination of experience,
knowledge and careful evaluation may not be able to overcome. Acquisition and
development decisions generally are based on subjective judgments and
assumptions that, while they may be reasonable, are by their nature speculative.
It is impossible to predict with certainty the production potential of a
particular property or well.
Item
1A. Risk
Factors. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Furthermore,
a successful completion of a well does not ensure a profitable return on the
investment. A variety of geological, operational, and market-related factors,
including, but not limited to, unusual or unexpected geological formations,
pressures, equipment failures or accidents, fires, explosions, blowouts,
cratering, pollution and other environmental risks, shortages or delays in the
availability of drilling rigs and the delivery of equipment, loss of circulation
of drilling fluids or other conditions may substantially delay or prevent
completion of any well, or otherwise prevent a property or well from being
profitable. A productive well may become uneconomic in the event water or other
deleterious substances are encountered, which impair or prevent the production
of oil and/or gas from the well. In addition, production from any well may be
unmarketable if it is contaminated with water or other deleterious
substances.
The
volatility of natural gas and oil prices could have a material adverse effect on
our business.
The
revenues, profitability and future growth of the CO2–KMP
business segment and the carrying value of its oil, natural gas liquids and
natural gas properties depend to a large degree on prevailing oil and gas
prices. Prices for oil, natural gas liquids and natural gas are subject to large
fluctuations in response to relatively minor changes in the supply and demand
for oil, natural gas liquids and natural gas, uncertainties within the market
and a variety of other factors beyond our control. These factors include, among
other things, weather conditions and events such as hurricanes in the United
States; the condition of the United States economy; the activities of the
Organization of Petroleum Exporting Countries; governmental regulation;
political stability in the Middle East and elsewhere; the foreign supply of and
demand for oil and natural gas; the price of foreign imports; and the
availability of alternative fuel sources.
A
sharp decline in the price of natural gas, natural gas liquids or oil prices
would result in a commensurate reduction in our revenues, income and cash flows
from the production of oil and natural gas and could have a material adverse
effect on the carrying value of Kinder Morgan Energy Partners’ proved reserves.
In the event prices fall substantially, Kinder Morgan Energy Partners may not be
able to realize a profit from its production and would operate at a loss. In
recent decades, there have been periods of both worldwide overproduction and
underproduction of hydrocarbons and periods of both increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis. These periods have been followed by periods of short supply
of, and increased demand for, crude oil and natural gas. The excess or short
supply of crude oil or natural gas has placed pressures on prices and has
resulted in dramatic price fluctuations even during relatively short periods of
seasonal market demand. These fluctuations necessarily impact the accuracy of
assumptions used in our budgeting process.
Our
use of hedging arrangements could result in financial losses or reduce our
income.
We
currently engage in hedging arrangements to reduce our exposure to fluctuations
in the prices of oil and natural gas. These hedging arrangements expose us to
risk of financial loss in some circumstances, including when production is less
than expected, when the counterparty to the hedging contract defaults on its
contract obligations, or when there is a change in the expected differential
between the underlying price in the hedging agreement and the actual prices
received. In addition, these hedging arrangements may limit the benefit we would
otherwise receive from increases in prices for oil and natural gas.
The
accounting standards regarding hedge accounting are very complex, and even when
we engage in hedging transactions (for example, to mitigate our exposure to
fluctuations in commodity prices or currency exchange rates or to balance our
exposure to fixed and variable interest rates) that are effective economically,
these transactions may not be considered effective for accounting purposes.
Accordingly, our financial statements may reflect some volatility due to these
hedges, even when there is no underlying economic impact at that point. In
addition, it is not always possible for us to engage in a hedging transaction
that completely mitigates our exposure to commodity prices. Our financial
statements may reflect a gain or loss arising from an exposure to commodity
prices for which we are unable to enter into a completely effective
hedge.
We
must either obtain the right from landowners or exercise the power of eminent
domain in order to use most of the land on which our pipelines are constructed,
and we are subject to the possibility of increased costs to retain necessary
land use.
We
obtain the right to construct and operate pipelines on other owners’ land for a
period of time. If we were to lose these rights or be required to relocate our
pipelines, our business could be affected negatively. In addition, we are
subject to the possibility of increased costs under our rental agreements with
landowners, primarily through rental increases and renewals of expired
agreements.
Whether
Kinder Morgan Energy Partners has the power of eminent domain for its pipelines,
other than interstate natural gas pipelines, varies from state to state
depending upon the type of pipeline—petroleum liquids, natural gas or carbon
dioxide—and the laws of the particular state. Kinder Morgan Energy Partners’
interstate natural gas pipelines have federal eminent domain authority. In
either case, Kinder Morgan Energy Partners must compensate landowners for the
use of their property and, in eminent domain actions, such compensation may be
determined by a court. The inability to exercise the power of eminent domain
could negatively affect Kinder Morgan Energy Partners’ business if it were to
lose the right to use or occupy the property on which its pipelines are
located.
Item
1A. Risk
Factors. (continued)
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Kinder
Morgan, Inc. Form 10-K
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Our
substantial debt could adversely affect our financial health and make us more
vulnerable to adverse economic conditions.
As
of December 31, 2009, we had outstanding $13.6 billion of consolidated debt
(excluding the fair value of interest rate swaps). Of this amount, $10.6 billion
was debt of Kinder Morgan Energy Partners and its subsidiaries, and the
remaining $3.0 billion was debt of Kinder Morgan, Inc. and its subsidiaries,
other than Kinder Morgan Energy Partners and its subsidiaries. Kinder Morgan,
Inc.’s debt is currently secured by most of the assets of Kinder Morgan, Inc.
and its subsidiaries, but the security interest does not apply to the assets of
Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, Kinder Morgan
Management and their respective subsidiaries. This level of debt could have
important consequences, such as (i) limiting our ability to obtain additional
financing to fund our working capital, capital expenditures, debt service
requirements or potential growth or for other purposes, (ii) limiting our
ability to use operating cash flow in other areas of our business because we
must dedicate a substantial portion of these funds to make payments on our debt,
(iii) placing us at a competitive disadvantage compared to competitors with less
debt and (iv) increasing our vulnerability to adverse economic and industry
conditions. Each of these factors is to a large extent dependent on
economic, financial, competitive and other factors beyond our
control.
Our
variable rate debt makes us vulnerable to increases in interest
rates.
As
of December 31, 2009, we had outstanding $13.6 billion of consolidated debt
(excluding the fair value of interest rate swaps). Of this amount, approximately
48% was subject to variable interest rates, either as short-term or long-term
debt of variable rate credit facilities or as long-term fixed-rate debt
converted to variable rates through the use of interest rate swaps. Should
interest rates increase significantly, the amount of cash required to service
our debt would increase and our earnings could be adversely affected. For
information on our interest rate risk, see Item 7A “Quantitative and Qualitative
Disclosures About Market Risk—Interest Rate Risk.”
Our debt instruments may limit our
financial flexibility and increase our financing costs.
The
instruments governing our debt contain restrictive covenants that may prevent us
from engaging in certain transactions that we deem beneficial and that may be
beneficial to us. The agreements governing our debt generally require us to
comply with various affirmative and negative covenants, including the
maintenance of certain financial ratios and restrictions on (i) incurring
additional debt, (ii) entering into mergers, consolidations and sales of assets,
(iii) granting liens and (iv) entering into sale-leaseback transactions. The
instruments governing any future debt may contain similar or more restrictive
restrictions. Our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be
restricted.
Current
or future distressed financial conditions of customers could have an adverse
impact on us in the event these customers are unable to pay us for the products
or services we provide.
Some
of our customers are experiencing, or may experience in the future, severe
financial problems that have had or may have a significant impact on their
creditworthiness. We cannot provide assurance that one or more of our
financially distressed customers will not default on their obligations to us or
that such a default or defaults will not have a material adverse effect on our
business, financial position, future results of operations, or future cash
flows. Furthermore, the bankruptcy of one or more of our customers, or some
other similar proceeding or liquidity constraint, might make it unlikely that we
would be able to collect all or a significant portion of amounts owed by the
distressed entity or entities. In addition, such events might force such
customers to reduce or curtail their future use of our products and services,
which could have a material adverse effect on our results of operations and
financial condition.
Current
levels of market volatility could impair our access to the credit and capital
markets.
The
capital markets have been experiencing extreme volatility since mid-year
2008. Our plans for growth, primarily at Kinder Morgan Energy
Partners, require regular access to the capital markets. If current
levels of market volatility continue or worsen, our access to capital markets,
primarily at Kinder Morgan Energy Partners, could be disrupted making growth
through acquisitions and development projects, primarily at Kinder Morgan Energy
Partners, difficult or impractical to pursue until such time as markets
stabilize.
Our
operating results may be adversely affected by unfavorable economic and market
conditions.
Economic
conditions worldwide have from time to time contributed to slowdowns in several
industries, including, the oil and gas industry, the steel industry and in
specific segments and markets in which we, primarily Kinder Morgan Energy
Partners, operate resulting in reduced demand and increased price competition
for our products and services. Our operating results in one or more geographic
regions may also be affected by uncertain or changing economic conditions within
that region, such as the challenges that are currently affecting economic
conditions in the United States and Canada. Volatility in commodity prices might
have an impact on many of our customers, which in turn could have a negative
impact on their
Item
1A. Risk
Factors. (continued)
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Kinder
Morgan, Inc. Form 10-K
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ability
to meet their obligations to us. In addition, decreases in the prices of crude
oil and natural gas liquids will have a negative impact on the results of the
CO2–KMP
business segment. If global economic and market conditions (including volatility
in commodity markets), or economic conditions in the United States or other key
markets, remain uncertain or persist, spread or deteriorate further, we may
experience material impacts on our business, financial condition and results of
operations.
Downturns
in the credit markets can increase the cost of borrowing and can make financing
difficult to obtain, each of which may have a material adverse effect on our
results of operations and business.
In
2008 and 2009 events in the financial markets had an adverse impact on the
credit markets and, as a result, the availability of credit has become more
expensive and difficult to obtain. Some lenders are imposing more stringent
restrictions on the terms of credit and there may be a general reduction in the
amount of credit available in the markets in which we conduct business. In
addition, as a result of the current credit market conditions and the downgrade
of Kinder Morgan Energy Partners’ short-term credit ratings by Standard &
Poor’s Rating Services, it is currently unable to access commercial paper
borrowings and instead is meeting its short-term financing and liquidity needs
through borrowings under its bank credit facility. The negative impact of these
events may have a material adverse effect on Kinder Morgan Energy Partners
resulting from, but not limited to, an inability to expand facilities or finance
the acquisition of assets on favorable terms, if at all, increased financing
costs or financing with increasingly restrictive covenants.
The
Going Private transaction resulted in substantially more debt to us and a
downgrade of the ratings of our debt securities, which has increased our cost of
capital.
In
connection with the Going Private transaction, Standard & Poor’s Rating
Services and Moody’s Investors Service, Inc. downgraded the ratings assigned to
Kinder Morgan, Inc.’s senior unsecured debt to BB- and Ba2, respectively. Upon
the February 2008 80% ownership interest sale of our NGPL PipeCo LLC business
segment, which resulted in Kinder Morgan, Inc.’s repayment of a substantial
amount of debt; Standard & Poor’s Rating Services and Moody’s Investors
Service, Inc. upgraded Kinder Morgan, Inc.’s senior unsecured debt to BB and
Ba1, respectively. However, these ratings are still below investment grade.
Since the Going Private transaction, Kinder Morgan, Inc. has not had access to
the commercial paper market and is currently utilizing its $1.0 billion
revolving credit facility for its short-term borrowing needs.
The
future success of Kinder Morgan Energy Partners’ oil and gas development and
production operations depends in part upon its ability to develop additional oil
and gas reserves that are economically recoverable.
The
rate of production from oil and natural gas properties declines as reserves are
depleted. Without successful development activities, the reserves and revenues
of the oil producing assets within the CO2–KMP
business segment will decline. Kinder Morgan Energy Partners may not be able to
develop or acquire additional reserves at an acceptable cost or have necessary
financing for these activities in the future. Additionally, if Kinder Morgan
Energy Partners does not realize production volumes greater than, or equal to,
its hedged volumes, Kinder Morgan Energy Partners may suffer financial losses
not offset by physical transactions.
Competition
could ultimately lead to lower levels of profits and adversely impact our
ability to recontract for expiring transportation capacity at favorable rates or
maintain existing customers.
In
the past, competitors to our interstate natural gas pipelines have constructed
or expanded pipeline capacity into the areas served by our pipelines. To the
extent that an excess of supply into these market areas is created and persists,
our ability to recontract for expiring transportation capacity at favorable
rates or to maintain existing customers could be impaired. In addition, our
products pipelines compete against proprietary pipelines owned and operated by
major oil companies, other independent products pipelines, trucking and marine
transportation firms (for short-haul movements of products) and railcars.
Throughput on our products pipelines may decline if the rates we charge become
uncompetitive compared to alternatives.
Future
business development of our products, crude oil and natural gas pipelines is
dependent on the supply of and demand for those commodities.
Our
pipelines depend on production of natural gas, oil and other products in the
areas serviced by our pipelines. Without reserve additions, production will
decline over time as reserves are depleted and production costs may rise.
Producers may shut down production at lower product prices or higher production
costs, especially where the existing cost of production exceeds other extraction
methodologies, such as at the Alberta oil sands. Producers in areas serviced by
us may not be successful in exploring for and developing additional reserves,
and the gas plants and the pipelines may not be able to maintain existing
volumes of throughput. Commodity prices and tax incentives may not remain at a
level which encourages producers to explore for and develop additional reserves,
produce existing marginal reserves or renew transportation contracts as they
expire.
Item
1A. Risk
Factors. (continued)
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Kinder
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Changes
in the business environment, such as a decline in crude oil or natural gas
prices, an increase in production costs from higher feedstock prices, supply
disruptions, or higher development costs, could result in a slowing of supply
such as from the Alberta oil sands. In addition, with respect to the CO2–KMP
business segment, changes in the regulatory environment or governmental policies
may have an impact on the supply of crude oil. Each of these factors impact our
customers shipping through our pipelines, which in turn could impact the
prospects of new transportation contracts or renewals of existing
contracts.
Throughput
on our products pipelines may also decline as a result of changes in business
conditions. Over the long term, business will depend, in part, on the level of
demand for oil and natural gas in the geographic areas in which deliveries are
made by pipelines and the ability and willingness of shippers having access or
rights to utilize the pipelines to supply such demand. The implementation of new
regulations or the modification of existing regulations affecting the oil and
gas industry could reduce demand for natural gas and crude oil, increase our
costs and may have a material adverse effect on our results of operations and
financial condition. We cannot predict the impact of future economic conditions,
fuel conservation measures, alternative fuel requirements, governmental
regulation or technological advances in fuel economy and energy generation
devices, all of which could reduce the demand for natural gas and
oil.
We
are subject to U.S. dollar/Canadian dollar exchange rate
fluctuations.
As
a result of the operations of the Kinder Morgan Canada–KMP segment, a portion of
our assets, liabilities, revenues and expenses are denominated in Canadian
dollars. We are a U.S. dollar reporting company. Fluctuations in the exchange
rate between United States and Canadian dollars could expose us to reductions in
the U.S. dollar value of our earnings and cash flows and a reduction in our
stockholder’s equity under applicable accounting rules.
Terrorist
attacks, or the threat of them, may adversely affect our business.
The
U.S. government has issued public warnings that indicate that pipelines and
other energy assets might be specific targets of terrorist organizations. These
potential targets might include our pipeline systems or storage facilities. Our
operations could become subject to increased governmental scrutiny that would
require increased security measures. Recent federal legislation provides an
insurance framework that should cause current insurers to continue to provide
sabotage and terrorism coverage under standard property insurance policies.
Nonetheless, there is no assurance that adequate sabotage and terrorism
insurance will be available at rates we believe are reasonable in the near
future. These developments may subject our operations to increased risks, as
well as increased costs, and, depending on their ultimate magnitude, could have
a material adverse effect on our business, results of operations and financial
condition.
Hurricanes and other natural disasters could
have a material adverse effect on our business, financial condition and results
of operations.
Some
of our pipelines, terminals and other assets are located in areas that are
susceptible to hurricanes and other natural disasters. These natural disasters
could potentially damage or destroy our pipelines, terminals and other assets
and disrupt the supply of the products we transport through our pipelines, which
could have a material adverse effect on our business, financial condition and
results of operations.
There
is the potential for a change of control of the general partner of Kinder Morgan
Energy Partners if we default on debt.
We
own all of the common equity of Kinder Morgan G.P., Inc., the general partner of
Kinder Morgan Energy Partners. If we default on our debt, in exercising their
rights as lenders, our lenders could acquire control of Kinder Morgan G.P., Inc.
or otherwise influence Kinder Morgan G.P., Inc. through their control of us.
While our operations provide cash independent of the dividends we receive from
Kinder Morgan G.P., Inc., a change in control could materially affect our cash
flow and results of operations.
Kinder Morgan Energy Partners’ tax
treatment depends on its status as a partnership for United States federal
income tax purposes, as well as it not being subject to a material amount of
entity-level taxation by individual states. If the Internal Revenue Service were
to treat Kinder Morgan Energy Partners as a corporation for United States
federal income tax purposes or it was to become subject to a material amount of
entity-level taxation for state tax purposes, then its cash available for
distribution to its partners, including us, would be substantially
reduced.
The
anticipated after-tax economic benefit of an investment in Kinder Morgan Energy
Partners depends largely on it being treated as a partnership for United States
federal income tax purposes. In order for Kinder Morgan Energy
Partners to be treated as a partnership for United States federal income tax
purposes, current law requires that 90% or more of its gross income for every
taxable year consist of “qualifying income,” as defined in Section 7704 of
the Internal Revenue Code. Kinder Morgan Energy Partners may not meet
this requirement or current law may change so as to cause, in either event, it
to be treated as a corporation for United States federal income tax purposes or
otherwise subject it to taxation as an entity.
Item
1A. Risk
Factors. (continued)
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Kinder
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Kinder
Morgan Energy Partners has not requested, and does not plan to request, a ruling
from the Internal Revenue Service, or the IRS, on this or any other matter
affecting it.
If
Kinder Morgan Energy Partners were treated as a corporation for United States
federal income tax purposes, it would pay United States federal income tax on
its income at the corporate tax rate, which is currently a maximum of 35%, and
would pay state income tax at varying rates. Distributions by Kinder
Morgan Energy Partners would generally be taxed again as corporate
distributions, and no income, gains, losses or deductions would flow through to
its partners, including us. Because a tax would be imposed on Kinder
Morgan Energy Partners as a corporation, the cash available for distribution
would be substantially reduced. Therefore, treatment of Kinder Morgan
Energy Partners as a corporation would result in a material reduction in the
anticipated cash flow and after-tax return to its partners, including us, likely
causing a substantial reduction in the value of our investment in Kinder Morgan
Energy Partners.
Current
law or Kinder Morgan Energy Partners’ business may change so as to cause it to
be treated as a corporation for United States federal income tax purposes or
otherwise subject it to a material amount of entity-level
taxation. In addition, because of widespread state budget deficits
and other reasons, several states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income, franchise or other
forms of taxation. For example, Kinder Morgan Energy Partners is now
subject to an entity-level tax on the portion of its total revenue that is
generated in Texas. Specifically, the Texas margin tax is imposed at
a maximum effective rate of 0.7% of Kinder Morgan Energy Partners’ total revenue
that is apportioned to Texas. This tax reduces, and the imposition of
such a tax on Kinder Morgan Energy Partners by any other state will reduce, the
cash available for distribution by Kinder Morgan Energy Partners to its
partners, including us.
Kinder
Morgan Energy Partners’ partnership agreement provides that if a law is enacted
that subjects it to taxation as a corporation or otherwise subjects it to
entity-level taxation for United States federal income tax
purposes, the minimum quarterly distribution and the target distribution levels
will be adjusted to reflect the impact on it of that law.
The tax treatment of publicly traded
partnerships or an investment, including that of the general partner, in Kinder
Morgan Energy Partners units could be subject to potential legislative, judicial
or administrative changes and differing interpretations, possibly on a
retroactive basis.
The
present United States federal income tax treatment of publicly traded
partnerships, including Kinder Morgan Energy Partners, or an investment in it,
may be modified by administrative, legislative or judicial interpretation at any
time. For example, members of Congress are considering substantive
changes to the existing United States federal income tax laws that affect
certain publicly traded partnerships. Any modification to the United
States federal income tax laws or interpretations thereof could make it
difficult or impossible to meet the requirements for Kinder Morgan Energy
Partners to be treated as a partnership for United States federal income tax
purposes, affect or cause Kinder Morgan Energy Partners to change its business
activities, affect the tax considerations of an investment in it, change the
character or treatment of portions of its income and adversely affect an
investment, including that of the general partner, in Kinder Morgan Energy
Partners. Moreover, any modification to the United States federal
income tax laws and interpretations thereof may or may not be applied
retroactively. Although the currently proposed legislation would not
appear to affect Kinder Morgan Energy Partners’ tax treatment as a partnership,
it is unable to predict whether any of these changes, or other proposals, will
ultimately be enacted. Any potential change in law or interpretation
thereof could negatively impact the value of an investment, including that of
the general partner, in Kinder Morgan Energy Partners.
If the IRS contests the United
States federal income tax positions Kinder Morgan Energy Partners takes, the
market for its units may be adversely impacted and the cost of any IRS contest
will reduce its cash available for distribution to its
partners.
Kinder
Morgan Energy Partners has not requested a ruling from the IRS with respect to
its treatment as a partnership for United States federal income tax purposes or
any other matter affecting it. The IRS may adopt positions that
differ from the conclusions of its counsel or from the positions it
takes. It may be necessary to resort to administrative or court
proceedings to sustain some or all of conclusions or the positions taken by
Kinder Morgan Energy Partners. A court may not agree with some or all
of such conclusions or the positions taken by Kinder Morgan Energy Partners’
counsel. Any contest with the IRS may materially and adversely impact
the market for Kinder Morgan Energy Partners’ units and the price at which they
trade. In addition, the costs of any contest with the IRS will be
borne indirectly by the partners of Kinder Morgan Energy Partners because the
costs will reduce the cash available for distribution.
Item
1B. Unresolved
Staff Comments.
None.
|
Kinder
Morgan, Inc. Form 10-K
|
Item 3. Legal
Proceedings.
See
Note 16 of the accompanying Notes to Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of
Security Holders.
None.
|
Kinder
Morgan, Inc. Form 10-K
|
|
Item
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
As
a result of the Going Private transaction, our common stock ceased trading on
May 30, 2007. Prior to the Going Private transaction, our common
stock was listed for trading on the New York Stock Exchange under the symbol
“KMI.”
On
February 17, 2009, May 18, 2009, August 17, 2009 and November 16, 2009, we paid
cash dividends on our common stock of $50.0 million, $100.0 million, $150.0
million and $350.0 million, respectively, to our sole stockholder, which then
made dividends to Kinder Morgan Holdco LLC. Our Board of Directors
declared a dividend of $150.0 million on January 20, 2010 that was paid on
February 16, 2010.
For
information on our equity compensation plans, see Item 12 “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters—Equity
Compensation Plan Information.” Also see Note 12 of the accompanying
Notes to Consolidated Financial Statements “Commitments and Contingent
Liabilities-Share-based Compensation.”
Item 6. Selected Financial
Data
Five-Year
Review
Kinder
Morgan, Inc. and Subsidiaries
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
Year Ended December 31,
|
|
|
Seven Months
Ended
December
31,
|
|
|
Five Months
Ended
May
31,
|
|
|
Year Ended December 31,
|
|
|
|
2009(a)(b)
|
|
|
2008(a)(b)
|
|
|
2007(a)(b)
|
|
|
2007(b)(c)
|
|
|
2006(b)(c)
|
|
|
2005(c)
|
|
Income
and Cash Flow Data
|
|
(In
millions)
|
|
|
(In
millions)
|
|
Revenues
|
|
$ |
7,185.2 |
|
|
$ |
12,094.8 |
|
|
$ |
6,394.7 |
|
|
$ |
4,165.1 |
|
|
$ |
10,208.6 |
|
|
$ |
1,025.6 |
|
Operating
income (loss) (d)(e)
|
|
$ |
1,407.2 |
|
|
$ |
(2,472.1 |
) |
|
$ |
1,042.8 |
|
|
$ |
204.8 |
|
|
$ |
1,745.2 |
|
|
$ |
381.3 |
|
Earnings
from equity investments
|
|
$ |
221.9 |
|
|
$ |
201.1 |
|
|
$ |
56.8 |
|
|
$ |
40.7 |
|
|
$ |
104.2 |
|
|
$ |
620.7 |
|
Income
(loss) from continuing operations
|
|
$ |
773.8 |
|
|
$ |
(3,202.3 |
) |
|
$ |
286.1 |
|
|
$ |
(142.0 |
) |
|
$ |
974.6 |
|
|
$ |
564.7 |
|
Income (loss) from discontinued operations,
net of tax (f)
|
|
$ |
0.3 |
|
|
$ |
(0.9 |
) |
|
$ |
(1.5 |
) |
|
$ |
298.6 |
|
|
$ |
(528.5 |
) |
|
$ |
40.4 |
|
Net
income (loss)
|
|
$ |
774.1 |
|
|
$ |
(3,203.2 |
) |
|
$ |
284.6 |
|
|
$ |
156.6 |
|
|
$ |
446.1 |
|
|
$ |
605.1 |
|
Net
income attributable to noncontrolling interests (g)
|
|
$ |
278.1 |
|
|
$ |
396.1 |
|
|
$ |
37.6 |
|
|
$ |
90.7 |
|
|
$ |
374.2 |
|
|
$ |
50.5 |
|
Net
income (loss) attributable to Kinder Morgan, Inc.’s
stockholder
|
|
$ |
496.0 |
|
|
$ |
(3,599.3 |
) |
|
$ |
247.0 |
|
|
$ |
65.9 |
|
|
$ |
71.9 |
|
|
$ |
554.6 |
|
Capital
expenditures (h)
|
|
$ |
1,324.3 |
|
|
$ |
2,545.3 |
|
|
$ |
1,287.0 |
|
|
$ |
652.8 |
|
|
$ |
1,375.6 |
|
|
$ |
134.1 |
|
|
|
Successor Company
|
|
|
Predecessor
Company
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2007(a) |
|
|
|
2006(b) |
|
|
|
2005(c) |
|
Balance
Sheet Data
|
|
(In
millions)
|
|
|
(In
millions)
|
|
Net property, plant and equipment
|
|
$ |
16,803.5 |
|
|
$ |
16,109.8 |
|
|
$ |
14,803.9 |
|
|
$ |
18,839.6 |
|
|
$ |
9,545.6 |
|
Total assets
|
|
$ |
27,586.3 |
|
|
$ |
25,444.9 |
|
|
$ |
36,101.0 |
|
|
$ |
26,795.6 |
|
|
$ |
17,451.6 |
|
Long-term debt(i)
|
|
$ |
12,879.7 |
|
|
$ |
11,155.8 |
|
|
$ |
15,097.7 |
|
|
$ |
11,014.4 |
|
|
$ |
6,677.6 |
|
________
(a)
|
Includes
significant impacts resulting from the Going Private transaction. See Note
2 of the accompanying Notes to Consolidated Financial Statements for
additional information.
|
(b)
|
Effective
January 1, 2006, the accounts, balances and results of operations of
Kinder Morgan Energy Partners were consolidated into our financial
statements and we ceased applying the equity method of accounting for our
investments in Kinder Morgan Energy Partners. See Note 2 of the
accompanying Notes to Consolidated Financial
Statements.
|
(c)
|
Reflects
the acquisition of Terasen Inc. on November 30, 2005.
|
(d)
|
Includes
non-cash goodwill charges of $4,033.3 million in the year ended December
31, 2008.
|
(e)
|
Includes
a goodwill impairment charge of $377.1 million in the five months ended
May 31, 2007 relating to Kinder Morgan Energy Partners’ acquisition of
Trans Mountain pipeline from us on April 30, 2007. See Note 7 of the
accompanying Notes to Consolidated Financial
Statements.
|
(f)
|
Includes
a goodwill impairment charge of $650.5 million in 2006 to reduce the
carrying value of Terasen Inc.
|
(g)
|
Includes
application of new accounting policies for noncontrolling interests adopted in 2009
and applied to all years presented. See Note 2 of the accompanying Notes
to Consolidated Financial Statements.
|
(h)
|
Capital
expenditures shown are for continuing operations only.
|
(i)
|
Excludes
value of interest rate swaps. Increases to long-term debt for
value of interest rate swaps totaled $361.0 million, $971.0 million,
$199.7 million, $46.4 million and $51.8 million as of December 31, 2009,
2008, 2007, 2006 and 2005,
respectively.
|
|
Kinder
Morgan, Inc. Form 10-K
|
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
The
following discussion and analysis should be read in conjunction with the
accompanying Consolidated Financial Statements and related
Notes. Additional sections in this report which should be helpful to
the reading of our discussion and analysis include the following: (i) a
description of our business strategy found in Items 1 and 2 “Business and
Properties—(c) Narrative Description of Business—Business Strategy;” (ii) a
description of developments during 2009, found in Items 1 and 2 “Business and
Properties—(a) General Development of Business—Recent Developments;” and (iii) a
description of risk factors affecting us and our business, found in Item 1A
“Risk Factors.” In as much as the discussion below and the other sections to
which we have referred you pertain to management’s comments on financial
resources, capital spending, our business strategy and the outlook for our
business, such discussions contain forward-looking statements. These
forward-looking statements reflect the expectations, beliefs, plans and
objectives of management about future financial performance and assumptions
underlying management’s judgment concerning the matters discussed, and
accordingly, involve estimates, assumptions, judgments and
uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause
or contribute to any differences include, but are not limited to, those
discussed below and elsewhere in this report, particularly in “Risk Factors” and
“Information Regarding Forward-looking Statements.”
Our
business model, through our direct ownership and operation of energy related
assets and through our ownership interests in and operation of Kinder Morgan
Energy Partners, is built to support two principal components:
|
·
|
helping
customers by providing energy, bulk commodity and liquids products
transportation, storage and distribution;
and
|
|
·
|
creating
long-term value for our
shareholder.
|
To
achieve these objectives, we focus on providing fee-based services to customers
from a business portfolio consisting of energy-related pipelines, bulk and
liquids terminal facilities, and carbon dioxide and petroleum
reserves. Our reportable business segments are based on the way our
management organizes our enterprise, and each of our segments represents a
component of our enterprise that engages in a separate business activity and for
which discrete financial information is available.
Our
reportable business segments are:
|
·
|
Products Pipelines–KMP:
the ownership and operation of refined petroleum products pipelines that
deliver gasoline, diesel fuel, jet fuel and natural gas liquids to various
markets, plus the ownership and/or operation of associated product
terminals and petroleum pipeline transmix
facilities;
|
|
·
|
Natural Gas
Pipelines–KMP: the ownership and operation of major interstate and
intrastate natural gas pipeline and storage systems, plus the ownership
and/or operation of associated natural gas processing and treating
facilities;
|
|
·
|
CO2
–KMP: (i)
the production, transportation and marketing of carbon dioxide, referred
to as CO2, to
oil fields that use CO2 to
increase production of oil, (ii) ownership interests in and/or operation
of oil fields in West Texas and (iii) the ownership and operation of a
crude oil pipeline system in West
Texas;
|
|
·
|
Terminals–KMP: the
ownership and/or operation of liquids and bulk terminal facilities and
rail transloading and materials handling facilities located throughout the
United States and portions of
Canada;
|
|
·
|
Kinder Morgan
Canada–KMP: (i) the ownership and operation of the Trans Mountain
pipeline system that transports crude oil and refined petroleum products
from Edmonton, Alberta, Canada to marketing terminals and refineries in
British Columbia, Canada and the state of Washington and (ii) the 33 1/3%
interest in the Express crude oil pipeline system, which connects Canadian
and U.S. producers to refineries located in the U.S. Rocky Mountain and
Midwest regions, and the Jet Fuel aviation turbine fuel pipeline that
serves the Vancouver (Canada) International
Airport;
|
|
·
|
NGPL PipeCo
LLC—consists of our 20% interest in NGPL PipeCo LLC, the owner of
Natural Gas Pipeline Company of America and certain affiliates,
collectively referred to as Natural Gas Pipeline Company of America or
NGPL, a major interstate natural gas pipeline and storage system, which we
operate. Prior to February 15, 2008, we owned 100% of NGPL;
and
|
|
·
|
Power—which consists of
two natural gas-fired electric generation
facilities.
|
As
an energy infrastructure owner and operator in multiple facets of the United
States’ and Canada’s various energy businesses and markets, we examine a number
of variables and factors on a routine basis to evaluate our current performance
and our prospects for the future. Many of our operations are regulated by
various U.S. and Canadian regulatory bodies. The
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
profitability
of our products pipeline transportation business is generally driven by the
utilization of our facilities in relation to their capacity, as well as the
prices we receive for our services. Transportation volume levels are primarily
driven by the demand for the petroleum products being shipped or stored and the
prices for shipping are generally based on regulated tariffs that are adjusted
annually based on changes in the U.S. Producer Price Index. Because of the
overall effect of utilization on our products pipeline transportation business,
we seek to own refined products pipelines located in, or that transport to,
stable or growing markets and population centers.
With
respect to our interstate natural gas pipelines and related storage facilities,
the revenues from these assets tend to be received under contracts with terms
that are fixed for various periods of time. To the extent practicable and
economically feasible in light of our strategic plans and other factors, we
generally attempt to mitigate risk of reduced volumes and prices by negotiating
contracts with longer terms, with higher per-unit pricing and for a greater
percentage of our available capacity. However, changes, either positive or
negative, in actual quantities transported on our interstate natural gas
pipelines may not accurately measure or predict associated changes in
profitability because many of the underlying transportation contracts specify
that we receive the majority of our fee for making the capacity available,
whether or not the customer actually chooses to utilize the
capacity.
The
CO2–KMP
business segment sales and transportation business, like the natural gas
pipelines business, generally has take-or-pay contracts, although the contracts
in the CO2–KMP
business segment typically have minimum volume requirements. In the long term,
the success in this business is driven by the demand for carbon dioxide.
However, short-term changes in the demand for carbon dioxide typically do not
have a significant impact on us due to the required minimum transport volumes
under many of our contracts. In the oil and gas producing activities within the
CO2–KMP
business segment, we monitor the amount of capital we expend in relation to the
amount of production that is added or the amount of declines in oil and gas
production that are postponed. In that regard, our production during any period
and the reserves that we add during that period are important measures. In
addition, the revenues we receive from our crude oil, natural gas liquids and
carbon dioxide sales are affected by the prices we realize from the sale of
these products. Over the long term, we will tend to receive prices that are
dictated by the demand and overall market price for these products. In the
shorter term, however, published market prices are likely not indicative of the
revenues we will receive due to our risk management, or hedging, program in
which the prices to be realized for certain of our future sales quantities are
fixed, capped or bracketed through the use of financial derivative contracts,
particularly for crude oil.
As
with our pipeline transportation businesses, the profitability of our terminals
businesses is generally driven by the utilization of our terminals facilities in
relation to their capacity, as well as the prices we receive for our services,
which in turn are driven by the demand for the products being shipped or stored.
The extent to which changes in these variables affect our terminals businesses
in the near term is a function of the length of the underlying service
contracts, the extent to which revenues under the contracts are a function of
the amount of product stored or transported and the extent to which such
contracts expire during any given period of time. To the extent practicable and
economically feasible in light of our strategic plans and other factors, we
generally attempt to mitigate the risk of reduced volumes and pricing by
negotiating contracts with longer terms, with higher per-unit pricing and for a
greater percentage of our available capacity. In addition, weather-related
factors such as hurricanes, floods and droughts may impact our facilities and
access to them and, thus, the profitability of certain terminals for limited
periods of time or, in relatively rare cases of severe damage to facilities, for
longer periods.
In
our discussions of the operating results of individual businesses that follow,
we generally identify the important fluctuations between periods that are
attributable to acquisitions and dispositions separately from those that are
attributable to businesses owned in both periods. Principally through Kinder
Morgan Energy Partners, we have a history of making accretive acquisitions and
economically advantageous expansions of existing businesses. Our ability to
increase earnings and Kinder Morgan Energy Partners’ ability to increase
distributions to us and other investors will, to some extent, be a function of
Kinder Morgan Energy Partners’ success in acquisitions and expansions. Kinder
Morgan Energy Partners continues to have opportunities for expansion of its
facilities in many markets and expects to continue to have such opportunities in
the future, although the level of such opportunities is difficult to
predict.
Kinder
Morgan Energy Partners’ ability to make accretive acquisitions is a function of
the availability of suitable acquisition candidates and, to some extent, its
ability to raise necessary capital to fund such acquisitions, factors over which
it has limited or no control. Thus, it has no way to determine the number or
size of accretive acquisition candidates, in the future, or whether it will
complete the acquisition of any such candidates.
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 our financial statements are
prepared. These estimates and assumptions affect the amounts we
report for our
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
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, and any effects on our
business, financial position or results of operations resulting from revisions
to these estimates are recorded in the period in which the facts that give rise
to the revision become known.
In
preparing our consolidated financial statements and related disclosures,
examples of certain areas that require more judgment relative to others include
our use of estimates in determining (i) the economic useful lives of our assets,
(ii) the fair values used to allocate purchase price from business combinations,
determine possible asset impairment charges, and calculate the annual goodwill
impairment test, (iii) reserves for environmental claims, legal fees,
transportation rate cases and other litigation liabilities, (iv) provisions for
uncollectible accounts receivables, (v) exposures under contractual
indemnifications and (vi) unbilled revenues.
For
a summary of our significant accounting policies, see Note 2 of the accompanying
Notes to Consolidated Financial Statements. We believe that certain
accounting policies are of more significance in the consolidated financial
statement preparation process than others, which policies are discussed as
follows.
Environmental
Matters
With
respect to our environmental exposure, we utilize both internal staff and
external experts to assist us in identifying environmental issues and in
estimating the costs and timing of remediation efforts. We expense or
capitalize, as appropriate, environmental expenditures that relate to current
operations, and we record environmental liabilities when environmental
assessments and/or remedial efforts are probable and we can reasonably estimate
the costs. We do not discount environmental liabilities to a net
present value, and we recognize receivables for anticipated associated insurance
recoveries when such recoveries are deemed to be probable.
Our
recording of our environmental accruals often coincides with our completion of a
feasibility study or our commitment to a formal plan of action, but generally,
we recognize and/or adjust our environmental liabilities following routine
reviews of potential environmental issues and claims that could impact our
assets or operations. These adjustments may result in increases in
environmental expenses and are primarily related to quarterly reviews of
potential environmental issues and resulting environmental liability
estimates.
These
environmental liability adjustments are recorded pursuant to our management’s
requirement to recognize contingent environmental liabilities whenever the
associated environmental issue is likely to occur and the amount of our
liability can be reasonably estimated. In making these liability
estimations, we consider the effect of environmental compliance, pending legal
actions against us, and potential third party liability claims. For
more information on our environmental disclosures, see Note 16 of the
accompanying Notes to Consolidated Financial Statements.
Legal
Matters
We
are subject to litigation and regulatory proceedings as a result of our business
operations and transactions. We utilize both internal and external
counsel in evaluating our potential exposure to adverse outcomes from orders,
judgments or settlements. To the extent that actual outcomes differ
from our estimates, or additional facts and circumstances cause us to revise our
estimates, our earnings will be affected. In general, we expense
legal costs as incurred. When we identify specific litigation that is
expected to continue for a significant period of time and require substantial
expenditures, we identify a range of possible costs expected to be required to
litigate the matter to a conclusion or reach an acceptable
settlement. Generally, if no amount within this range is a better
estimate than any other amount, we record a liability equal to the low end of
the range. Any such liability recorded is revised as better
information becomes available.
As
of December 31, 2009, our most significant ongoing litigation proceedings
involved Kinder Morgan Energy Partners’ West Coast Products
Pipelines. Tariffs charged by certain of these pipeline systems are
subject to certain proceedings at the FERC involving shippers’ complaints
regarding the interstate rates, as well as practices and the jurisdictional
nature of certain facilities and services. Generally, the interstate
rates on our product pipeline systems are “grandfathered” under the Energy
Policy Act of 1992 unless “substantially changed circumstances” are found to
exist. To the extent “substantially changed circumstances” are found
to exist, Kinder Morgan Energy Partners’ West Coast Products Pipeline operations
may be subject to substantial exposure under these FERC complaints and could,
therefore, owe reparations and/or refunds to complainants as mandated by the
FERC or the United States’ judicial system. For more information on
our FERC regulatory proceedings, see Note 16 of the accompanying Notes to
Consolidated Financial Statements.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Intangible
Assets
Intangible
assets are those assets which provide future economic benefit but have no
physical substance. Identifiable intangible assets having indefinite
useful economic lives, including goodwill, are not subject to regular periodic
amortization, and such assets are not to be amortized until their lives are
determined to be finite. Instead, the carrying amount of a recognized
intangible asset with an indefinite useful life must be tested for impairment
annually or on an interim basis if events or circumstances indicate that the
fair value of the asset has decreased below its carrying value. There
have not been any significant changes in these estimates during 2009; however,
during the second quarter of 2008, we changed the date of our annual goodwill
impairment test date to May 31 of each year (from January 1).
In
conjunction with our annual impairment test of the carrying value of goodwill,
performed as of May 31, 2008, we determined that the fair value of certain
reporting units that are part of our investment in Kinder Morgan Energy Partners
were less than the carrying values. The fair value of each reporting unit was
determined from the present value of the expected future cash flows from the
applicable reporting unit (inclusive of a terminal value calculated using a
market multiple for the individual assets). The implied fair value of goodwill
within each reporting unit was then compared to the carrying value of goodwill
of each such unit, resulting in the following goodwill impairments by reporting
unit: Products Pipelines–KMP (excluding associated terminals) $1.20 billion,
Products Pipelines Terminals–KMP (separate from Products Pipelines–KMP for
goodwill impairment purposes)—$70 million, Natural Gas Pipelines–KMP—$2.09
billion, and Terminals–KMP $677 million, for a total impairment of $4.03
billion. The goodwill impairment was a non-cash charge and did not have any
impact on our cash flow. We have determined that our goodwill was not impaired
as of May 31, 2009.
As
of December 31, 2009 and 2008, our goodwill was $4,744.3 million and $4,698.7
million, respectively. Included in these goodwill balances are $236.0 million
and $203.6 million as of December 31, 2009 and 2008, respectively, related to
the Trans Mountain pipeline, which we sold to Kinder Morgan Energy Partners on
April 30, 2007. This sale transaction caused us to reconsider the fair value of
the Trans Mountain pipeline system in relation to its carrying value, and to
make a determination as to whether the associated goodwill was impaired. As a
result of our analysis, we recorded a goodwill impairment charge of $377.1
million to the accompanying Statement of Operations for the five months ended
May 31, 2007.
Our
remaining intangible assets, excluding goodwill, include customer relationships,
contracts and agreements, technology-based assets, lease value and other
long-term assets. These intangible assets have definite lives, are being
amortized in a systematic and rational manner over their estimated useful lives
and are reported separately as “Other intangibles, net” in the accompanying
Consolidated Balance Sheets. As of December 31, 2009 and 2008, these intangibles
totaled $259.8 million and $251.5 million, respectively
For
more information on our goodwill and intangibles, see Notes 2 and 7 of the
accompanying Notes to Consolidated Financial Statements.
Estimated
Net Recoverable Quantities of Oil and Gas
We
use the successful efforts method of accounting for our oil and gas producing
activities. The successful efforts method inherently relies on the
estimation of proved reserves, both developed and undeveloped. The
existence and the estimated amount of proved reserves affect, among other
things, whether certain costs are capitalized or expensed, the amount and timing
of costs depleted or amortized into income, and the presentation of supplemental
information on oil and gas producing activities. The expected future
cash flows to be generated by oil and gas producing properties used in testing
for impairment of such properties also rely in part on estimates of net
recoverable quantities of oil and gas.
Proved
reserves are the estimated quantities of oil and gas that geologic and
engineering data demonstrates with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Estimates of proved reserves may change, either
positively or negatively, as additional information becomes available and as
contractual, economic and political conditions change. For more information on
our ownership interests in the net quantities of proved oil and gas reserves see
Note 20 of the accompanying Notes to Consolidated Financial
Statements.
Hedging
Activities
We
engage in a hedging program that utilizes derivative contracts to mitigate
(offset) our exposure to fluctuations in energy commodity prices and to balance
our exposure to fixed and variable interest rates, and we believe that these
hedges are generally effective in realizing these
objectives. According to the provisions of current accounting
standards, to be considered effective, changes in the value of a derivative
contract or its resulting cash flows must substantially offset changes in the
value or cash flows of the item being hedged, and any ineffective portion of the
hedge gain or loss and any component excluded from the computation of the
effectiveness of the derivative contract must be reported in earnings
immediately.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Since
it is not always possible for us to engage in a hedging transaction that
completely mitigates our exposure to unfavorable changes in commodity prices—a
perfectly effective hedge—we often enter into hedges that are not completely
effective in those instances where we believe to do so would be better than not
hedging at all. But because the part of such hedging transactions
that is not effective in offsetting undesired changes in commodity prices (the
ineffective portion) is required to be recognized currently in earnings, our
financial statements may reflect a gain or loss arising from an exposure to
commodity prices for which we are unable to enter into a completely effective
hedge. For example, when we purchase a commodity at one location and
sell it at another, we may be unable to hedge completely our exposure to a
differential in the price of the product between these two locations;
accordingly, our financial statements may reflect some volatility due to these
hedges. For more information on our hedging activities, see Note 13
of the accompanying Notes to Consolidated Financial Statements.
Employee
Benefit Plans
With
respect to the amount of income or expense we recognize in association with our
pension and retiree medical plans, we must make a number of assumptions with
respect to both future financial conditions (for example, medical costs, returns
on fund assets and market interest rates) as well as future actions by plan
participants (for example, when they will retire and how long they will live
after retirement). Most of these assumptions have relatively minor impacts on
the overall accounting recognition given to these plans, but two assumptions in
particular, the discount rate and the assumed long-term rate of return on fund
assets, can have significant effects on the amount of expense recorded and
liability recognized. We review historical trends, future expectations, current
and projected market conditions, the general interest rate environment and
benefit payment obligations to select these assumptions. The discount rate
represents the market rate for a high quality corporate bond. The selection of
these assumptions is further discussed in Note 9 of the accompanying Notes to
Consolidated Financial Statements. While we believe our choices for these
assumptions are appropriate in the circumstances, other assumptions could also
be reasonably applied and, therefore, we note that, at our current level of
pension and retiree medical funding, a change of 1% in the long-term return
assumption would increase (decrease) our annual retiree medical expense by
approximately $0.5 million ($0.5 million) and would increase (decrease) our
annual pension expense by $1.9 million ($1.9 million) in comparison to that
recorded in 2009. Similarly, a 1% change in the discount rate would increase
(decrease) our accumulated postretirement benefit obligation by $6.3 million
($5.8 million) and would increase (decrease) our projected pension benefit
obligation by $30.9 million ($27.6 million) compared to those balances as of
December 31, 2009.
Income
Taxes
We
record a valuation allowance to reduce our deferred tax assets to an amount that
is more likely than not to be realized. While we have considered estimated
future taxable income and prudent and feasible tax planning strategies in
determining the amount of our valuation allowance, any change in the amount that
we expect to ultimately realize will be included in income in the period in
which such a determination is reached. In addition, we do business in a number
of states with differing laws concerning how income subject to each state’s tax
structure is measured and at what effective rate such income is taxed.
Therefore, we must make estimates of how our income will be apportioned among
the various states in order to arrive at an overall effective tax rate. Changes
in our effective rate, including any effect on previously recorded deferred
taxes, are recorded in the period in which the need for such change is
identified.
In
determining the deferred income tax asset and liability balances attributable to
our investments, we have applied an accounting policy that looks through our
investments including our investment in Kinder Morgan Energy Partners. The
application of this policy resulted in no deferred income taxes being provided
on the difference between the book and tax basis on the non-tax-deductible
goodwill portion of our investment in Kinder Morgan Energy
Partners.
The
Going Private transaction was accounted for as a purchase business combination
and, as a result of the application of the Securities and Exchange Commission’s
“push-down” accounting requirements, this transaction has resulted in our
adoption of a new basis of accounting for our assets and liabilities.
Accordingly, our assets and liabilities have been recorded at their estimated
fair values as of the date of the completion of the Going Private transaction,
with the excess of the purchase price over these combined fair values recorded
as goodwill.
Therefore,
in the accompanying financial information, transactions and balances prior to
the closing of the Going Private transaction (the amounts labeled “Predecessor
Company”) reflect the historical basis of accounting for our assets and
liabilities, while the amounts subsequent to the closing (the amounts labeled
“Successor Company”) reflect the push-down of the investors’ new accounting
basis to our financial statements. Additional information concerning the impact
of the Going Private transaction on the accompanying financial information is
contained under “Impact of the Purchase Method of Accounting on Segment Earnings
(Loss)” following.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Our
adoption of a new basis of accounting for our assets and liabilities as a result
of the 2007 Going Private transaction, the 2007 sale of our retail natural gas
distribution and related operations, and our Corridor operations, the 2008 sale
of our North System, the 2008 sale of our 80% interest in NGPL PipeCo LLC, the
2008 goodwill impairments described above, and other acquisitions and
divestitures (including the transfer of certain assets to Kinder Morgan Energy
Partners), among other factors, affect comparisons of our financial position and
results of operations between certain periods.
Consolidated
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
Year
Ended December 31,
|
|
|
Seven
Months
Ended
December
31,
|
|
|
Five
Months
Ended
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
(In
millions)
|
|
Segment
earnings (loss) before depreciation, depletion and amortization
expense and amortization of excess cost of equity
investments(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
Pipelines–KMP(b)
|
|
$ |
584.0 |
|
|
$ |
(722.0 |
) |
|
$ |
162.5 |
|
|
$ |
224.4 |
|
Natural
Gas Pipelines–KMP(c)
|
|
|
788.7 |
|
|
|
(1,344.3 |
) |
|
|
373.3 |
|
|
|
228.5 |
|
CO2–KMP(d)
|
|
|
878.5 |
|
|
|
896.1 |
|
|
|
433.0 |
|
|
|
210.0 |
|
Terminals–KMP(e)
|
|
|
596.4 |
|
|
|
(156.5 |
) |
|
|
243.7 |
|
|
|
172.3 |
|
Kinder
Morgan Canada–KMP(f)
|
|
|
154.5 |
|
|
|
152.0 |
|
|
|
58.8 |
|
|
|
(332.0 |
) |
NGPL
PipeCo LLC(g)
|
|
|
42.5 |
|
|
|
129.8 |
|
|
|
422.8 |
|
|
|
267.4 |
|
Power
|
|
|
4.8 |
|
|
|
5.7 |
|
|
|
13.4 |
|
|
|
8.9 |
|
Segment
earnings (loss) before depreciation, depletion and amortization expense
and amortization of excess cost of equity investments
|
|
|
3,049.4 |
|
|
|
(1,039.2 |
) |
|
|
1,707.5 |
|
|
|
779.5 |
|
Depreciation,
depletion and amortization expense
|
|
|
(1,070.2 |
) |
|
|
(918.4 |
) |
|
|
(472.3 |
) |
|
|
(261.0 |
) |
Amortization
of excess cost of equity investments
|
|
|
(5.8 |
) |
|
|
(5.7 |
) |
|
|
(3.4 |
) |
|
|
(2.4 |
) |
NGPL
PipeCo LLC fixed fee revenue(h)
|
|
|
45.8 |
|
|
|
39.0 |
|
|
|
- |
|
|
|
- |
|
General
and administrative expenses(i)
|
|
|
(373.0 |
) |
|
|
(352.5 |
) |
|
|
(175.6 |
) |
|
|
(283.6 |
) |
Unallocable
interest and other, net(j)
|
|
|
(583.7 |
) |
|
|
(623.6 |
) |
|
|
(586.7 |
) |
|
|
(254.6 |
) |
Income
(loss) from continuing operations before income taxes
|
|
|
1,062.5 |
|
|
|
(2,900.4 |
) |
|
|
469.5 |
|
|
|
(22.1 |
) |
Unallocable
income tax expense(a)
|
|
|
(288.7 |
) |
|
|
(301.9 |
) |
|
|
(183.4 |
) |
|
|
(119.9 |
) |
Income
(loss) from continuing operations
|
|
|
773.8 |
|
|
|
(3,202.3 |
) |
|
|
286.1 |
|
|
|
(142.0 |
) |
Income
(loss) from discontinued operations, net of tax
|
|
|
0.3 |
|
|
|
(0.9 |
) |
|
|
(1.5 |
) |
|
|
298.6 |
|
Net
(loss) income
|
|
|
774.1 |
|
|
|
(3,203.2 |
) |
|
|
284.6 |
|
|
|
156.6 |
|
Net
income attributable to noncontrolling interests
|
|
|
(278.1 |
) |
|
|
(396.1 |
) |
|
|
(37.6 |
) |
|
|
(90.7 |
) |
Net
(loss) income attributable to Kinder Morgan, Inc.
|
|
$ |
496.0 |
|
|
$ |
(3,599.3 |
) |
|
$ |
247.0 |
|
|
$ |
65.9 |
|
____________
(a)
|
Kinder
Morgan Energy Partners’ income taxes expenses for the years ended December
31, 2009 and 2008, seven months ended December 31, 2007 and five months
ended May 31, 2007 were $36.9 million, $2.4 million, $44.0 million and
$15.6 million, respectively, and are included in segment
earnings.
|
(b)
|
2009
amount includes (i) a $23.0 million increase in expense from the amounts
previously reported in Kinder Morgan Energy Partners’ 2009 fourth quarter
earnings release issued on January 20, 2010, associated with adjustments
to long-term receivables for environmental cost recoveries, which is
primarily non-cash in 2009, (ii) an $18.0 million increase in expense
associated with rate case and other legal liability adjustments, (iii) an
$11.5 million increase in expense associated with environmental liability
adjustments, (iv) a $1.7 million increase in income resulting from
unrealized foreign currency gains on long-term debt transactions, (v) a
$0.2 million increase in income from hurricane casualty gains and (vi)
$0.5 million decrease in 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 . 2008 amount
includes (i) a combined $10.0 million decrease in income from the proposed
settlement of certain litigation matters related to Kinder Morgan Energy
Partners Pacific operations’ East Line pipeline and other legal liability
adjustments, (ii) a combined $10.0 million decrease in income associated
with environmental liability adjustments, (iii) a $3.6 million decrease in
income resulting from unrealized foreign currency losses on long-term debt
transactions, (iv) a combined $2.7 million decrease in income resulting
from refined product inventory losses and certain property, plant and
equipment write-offs, (v) a $0.3 million decrease in income related to
hurricane clean-up and repair activities, (vi) non-cash goodwill
impairment adjustments of $1,266.5 million and (vii) $0.4
million decrease in 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.
|
(c)
|
2009
amount includes (i) a $7.8 million increase in income from hurricane
casualty gains, (ii) a decrease in income of $5.6 million resulting from
unrealized mark to market gains and losses due to the discontinuance of
hedge accounting at Casper Douglas, (iii) a $0.1 million increase in
expense from the amounts previously reported in Kinder Morgan Energy
Partners’ 2009 fourth quarter earnings release issued on January 20, 2010,
associated with adjustments to long-term receivables for environmental
cost recoveries and (iv) a
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
combined
$0.9 million decrease in earnings related sales and valuation adjustments
of assets which had been revalued as part of the Going Private transaction
and recorded in the application of the purchase method of
accounting. 2008 amount includes (i) a combined $5.6 million
increase in income resulting from unrealized mark to market gains and
losses due to the discontinuance of hedge accounting at Casper Douglas,
(ii) a $0.5 million decrease in expense associated with environmental
liability adjustments, (iii) a $5.0 million increase in expense related to
hurricane clean-up and repair activities, (iv) a $0.3 million increase in
expense associated with legal liability adjustments, (v) a non-cash
goodwill impairment adjustments of $2,090.2 million, and (vi) a combined
$1.7 million decrease in earnings related to sales and valuation
adjustments of assets which had been revalued as part of the Going Private
transaction and recorded in the application of the purchase method of
accounting.
|
(d)
|
2009
amount includes (i) a $13.5 million unrealized loss on derivative
contracts used to hedge forecasted crude oil sales and (ii) increases in
earnings resulting from valuation adjustments of $95.6 million 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. 2008 amount includes (i) a $0.3 million increase in
expense associated with environmental liability adjustments and (ii)
increases in earnings resulting from valuation adjustments of $136.2
million 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.
|
(e)
|
2009
amount includes (i) a combined $24.0 million increase in income from
hurricane and fire casualty gains and clean-up and repair activities, (ii)
a $0.5 million decrease in expense associated with legal liability
adjustments related to a litigation matter involving the Staten Island
liquids terminal, (iii) a $0.9 million increase in expense associated with
environmental liability adjustments, (iv) a $0.7 million increase in
expense from the amounts previously reported in Kinder Morgan Energy
Partners’ 2009 fourth quarter earnings release issued on January 20, 2010,
associated with adjustments to long-term receivables for environmental
cost recoveries and (v) a decreases in earnings of $2.6 million 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. 2008 amount includes (i) a combined $7.2 million
decrease in income related to fire damage and repair activities, (ii) a
combined $5.7 million decrease in income related to hurricane clean-up and
repair activities, (iii) a combined $2.8 million increase in expense from
both the settlement of certain litigation matters related to Kinder Morgan
Energy Partners’ Elizabeth River bulk terminal and Staten Island liquids
terminal, and other legal liability adjustments, (iv) a $0.6 million
decrease in expense associated with environmental liability adjustments,
(v) a non-cash goodwill impairment charge of $676.6 million and (vi) a
decreases in earnings of $3.7 million 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.
|
(f)
|
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, and a $3.7 million
decrease in expense due to a certain non-cash accounting change related to
book tax accruals. 2008 amount includes a $19.3 million
decrease in expense associated with favorable changes in Canadian income
tax rates, and a combined $18.9 million increase in expense due to certain
non-cash regulatory accounting adjustments.
|
(g)
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC.
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.
|
(h)
|
General
administration fixed fee charges under an Operations and Reimbursement
Agreement.
|
(i)
|
Includes
unallocated litigation and environmental expenses. 2009 amount
includes (i) a $2.3 million increase in expense for certain asset and
business acquisition costs, which under prior accounting standards would
have been capitalized, (ii) a $1.3 million increase in expense for certain
land transfer taxes associated with the April 30, 2007 Trans Mountain
acquisition and (iii) a $2.7 million decrease in expense related to
capitalized overhead costs associated with the 2008 hurricane
season. 2008 amount includes (i) a $0.9 million increase in
expense for certain Express pipeline system acquisition costs, (ii) a $0.4
million increase in expense resulting from the write-off of certain
acquisition costs, which under prior accounting standards would have been
capitalized, (iii) a $0.1 million increase in expense related to hurricane
clean-up and repair activities and (iv) a $2.0 million decrease in expense
due to the adjustment of certain insurance related
liabilities.
|
(j)
|
2009
amount includes a $1.6 million increase in imputed interest expense
related to the January 1, 2007 Cochin Pipeline
acquisition. 2008 amount includes (i) a $7.1 million decrease
in interest expense due to certain non-cash Trans Mountain regulatory
accounting adjustments, (ii) a $2.0 million increase in imputed interest
expense related to the January 1, 2007 Cochin Pipeline acquisition and
(iii) a $0.2 million increase in interest expense related to the proposed
settlement of certain litigation matters related to Kinder Morgan Energy
Partners Pacific operations’ East Line
pipeline.
|
Year
Ended December 31, 2009 vs. 2008
Our
total revenues for 2009 and 2008 were $7.2 billion and $12.1 billion,
respectively. For 2009 the net income attributable to Kinder Morgan,
Inc. totaled $0.5 billion as compared to a loss of $3.6 billion in
2008. The increase in Kinder Morgan, Inc.’s net income for 2009 as
compared to 2008 is primarily due to non-cash goodwill impairment charges that
were recorded in the second quarter of 2008 to each segment as follows: Products
Pipelines–KMP – $1.26 billion, Natural Gas Pipelines–KMP – $2.09 billion, and
Terminals–KMP – $677 million, for a total impairment of $4.03
billion.
Seven
Months Ended December 31, 2007
Net
income for the period was driven by solid contributions from CO2–KMP, NGPL
PipeCo LLC, Natural Gas Pipelines–KMP and Products Pipelines–KMP, which
accounted for 25.4%, 24.7%, 21.9% and 9.5%, respectively, or 81.5% collectively,
of segment earnings before DD&A. CO2–KMP was
driven almost equally by its sales and transport and oil and gas producing
activities. The Texas Intrastate Natural Gas Pipelines Group accounted for over
50% of the Natural Gas Pipelines–KMP performance and the West Coast Products
Pipelines accounted for approximately 50% of the Product Pipelines–KMP segment
earnings. NGPL PipeCo LLC contributed earnings of $422.8 million with
incremental earnings
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
coming
from the re-contracting of transportation and storage services at higher rates,
increased contract volumes, and recent transportation and storage
expansions.
Net
income was adversely impacted by (i) interest expenses related to the $4.8
billion of incremental debt resulting from the Going Private transaction (see
discussion below on the impact of the purchase method of accounting on segment
earnings) and (ii) DD&A expense associated with expansion capital
expenditures.
Five
Months Ended May 31, 2007
Net
income was driven by solid performance from NGPL PipeCo LLC as well as all
Kinder Morgan Energy Partners segments except Kinder Morgan Canada–KMP, as
discussed below. NGPL PipeCo LLC contributed $267 million while Products
Pipelines–KMP, Natural Gas Pipelines–KMP and CO2–KMP each
contributed over $200 million.
Offsetting
these positive factors were (i) a $377.1 million goodwill impairment charge
associated with the Trans Mountain Pipeline (see Note 7 of the accompanying
Notes to Consolidated Financial Statements) and (ii) $141.0 million in
additional general and administrative expense associated with the Going Private
transaction.
Impact
of the Purchase Method of Accounting on Segment Earnings (Loss)
The
impacts of the purchase method of accounting on segment earnings (loss) before
DD&A relate primarily to the revaluation of the accumulated other
comprehensive income related to derivatives accounted for as hedges in the
CO2–KMP and
Natural Gas Pipelines–KMP segments. Where there is an impact to segment earnings
(loss) before DD&A from the Going Private transaction, the impact is
described in the individual business segment discussions, which follow. The
effects on DD&A expense result from changes in the carrying values of
certain tangible and intangible assets to their estimated fair values as of May
30, 2007. This revaluation results in changes to DD&A expense in periods
subsequent to May 30, 2007. The purchase accounting effects on “Unallocable
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.
Segment
earnings before depreciation, depletion and amortization expenses
Certain
items included in earnings from continuing operations are either not allocated
to business segments or are not considered by management in its evaluation of
business segment performance. In general, the items not included in segment
results are interest expense, general and administrative expenses, DD&A and
Kinder Morgan, Inc. income taxes. We currently evaluate business segment
performance primarily based on segment earnings before DD&A in relation to
the level of capital employed. Because Kinder Morgan Energy Partners’
partnership agreement requires it to distribute 100% of its available cash to
its partners on a quarterly basis (Kinder Morgan Energy Partners’ available cash
consists primarily of all of its cash receipts, less cash disbursements and
changes in reserves), we consider each period’s earnings before all non-cash
depreciation, depletion and amortization expenses to be an important measure of
business segment performance for our segments that are also segments of Kinder
Morgan Energy Partners. We account for intersegment sales at market prices.
We account
for the transfer of net assets between entities under common control by carrying
forward the net assets recognized in the balance sheets of each combining entity
to the balance sheet of the combined entity, and no other assets or liabilities
are recognized as a result of the combination. Transfers of net assets between
entities under common control do not affect the income statement of the combined
entity.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Products
Pipelines – KMP
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
Year
Ended December 31,
|
|
|
Seven
Months
Ended
December
31,
|
|
|
Five
Months
Ended
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In
millions, except operating statistics)
|
|
|
(In
millions, except operating statistics)
|
|
Revenues(a)
|
|
$ |
826.6 |
|
|
$ |
815.9 |
|
|
$ |
471.5 |
|
|
$ |
331.8 |
|
Operating
expenses(b)
|
|
|
(269.5 |
) |
|
|
(291.0 |
) |
|
|
(320.6 |
) |
|
|
(116.4 |
) |
Other
income (expense)(c)
|
|
|
(1.1 |
) |
|
|
(3.0 |
) |
|
|
0.8 |
|
|
|
(0.6 |
) |
Goodwill
impairment(d)
|
|
|
- |
|
|
|
(1,266.5 |
) |
|
|
- |
|
|
|
- |
|
Earnings
from equity investments(e)
|
|
|
18.7 |
|
|
|
15.7 |
|
|
|
11.5 |
|
|
|
12.4 |
|
Interest
income and Other, net(f)
|
|
|
12.4 |
|
|
|
2.0 |
|
|
|
4.7 |
|
|
|
4.7 |
|
Income
tax benefit (expense)(g)
|
|
|
(3.1 |
) |
|
|
4.9 |
|
|
|
(5.4 |
) |
|
|
(7.5 |
) |
Earnings
(loss) before depreciation, depletion and amortization expense and
amortization of excess cost of equity investments
|
|
$ |
584.0 |
|
|
$ |
(722.0 |
) |
|
$ |
162.5 |
|
|
$ |
224.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
(MMBbl) (h)
|
|
|
400.1 |
|
|
|
398.4 |
|
|
|
252.7 |
|
|
|
182.8 |
|
Diesel
fuel (MMBbl)
|
|
|
143.2 |
|
|
|
157.9 |
|
|
|
97.5 |
|
|
|
66.6 |
|
Jet
fuel (MMBbl)
|
|
|
111.4 |
|
|
|
117.3 |
|
|
|
73.8 |
|
|
|
51.3 |
|
Total
refined product volumes (MMBbl)
|
|
|
654.7 |
|
|
|
673.6 |
|
|
|
424.0 |
|
|
|
300.7 |
|
Natural
gas liquids (MMBbl)
|
|
|
26.5 |
|
|
|
27.3 |
|
|
|
16.7 |
|
|
|
13.7 |
|
Total
delivery volumes (MMBbl)(i)
|
|
|
681.2 |
|
|
|
700.9 |
|
|
|
440.7 |
|
|
|
314.4 |
|
__________
(a)
|
2008
amount includes a $5.1 million decrease in revenues from the proposed
settlement of certain litigation matters related to the Pacific
operations’ East Line pipeline.
|
(b)
|
2009
and 2008 amounts include increases in expense of $11.5 million and $9.2
million, respectively, associated with environmental liability
adjustments. 2009 amount also includes (i) a $23.0 million
increase in expense from the amounts previously reported in Kinder Morgan
Energy Partners’ 2009 fourth quarter earnings release issued on January
20, 2010, associated with adjustments to long-term receivables for
environmental cost recoveries, which is primarily non-cash in 2009 and
(ii) an $18.0 million increase in expense associated with rate case and
other legal liability adjustments. 2008 amount also includes a combined
$5.0 million increase in expense from the proposed settlement of certain
litigation matters related to the Pacific operations’ East Line pipeline
and other legal liability adjustments, a $0.5 million increase in expense
resulting from refined product inventory losses, and a $0.2 million
increase in expense related to hurricane clean-up and repair
activities.
|
(c)
|
2009
amount includes a gain of $0.2 million from hurricane casualty
indemnifications. 2008 amount includes a $2.2 million decrease
in income resulting from certain property, plant and equipment
write-offs. Also, 2009 and 2008 amounts include $0.5 million
and $0.4 million, respectively, of decreases in 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.
|
(d)
|
2008
includes non-cash goodwill impairment adjustments of $1,266.5
million.
|
(e)
|
2008
amount includes an expense of $1.3 million associated with the portion of
environmental liability adjustments on Plantation Pipe Line Company,
and an expense of $0.1 million reflecting Kinder Morgan Energy Partners’
portion of Plantation Pipe Line Company’s expenses related to hurricane
clean-up and repair activities.
|
(f)
|
2009
and 2008 amounts include a $1.7 million increase in income and a $3.6
million decrease in income, respectively, resulting from unrealized
foreign currency gains and losses on long-term debt
transactions.
|
(g)
|
2008
amount includes a $0.5 million decrease in expense reflecting the tax
effect (savings) on a proportionate share of environmental expenses
incurred by Plantation Pipe Line Company and described in footnote (e),
and a $0.1 million decrease in expense reflecting the tax effect (savings)
on the incremental legal expenses described in footnote
(b).
|
(h)
|
Years
ended December 31, 2009 and 2008, seven months ended December 31, 2007 and
five months ended May 31, 2007 volumes include ethanol volumes of 23.1
million barrels, 18.7 million barrels, 7.0 million barrels and 4.8 million
barrels, respectively.
|
(i)
|
Includes
Pacific, Plantation, Calnev, Central Florida, Cochin, and Cypress pipeline
volumes.
|
The
Products Pipelines–KMP segment’s primary businesses include transporting refined
petroleum products and natural gas liquids through pipelines and operating
liquid petroleum products terminals and petroleum pipeline transmix processing
facilities. Combined, the certain items described in the footnotes to
the table above accounted for decreases in earnings before depreciation,
depletion and amortization expenses of $51.1 million in 2009 and $1,293.5
million in 2008; accounting for $1,242.4 million increase in earnings in 2009
when compared to 2008. Following is information related to the
remaining increases and decreases in the segment’s (i) earnings before
depreciation, depletion and amortization expenses (EBDA) and (ii) revenues in
2009 when compared to 2008:
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Year Ended December 31, 2009
versus Year Ended December 31, 2008
|
|
EBDA
Increase/(Decrease)
|
|
|
Revenues
Increase/(Decrease)
|
|
|
|
(In
millions, except percentages)
|
|
Pacific
operations
|
|
$ |
21.2 |
|
|
|
8
|
% |
|
$ |
4.2 |
|
|
|
1
|
% |
West
Coast Terminals
|
|
|
13.4 |
|
|
|
25
|
% |
|
|
12.8 |
|
|
|
16
|
% |
Central
Florida Pipeline
|
|
|
9.2 |
|
|
|
22
|
% |
|
|
10.7 |
|
|
|
20
|
% |
Transmix
operations
|
|
|
7.7 |
|
|
|
26
|
% |
|
|
6.2 |
|
|
|
15
|
% |
Plantation
Pipeline
|
|
|
3.8 |
|
|
|
10
|
% |
|
|
(24.9 |
) |
|
|
(57 |
)
% |
Calnev
Pipeline
|
|
|
3.3 |
|
|
|
6
|
% |
|
|
(0.2 |
) |
|
|
- |
|
All
others (including eliminations)
|
|
|
5.0 |
|
|
|
5
|
% |
|
|
(3.2 |
) |
|
|
(2 |
)
% |
Total
Products Pipelines–KMP
|
|
$ |
63.6 |
|
|
|
11
|
% |
|
$ |
5.6 |
|
|
|
1
|
% |
Although
ongoing weak economic conditions continued to dampen demand for refined
petroleum products at many of the assets in this segment, resulting
in lower diesel and jet fuel volumes and relatively flat gasoline volumes versus
2008, earnings were positively impacted by higher ethanol and terminal revenues
from the Pacific operations and the Central Florida Pipeline, improved
warehousing margins at existing and expanded West Coast terminal facilities, and
an overall reduction in combined segment operating expenses in 2009, primarily
due to lower outside services and other discretionary expenses, and to lower
fuel and power expenses, when compared to a year earlier.
All
of the assets and operations included in the Products Pipelines–KMP business
segment reported higher earnings before depreciation, depletion and amortization
in 2009 when compared to 2008, and the primary increases and decreases in
segment earnings before depreciation, depletion and amortization in 2009
compared to 2008 were attributable to the following:
|
▪
|
a
$21.2 million (8%) increase in earnings from the Pacific
operations—consisting of an $18.8 million decrease in combined operating
expenses, a $4.2 million increase in total revenues, and a $1.8 million
decrease in other operating and non-operating income items, relative to
2008.
The decrease in the Pacific operations’
operating expenses in 2009 versus 2008 was primarily due to the following:
(i) overall cost reductions (due in part to a 4% decrease in overall
mainline delivery volumes) and delays in certain non-critical spending,
(ii) lower fuel and power, and outside services expenses, (iii) higher
product gains, (iv) lower right-of-way and environmental expenses and (v)
lower legal expenses (due in part to incremental expenses associated with
certain litigation settlements reached in 2008). The
year-over-year increase in revenues was driven by higher delivery revenues
to U.S. military customers, due to military tender increases in 2009,
annual tariff rate increases which positively impacted the California
products delivery revenues, and higher terminal revenues, primarily
related to incremental ethanol handling
services;
|
|
▪
|
a
$13.4 million (25%) increase in earnings from the West Coast terminal
operations—largely revenue related, driven by higher revenues from the
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 last
year. Revenues at the Carson/Los Angeles terminal complex
increased $8.8 million in 2009 versus 2008, due mainly to both increased
warehouse charges (escalated warehousing contract rates resulting from
customer contract revisions made since the end of 2008) and to new
customers (including incremental terminaling for U.S. defense fuel
services). Revenues from the remaining West Coast facilities
increased $4.0 million in 2009 versus 2008, due mostly to additional
throughput and storage services associated with renewable fuels (both
ethanol and biodiesel), and partly to incremental revenues of $0.8 million
from the terminals’ Portland, Oregon Airport pipeline, which was acquired
on July 31, 2009;
|
|
▪
|
a
$9.2 million (22%) increase in earnings from the Central Florida
Pipeline—driven by incremental ethanol revenues and higher refined
products delivery revenues, when compared to 2008. The increase
from ethanol handling resulted from completed capital expansion projects
that provided ethanol storage and terminal service beginning in mid-April
2008 at the Tampa and Orlando terminals, and the increase in pipeline
delivery revenues was driven by higher average transportation rates that
reflect two separate mid-year tariff rate increases that became effective
July 1, 2008 and 2009;
|
|
▪
|
a
$7.7 million (26%) increase in earnings from the transmix
operations—mainly due to a combined $8.0 million increase in revenues in
2009, associated with certain true-ups related to transmix settlement
gains;
|
|
▪
|
a
$3.8 million (10%) increase in earnings from the approximate 51% equity
ownership in the Plantation Pipe Line Company. Plantation’s net
income increased as a result of higher pipeline transportation revenues
(due to both higher volumes and average tariffs) and incremental other
income in 2009 from insurance reimbursements related to the settlement of
certain previous environmental
matters.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
|
The
decrease in revenues associated with the investment in Plantation in 2009
compared to 2008 was mainly due to a restructuring of the Plantation
operating agreement between ExxonMobil and Kinder Morgan Energy
Partners. On January 1, 2009, both parties agreed to reduce the
fixed operating fees Kinder Morgan Energy Partners earns from operating
the pipeline and to charge pipeline operating expenses directly to
Plantation, resulting in a minimal impact to the
earnings. Accordingly, the $24.9 million reduction in the fee
revenues in 2009 was offset by a corresponding decrease in the operating
expenses of $26.9 million; and
|
|
▪
|
a
$3.3 million (6%) increase in earnings from the Calnev Pipeline—driven by
a $2.9 million reduction in combined fuel and power expenses in 2009
versus 2008. The drop in fuel and power expenses was due
primarily to an overall 8% decrease in refined products delivery volumes,
chiefly due to lower diesel
volumes.
|
Earnings
Before DD&A by Major Segment Asset
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
|
Seven Months
Ended
December 31,
2007
|
|
|
Five Months
Ended
May 31, 2007
|
|
|
|
(In
millions)
|
|
|
(In
millions)
|
|
Pacific
operations
|
|
$ |
(10.3 |
) |
|
$ |
105.1 |
|
Calnev
Pipeline
|
|
|
27.5 |
|
|
|
20.1 |
|
West
Coast Terminals
|
|
|
24.3 |
|
|
|
19.3 |
|
Plantation
Pipeline
|
|
|
22.2 |
|
|
|
18.2 |
|
Central
Florida Pipeline
|