Kinder
Morgan, Inc. Form 10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
Form
10-K
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[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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[ ]
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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)
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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, $0.01 par value,
as of January 29, 2010 was 100 shares.
2
Kinder
Morgan, Inc. Form 10-K
TABLE
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Morgan, Inc. Form 10-K
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____________
Note: Individual
financial statements of the parent company are omitted pursuant to the
provisions of Accounting Series Release No. 302.
4
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
Morgan, Inc. Form 10-K
|
Unless
the context requires otherwise, references to “we,” “us,” “our,” or the
“Company” are intended to mean Kinder Morgan, Inc. and its consolidated
subsidiaries, including Kinder Morgan Energy Partners, L.P. All dollars are
United States dollars, except where stated otherwise. Canadian dollars are
designated as C$. 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.
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
5
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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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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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6
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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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7
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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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▪
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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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▪
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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;
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8
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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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▪
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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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9
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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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2010
Outlook
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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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10
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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. |
For
financial information on our seven reportable business segments, see Note 15 of
the accompanying Notes to Consolidated Financial Statements.
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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▪
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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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11
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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.
12
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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
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
13
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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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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.
14
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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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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.
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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.
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.
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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
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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.
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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.
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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
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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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▪
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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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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
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Items 1 and
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and Properties. (continued)
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Kinder
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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.
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Items 1 and
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and Properties. (continued)
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Kinder
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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
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Items 1 and
2. Business
and Properties. (continued)
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Kinder
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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
25
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Items 1 and
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and Properties. (continued)
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Kinder
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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
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and Properties. (continued)
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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
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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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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
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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.
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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
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Items 1 and
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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
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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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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.
|
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,
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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
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Items 1 and
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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
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Items 1 and
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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
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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.
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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,
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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.
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Item
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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.
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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.
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Item
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Factors. (continued)
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Kinder
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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
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Item
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Factors. (continued)
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Kinder
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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.
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Item
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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.
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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.
None.
46
|
Kinder
Morgan, Inc. Form 10-K
|
See
Note 16 of the accompanying Notes to Consolidated Financial
Statements.
None.
47
|
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.”
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.
|
48
|
Kinder
Morgan, Inc. Form 10-K
|
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
49
|
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.
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
50
|
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.
51
|
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.
52
|
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.
53
|
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
|
54
|
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
55
|
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.
56
|
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:
57
|
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.
|
58
|
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
|
21.9 | 15.3 | ||||||
|
Cochin
Pipeline System
|
30.6 | 15.3 | ||||||
|
Southeast
Terminals
|
24.8 | 16.6 | ||||||
|
Transmix
operations
|
18.3 | 12.4 | ||||||
|
All
others
|
3.2 | 2.1 | ||||||
|
Segment
Earnings Before DD&A
|
$ | 162.5 | $ | 224.4 | ||||
Revenues
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
|
$ | 224.4 | $ | 156.0 | ||||
|
Calnev
Pipeline
|
41.9 | 27.7 | ||||||
|
West
Coast Terminals
|
42.9 | 29.1 | ||||||
|
Plantation
Pipeline
|
24.6 | 17.6 | ||||||
|
Central
Florida Pipeline
|
27.1 | 19.3 | ||||||
|
Cochin
Pipeline System
|
42.6 | 32.3 | ||||||
|
Southeast
Terminals
|
38.4 | 29.9 | ||||||
|
Transmix
operations
|
25.8 | 17.5 | ||||||
|
All
others
|
3.8 | 2.4 | ||||||
|
Segment
Revenues
|
$ | 471.5 | $ | 331.8 | ||||
Seven
Months Ended December 31, 2007
The
results for the seven months were negatively impacted by $154.9 million of legal
liability adjustments primarily associated with the Pacific operations.
Offsetting the charges, earnings before DD&A for this segment were
positively affected by (i) approximately $15.4 million associated with Kinder
Morgan Energy Partners’ January 1, 2007 acquisition of the remaining ownership
interest in Cochin (approximately 50.2%) that it did not already own, at which
time Kinder Morgan Energy Partners became the pipeline operator, (ii) strong
pipeline revenues from the Plantation Pipeline for the period, largely due to
favorable oil loss allowance tariff rates, relative to pipeline operating
expenses that included only minor pipeline integrity expenses, (iii) favorable
margins and strong mainline delivery volumes from the 2006 East Line pipeline
expansion and demand from West Coast military bases within the Pacific
operations, (iv) military and commercial tariff rate
59
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
increases
in 2007 on the Calnev Pipeline, (v) strong demand for terminal services at the
Carson/Los Angeles Harbor terminal system, recently expanded in 2006, and the
Linnton and Willbridge terminals located in Portland, Oregon, included in the
West Coast Terminals operations, (vi) $4.8 million of earnings before DD&A
and $5.7 million of revenue generated by the Kinder Morgan Energy Partners’
approximate $11 million Greensboro facility, placed in service in 2006, which is
used for petroleum pipeline transmix operations and (vii) the West Coast
Terminals’ $3.6 million gain on the sale of its interest in the Black Oil
pipeline system in Los Angeles, California in June 2007.
Effective
October 5, 2007, Kinder Morgan Energy Partners sold its North System common
carrier natural gas liquids pipeline and its 50% ownership interest in the
Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $295.7
million in cash, and used the proceeds received to pay down short-term debt
borrowings. The North System business results of operations are not included in
the tables and discussion above and have been classified to Discontinued
Operations on the accompanying Statements of Operations for the seven months
ended December 31, 2007 and five months ended May 31, 2007.
Five
Months Ended May 31, 2007
Earnings
before DD&A were positively affected by (i) approximately $7.7 million
associated with Kinder Morgan Energy Partners’ January 1, 2007 acquisition of
the remaining ownership interest in Cochin (approximately 50.2%) that it did not
already own, at which time Kinder Morgan Energy Partners became the pipeline
operator, (ii) an increase in average tariff rates and mainline delivery from
the 2006 expansion of the East Line pipeline within the Pacific operations and
demand from West Coast military bases, which contributed to the Pacific
operations’ revenues and earnings, (iii) strong demand for throughput volumes at
the combined Carson/Los Angeles Harbor terminal system and the Linnton and
Willbridge terminals located in Portland, Oregon, for the West Coast Terminals
operations and (iv) $2.8 million of earnings before DD&A and $3.3 million of
revenue generated by the Kinder Morgan Energy Partners’ Greensboro facility
discussed above. The results for the five months were negatively impacted by a
$2.2 million expense associated with East Line pipeline legal liability
adjustments.
Natural
Gas 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
|
$ | 3,806.9 | $ | 8,422.0 | $ | 3,825.9 | $ | 2,640.6 | ||||||||
|
Operating
expenses(a)
|
(3,192.7 | ) | (7,803.3 | ) | (3,461.4 | ) | (2,418.5 | ) | ||||||||
|
Other
income (expense) (b)
|
6.6 | 0.2 | 1.9 | (0.1 | ) | |||||||||||
|
Goodwill
impairment(c)
|
- | (2,090.2 | ) | - | - | |||||||||||
|
Earnings
from equity investments
|
141.8 | 113.4 | 10.3 | 8.9 | ||||||||||||
|
Interest
income and other, net-income
|
31.8 | 16.3 | - | 0.2 | ||||||||||||
|
Income
tax expense
|
(5.7 | ) | (2.7 | ) | (3.4 | ) | (2.6 | ) | ||||||||
|
Earnings
(loss) before depreciation, depletion and amortization expense and
amortization of excess cost of equity investments
|
$ | 788.7 | $ | (1,344.3 | ) | $ | 373.3 | $ | 228.5 | |||||||
|
Natural
gas transport volumes (Trillion Btus)(d)
|
2,284.8 | 2,008.6 | 1,067.0 | 645.6 | ||||||||||||
|
Natural
gas sales volumes (Trillion Btus)(e)
|
794.5 | 866.9 | 519.7 | 345.8 | ||||||||||||
__________
|
(a)
|
2009
and 2008 amounts include a $5.6 million decrease in income and a $5.6
million increase in income, respectively, resulting from unrealized mark
to market gains and losses due to the discontinuance of hedge accounting
at Casper Douglas. Beginning in the second quarter of 2008, the
Casper and Douglas gas processing operations discontinued hedge
accounting. 2009 amount also includes 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. 2008 amount includes a $5.0 million increase in expense
related to hurricane clean-up and repair activities, a $0.3 million
increase in expense associated with legal liability adjustments, and a
$0.5 million decrease in expense associated with environmental liability
adjustments. Amounts also include increases in earnings of $0.3
million and $0.8 million for the years ended 2009 and 2008, respectively,
resulting from valuation adjustments related to derivative contracts in
place at the time of the Going Private transaction and recorded in the
application of the purchase method of
accounting.
|
60
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
(b)
|
2009
amount includes gains of $7.8 million from hurricane casualty
indemnifications. 2009 and 2008 amounts include $1.2 million
and $3.1 million, respectively, in decreased earnings related to assets
sold, and 2008 amount also includes a $0.6 million increase in earnings
related to valuation adjustments of assets. These assets had
been revalued as part of the Going Private transaction and recorded in the
application of the purchase method of accounting.
|
|
(c)
|
2008
amount include non-cash goodwill impairment adjustments of $2,090.2
million.
|
|
(d)
|
Includes
Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline
Company LLC, TransColorado Gas Transmission Company LLC, Rockies Express
Pipeline LLC, Midcontinent Express Pipeline LLC, Kinder Morgan Louisiana
Pipeline LLC and Texas intrastate natural gas pipeline group pipeline
volumes.
|
|
(e)
|
Represents
Texas intrastate natural gas pipeline group
volumes.
|
The
Natural Gas Pipelines–KMP segment’s primary businesses involve marketing,
transporting, storing, gathering, processing and treating natural gas through
both intrastate and interstate pipeline systems and related
facilities. Combined, the certain items described in the footnotes to
the table above accounted for an increase of $1.2 million in 2009 and a decrease
of $2,091.1 million in 2008 in earnings before depreciation, depletion and
amortization expenses; accounting for a $2,092.3 million increase in earnings
before depreciation, depletion and amortization expenses in 2009 when compared
to 2008. Following is information related to the increases and
decreases in the segment’s (i) remaining changes in earnings before
depreciation, depletion and amortization expenses (“EBDA”) and (ii) revenues in
2009 when compared to 2008:
Year Ended December 31, 2009
versus Year Ended December 31, 2008
|
EBDA
Increase/(Decrease)
|
Revenues
Increase/(Decrease)
|
|||||||||||||||
|
(In
millions, except percentages)
|
||||||||||||||||
|
Kinder
Morgan Louisiana Pipeline
|
$ | 30.2 | n/a | $ | 25.3 | n/a | ||||||||||
|
Midcontinent
Express Pipeline
|
14.1 | n/a | - | - | ||||||||||||
|
Rockies
Express Pipeline
|
13.2 | 16 | % | - | - | |||||||||||
|
Kinder Morgan Interstate Gas Transmission
|
9.6 | 8 | % | (24.6 | ) | (4 | ) % | |||||||||
|
Kinder
Morgan Gas Treating
|
9.4 | n/a | 14.2 | n/a | ||||||||||||
|
TransColorado
Pipeline
|
(3.5 | ) | (6 | ) % | (2.6 | ) | (4 | ) % | ||||||||
|
Texas Intrastate Natural Gas Pipeline Group
|
(34.0 | ) | (9 | ) % | (4,580.7 | ) | (57 | ) % | ||||||||
|
All
others
|
1.7 | 2 | % | (46.7 | ) | (25 | ) % | |||||||||
|
Intrasegment
eliminations
|
- | - | - | - | ||||||||||||
|
Total
Natural Gas Pipelines–KMP
|
$ | 40.7 | 5 | % | $ | (4,615.1 | ) | (55 | ) % | |||||||
The
overall increase in the Natural Gas Pipelines–KMP’s earnings before
depreciation, depletion and amortization expenses in 2009 versus 2008 was driven
by incremental contributions from the fully-owned Kinder Morgan Louisiana
pipeline system, the 50% investment in the Midcontinent Express pipeline system,
and the 50% investment in the Rockies Express pipeline system. Kinder
Morgan Energy Partners accounts for the investments in Midcontinent Express and
Rockies Express under the equity method of accounting.
The
Kinder Morgan Louisiana Pipeline commenced limited natural gas transportation
service on the 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. The overall incremental earnings in 2009
compared to 2008 consisted of operating income (revenues less operating
expenses) of $18.4 million and non-operating other income of $11.8 million, due
primarily to higher non-cash allowances for capital funds used during
construction. Pursuant to FERC regulations governing allowances for
capital funds that are used for pipeline construction costs (an equity cost of
capital allowance), Kinder Morgan Energy Partners was allowed a reasonable
return on the construction costs that it funded by equity contributions, similar
to the allowance for capital costs funded by borrowings.
The
incremental equity earnings from Midcontinent Express also relates to the
start-up of natural gas transportation service in 2009. The system
commenced interim service for Zone 1 of its pipeline system on April 10, 2009,
with deliveries to Natural Gas Pipeline Company of America. Natural
gas service to all Zone 1 delivery points occurred by May 21, 2009, and on
August 1, 2009, the system’s remaining portion (Zone2) was placed into
service. Currently, the pipeline system can provide transportation
service for 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.
The
increase in earnings from Rockies Express was primarily attributable to both the
completion and start-up of the Rockies Express-East pipeline segment in 2009 and
to the inclusion of a full year of operations from the Rockies Express-West
pipeline segment. The Rockies Express-East line is the third and
final phase of the Rockies Express joint venture project. It began
initial pipeline service on June 29, 2009, and began full operations on November
12, 2009. The Rockies Express-West line began initial pipeline
service on January 12, 2008, and began full operations on May 20,
2008.
61
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
On
November 14, 2009, a pipeline girth weld failure on the Rockies Express-East
line resulted in approximately 60 miles of the pipeline being
shutdown. The pipeline was placed back into service at a reduced
capacity on January 27, 2010, and at full capacity on February 6,
2010. The negative impact on the equity earnings from Rockies Express
in the fourth quarter of 2009 was approximately $16 million.
Following
is information on other year-over-year increases and decreases in segment
earnings before depreciation, depletion and amortization expenses in 2009
compared to 2008:
|
|
▪
|
a
$9.6 million (8%) increase in earnings from the Kinder Morgan Interstate
Gas Transmission pipeline system (“KMIGT”)— driven by higher operational
gas sales margins, higher firm transportation demand fees (resulting from
both system expansions and incremental ethanol customers) and higher
pipeline fuel recoveries (KMIGT’s operational gas sales are primarily made
possible by its collection of fuel in-kind pursuant to its transportation
tariffs and recovery of storage cushion gas
volumes);
|
|
|
▪
|
incremental
earnings of $9.4 million from Kinder Morgan Gas Treating, L.P., which
acquired the natural gas treating business from Crosstex Energy, L.P. and
Crosstex Energy, Inc. effective October 1, 2009. The business
consists of multiple natural gas treating plants, predominantly located in
Texas and Louisiana, that are used to remove impurities and liquids from
natural gas in order to meet pipeline quality
specifications;
|
|
|
▪
|
a
$3.5 million (6%) decrease in earnings from the TransColorado
Pipeline—primarily due to a $2.6 million (4%) drop in natural gas
transportation revenues and partly to increases in both pipeline
remediation expenses and property tax expenses in 2009 compared to
2008. The decrease in transportation revenues related primarily
to the negative impact caused by the increased transportation service
offered by a competing pipeline in 2009;
and
|
|
|
▪
|
a
$34.0 million (9%) decrease in earnings from the Texas intrastate natural
gas pipeline group—mainly attributable to (i) lower margins from natural
gas sales, primarily due to lower sales volumes and to higher supply
prices relative to sales prices in 2009. The increase in supply
prices resulted from a decline in field volumes being replaced with more
expensive supplies from more liquid supply locations in 2009, (ii) lower
natural gas processing margins, due to unfavorable gross processing
spreads as a result of significantly lower average natural gas liquids
prices in 2009 and (iii) higher system operational expenses, due primarily
to higher pipeline integrity expenses relative to last
year. The overall decreases in earnings were partially offset
by higher year-to-year natural gas storage margins which resulted from
favorable proprietary and fee based storage activities and from the
leasing of additional storage capacity to customers from completed capital
expansion projects.
|
The
Texas intrastate natural gas pipeline group includes the operations of the
following four natural gas pipeline systems: Kinder Morgan Tejas (including
Kinder Morgan Border Pipeline), Kinder Morgan Texas Pipeline, Kinder Morgan
North Texas Pipeline and the Mier-Monterrey Mexico Pipeline, and combined, the
group accounted for 46% and 53%, respectively, of the segment’s earnings before
depreciation, depletion and amortization expenses in 2009 and 2008, 89% and 95%,
respectively, of the segment’s revenues in 2009 and 2008, and 95% and 97%,
respectively, of the segment’s operating expenses in 2009 and 2008.
For
each of the years 2009 and 2008, the overall changes in both segment revenues
and segment operating expenses (which include natural gas costs of sales)
primarily relate to the natural gas purchase and sale activities of the
intrastate group, with the variances from year-to-year in both revenues and
operating expenses mainly due to corresponding changes in the intrastate group’s
average prices and volumes for natural gas purchased and sold. The
group both purchases and sells significant volumes of natural gas, which is
often stored and/or transported on its pipelines, and because the group
generally sells natural gas in the same price environment in which it is
purchased, the increases and decreases in its gas sales revenues are largely
offset by corresponding increases and decreases in gas purchase
costs.
With
regard to natural gas sales activity, the intrastate group’s business strategy
involves relying both on long and short-term natural gas sales and purchase
agreements, and the Texas intrastate natural gas pipeline group uses this
flexibility to help optimize the margins realized by capturing favorable
differences due to changes in timing, location, prices and
volumes. To the extent possible, the Texas intrastate natural gas
pipeline group balances the pricing and timing of the natural gas purchases to
the natural gas sales, and the purchase and sales contracts are frequently
settled in terms of an index price for both purchases and
sales. Generally, the Texas intrastate natural gas pipeline group
attempts to lock-in an acceptable margin by capturing the difference between the
average gas sales prices and the average gas purchase and cost of fuel
prices.
62
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
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)
|
|||||||
|
Texas Intrastate Natural Gas Pipeline Group
|
$ | 221.1 | $ | 133.0 | ||||
|
Kinder Morgan Interstate Gas Transmission
|
65.7 | 43.1 | ||||||
|
Trailblazer Pipeline
|
31.9 | 18.1 | ||||||
|
TransColorado Pipeline
|
25.7 | 17.9 | ||||||
|
Rockies Express Pipeline
|
(8.3 | ) | (4.3 | ) | ||||
|
Casper and Douglas Gas Processing
|
18.0 | 7.3 | ||||||
|
All others
|
19.2 | 13.4 | ||||||
|
Segment Earnings Before DD&A
|
$ | 373.3 | $ | 228.5 | ||||
Revenues
by Major Segment Activities
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
Seven Months
Ended
December 31,
2007
|
Five Months
Ended
May 31, 2007
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Texas Intrastate Natural Gas Pipeline Group
|
$ | 3,562.0 | $ | 2,492.4 | ||||
|
Kinder Morgan Interstate Gas Transmission
|
130.7 | 70.7 | ||||||
|
Trailblazer Pipeline
|
36.4 | 22.6 | ||||||
|
TransColorado Pipeline
|
30.3 | 20.7 | ||||||
|
Casper and Douglas Gas Processing
|
67.1 | 34.7 | ||||||
|
All others
|
0.2 | - | ||||||
|
Intrasegment eliminations
|
(0.8 | ) | (0.5 | ) | ||||
|
Segment Revenues
|
$ | 3,825.9 | $ | 2,640.6 | ||||
Seven
Months Ended December 31, 2007
Earnings
before DD&A in the seven months ended December 31, 2007 were also positively
affected by (i) strong performances by the Texas intrastate natural gas pipeline
group due to (a) favorable natural gas sales margins on renewal contracts, (b)
increased transportation service revenue due to a new long-term contract with a
major customer that became effective April 1, 2007, (c) greater value from
natural gas storage activities and natural gas processing margins, (d) sales of
cushion gas due to the termination of a storage facility lease and (e) storage
revenues from transportation and storage under a new long term contract with a
major customer that became effective April 1,2007, (ii) strong performance from
KMIGT, Trailblazer Pipeline and TransColorado Pipeline due mainly to solid
earnings from transportation and natural gas park and loan services and (iii)
earnings from Casper and Douglas gas processing operations that had solid
natural gas liquids sales revenues driven by favorable prices and
volumes.
Adversely
affecting earnings before DD&A in the seven months ended December 31, 2007
was Kinder Morgan Energy Partners’ share of net losses from its equity
investment in Rockies Express due to depreciation and interest expenses
allocable to a segment of this project that was placed in service in February
2007, and until the completion of the Rockies Express-West project which became
fully operational in May 2008, generated only limited natural gas reservation
revenues and volumes.
Five
Months Ended May 31, 2007
Earnings
before DD&A in the five months ended May 31, 2007 were positively affected
by (i) strong performances by the Texas intrastate natural gas pipeline group
due to (a) favorable natural gas sales margins on renewal and incremental
contracts, (b) strong demand for and favorable rates on transportation services,
(c) greater value from natural gas storage activities and natural gas processing
margins, (d) sales of cushion gas due to the termination of a storage facility
lease and (e) storage revenues from a new long-term contract with a major
customer that became effective April 1, 2007, (ii) strong
63
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
performance
from KMIGT, Trailblazer Pipeline and TransColorado Pipeline due mainly to solid
earnings from transportation and natural gas park and loan services and (iii)
earnings from Casper and Douglas gas processing operations that had solid
natural gas liquids sales revenues driven by favorable prices and
volumes.
Rockies
Express operations adversely affected earnings before DD&A by $4.3 million
for the five months ended May 31, 2007 as depreciation and interest expenses
were in excess of gross profits realized on limited natural gas reservation
revenues and volumes.
CO2–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)
|
$ | 1,131.3 | $ | 1,269.2 | $ | 605.9 | $ | 324.2 | ||||||||
|
Operating
expenses(b)
|
(271.1 | ) | (391.8 | ) | (182.7 | ) | (121.5 | ) | ||||||||
|
Earnings
from equity investments
|
22.3 | 20.7 | 10.5 | 8.7 | ||||||||||||
|
Other,
net income (expense)
|
- | 1.9 | 0.1 | (0.1 | ) | |||||||||||
|
Income
tax expense
|
(4.0 | ) | (3.9 | ) | (0.8 | ) | (1.3 | ) | ||||||||
|
Earnings
before depreciation, depletion and amortization expense and amortization
of excess cost of equity investments
|
$ | 878.5 | $ | 896.1 | $ | 433.0 | $ | 210.0 | ||||||||
|
Carbon
dioxide delivery volumes (Bcf)(c)
|
774.0 | 732.1 | 365.0 | 272.3 | ||||||||||||
|
SACROC
oil production (gross)(MBbl/d)(d)
|
30.1 | 28.0 | 26.5 | 29.1 | ||||||||||||
|
SACROC
oil production (net)(MBbl/d)(e)
|
25.1 | 23.3 | 22.1 | 24.2 | ||||||||||||
|
Yates
oil production (gross)(MBbl/d)(d)
|
26.5 | 27.6 | 27.4 | 26.4 | ||||||||||||
|
Yates
oil production (net)(MBbl/d)(e)
|
11.8 | 12.3 | 12.2 | 11.7 | ||||||||||||
|
Natural
gas liquids sales volumes (net)(MBbl/d)(e)
|
9.5 | 8.4 | 9.5 | 9.7 | ||||||||||||
|
Realized
weighted average oil price per Bbl(f)(g)
|
$ | 49.55 | $ | 49.42 | $ | 36.80 | $ | 35.03 | ||||||||
|
Realized
weighted average natural gas liquids price
per Bbl(g)(h)
|
$ | 37.96 | $ | 63.00 | $ | 58.55 | $ | 45.04 | ||||||||
__________
|
(a)
|
2009
amount includes a $13.5 million unrealized loss (from a decrease in
revenues) on derivative contracts used to hedge forecasted crude oil
sales. Also, amounts include increases in segment earnings resulting from
valuation adjustments of $95.6 million and $136.2 million for the years
ended 2009 and 2008, respectively, 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.
|
|
(b)
|
2008
amount includes increases in expense associated with environmental
liability adjustments of $0.3 million.
|
|
(c)
|
Includes
Cortez, Central Basin, Canyon Reef Carriers, Centerline and Pecos pipeline
volumes.
|
|
(d)
|
Represents
100% of the production from the field. Kinder Morgan Energy
Partners owns an approximately 97% working interest in the SACROC unit and
an approximately 50% working interest in the Yates
unit.
|
|
(e)
|
Net
to Kinder Morgan Energy Partners after royalties and outside working
interests.
|
|
(f)
|
Includes
all Kinder Morgan Energy Partners owned crude oil production
properties.
|
|
(g)
|
Hedge
gains/losses for crude oil and natural gas liquids are included with crude
oil.
|
|
(h)
|
Includes
production attributable to leasehold ownership and production attributable
to Kinder Morgan Energy Partners ownership in processing plants and third
party processing agreements.
|
The
CO2–KMP
segment’s primary businesses involve the production, marketing and
transportation of both carbon dioxide (commonly called CO2) and crude
oil, and the production and marketing of natural gas and natural gas
liquids. Combined,
the certain items described in the footnotes to the table above accounted for
increases in earnings before depreciation, depletion and amortization expenses
of $82.1 million in 2009 and $135.9 million in 2008; accounting for decreases in
earnings before depreciation, depletion and amortization expenses of $53.8
million in 2009 when compared with 2008. For each of the segment’s
two primary businesses, following is information related to the remaining
changes in (i) earnings before depreciation, depletion and amortization expenses
and (ii) revenues in 2009 when compared to 2008:
64
|
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)
|
||||||||||||||||
|
Sales
and transportation activities
|
$ | (84.4 | ) | (28 | ) % | $ | (78.2 | ) | (23 | ) % | ||||||
|
Oil
and gas producing activities
|
120.6 | 26 | % | (44.5 | ) | (5 | ) % | |||||||||
|
Intrasegment
eliminations
|
- | - | 38.9 | 46 | % | |||||||||||
|
Total
CO2–KMP
|
$ | 36.2 | 5 | % | $ | (83.8 | ) | (7 | ) % | |||||||
The
segment’s overall $36.2 million (5%) increase in earnings before depreciation,
depletion and amortization expenses in 2009 compared to 2008 was due to a $120.6
million (26%) increase in earnings from its oil and gas producing activities,
which include the operations associated with its ownership interests in
oil-producing fields and natural gas processing plants. Generally,
earnings from the segment’s oil and gas producing activities align closely with
the revenues it earns from both crude oil and natural gas plant products sales,
but the overall increase in earnings in 2009 consisted of (i) a $166.1 million
(39%) increase from lower oil and gas related operating expenses, (ii) a $44.5
million (5%) decrease from lower revenues and (iii) a $1.0 million (51%)
decrease in other income items.
The
overall decrease in combined operating expenses in 2009 consisted of a $103.6
million (29%) decrease in oil and gas related field operating and maintenance
expenses (including all cost of sales and fuel and power expenses), and a $62.5
million (87%) decrease in taxes, other than income tax expenses. The
decrease in operating expenses in 2009 compared to 2008 was primarily due to (i)
lower prices charged by the industry’s material and service providers (for items
such as outside services, maintenance, and well workover services), which
impacted rig costs, other materials and services, and capital and exploratory
costs, (ii) lower fuel and utility rates and (iii) the successful renewal of
lower priced service and supply contracts negotiated by the CO2–KMP
segment since the end of 2008. The overall decrease in other tax
expenses, relative to 2008, was driven by a decrease in severance tax expenses,
related both to the decrease in natural gas liquids and crude oil sales revenues
(discussed following) and to a $30.3 million favorable adjustment to the accrued
severance tax liabilities due to prior year overpayments.
The
overall $44.5 million (5%) decline in oil and gas related revenues in 2009
versus 2008 was driven by a $61.2 million (32%) decrease in natural gas liquids
sales revenues, but partly offset by a $22.9 million (3%) increase in crude oil
sales revenues, due to a 3% increase in crude oil sales volumes. The
decrease in liquids sales revenues was due entirely to a 40% decrease in the
realized weighted average price per barrel of liquids in 2009; however, the
decrease in revenues caused by lower natural gas liquids realizations in 2009
was partly offset by higher revenues resulting from a 13% increase in natural
gas liquids sales volumes in 2009, due in part to the negative impact on sales
volumes in 2008 from Hurricane Ike.
The
realized weighted average price per barrel of oil was essentially flat across
both 2009 and 2008, although average industry price levels for crude oil have
increased since the beginning of 2009. Because prices of crude oil
and natural gas liquids are subject to external factors over which Kinder Morgan
Energy Partners has no control, and because future price changes may be
volatile, the CO2–KMP
business segment is exposed to price risk related to the price volatility of
these commodities. To some extent, however, Kinder Morgan Energy
Partners is able to mitigate this risk through a long-term hedging strategy that
is intended to generate more stable realized prices by using derivative
contracts as hedges to the exposure of fluctuating expected future cash flows
produced by changes in commodity sales prices. Nonetheless, decreases
in the prices of crude oil and natural gas liquids will have a negative impact
on the results of the CO2–KMP
segment, and Kinder Morgan Energy Partners has exposure on all unhedged sales
volumes, the majority of which are natural gas liquids volumes. Had
Kinder Morgan Energy Partners not used energy derivative contracts to transfer
commodity price risk, the crude oil sales prices would have averaged $59.02 per
barrel in 2009 and $97.70 per barrel in 2008.
The
$84.4 million (28%) decrease in the segment’s sales and transportation earnings
for 2009 versus 2008 was due primarily to the $78.2 million (23%) drop in
revenues, which included both a $65.4 million (28%) decrease in carbon dioxide
sales revenues and a $9.7 million (11%) decrease in carbon dioxide and crude oil
pipeline transportation revenues. The decrease from carbon dioxide
sales revenues was entirely price related, as the segment’s average price
received from carbon dioxide sales in 2009 decreased 36% compared to last year,
reducing revenues by $95.8 million. The decrease in carbon dioxide
sales revenues resulting from the unfavorable price change more than offset a
$30.4 million increase in sales revenues resulting from higher sales volumes,
which increased 13% in 2009, primarily due to carbon dioxide expansion projects
completed since the end of 2008, and to a continued strong demand for carbon
dioxide from tertiary oil recovery projects. Although Kinder Morgan
Energy Partners purchases certain volumes of carbon dioxide on an intercompany
basis for use, Kinder Morgan Energy Partners does not recognize profits on
carbon dioxide sales to itself.
The
overall decrease in carbon dioxide and crude oil pipeline transportation
revenues in 2009 versus 2008 was mainly due to lower carbon dioxide
transportation revenues from the Central Basin Pipeline and to lower crude oil
transportation revenues from the Wink Pipeline. Although its
deliveries of carbon dioxide volumes increased 7% in 2009—and combined segment
delivery volumes increased 6%—Central Basin’s revenues were negatively impacted
by lower weighted average
65
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
transportation
rates, due partly to the fact that a portion of its carbon dioxide
transportation contracts were indexed to lower oil prices in 2009, when compared
to last year. The decrease in delivery revenues from the Wink crude
oil pipeline was primarily due to lower pipeline loss allowance revenues in
2009, resulting from lower market prices for crude oil relative to last
year.
For
more information on Kinder Morgan Energy Partners ownership interests in the net
quantities of proved oil and gas reserves and its measures of discounted future
net cash flows from oil and gas reserves, please see Note 20 of the accompanying
Notes to Consolidated Financial Statements.
Earnings
Before DD&A by Major Segment Activities
|
Successor
Company
|
Predecessor
Company
|
||||||||
|
Seven Months
Ended
December 31,
2007
|
Five Months
Ended
May 31, 2007
|
||||||||
|
(In
millions)
|
(In
millions)
|
||||||||
|
Sales and transportation activities
|
$ | 110.4 | $ | 67.2 | |||||
|
Oil and gas production activities
|
322.6 | 142.8 | |||||||
|
Segment Earnings Before DD&A
|
$ | 433.0 | $ | 210.0 | |||||
Revenues
by Major Segment Activities
|
Successor
Company
|
Predecessor
Company
|
||||||||
|
Seven Months
Ended
December 31,
2007
|
Five Months
Ended
May 31, 2007
|
||||||||
|
(In
millions)
|
(In
millions)
|
||||||||
|
Sales
and transportation activities
|
$ | 116.1 | $ | 71.3 | |||||
|
Oil
and gas production activities
|
518.7 | 271.7 | |||||||
|
Intrasegment
eliminations
|
(28.9 | ) | (18.8 | ) | |||||
|
Segment
Revenues
|
$ | 605.9 | $ | 324.2 | |||||
Seven
Months Ended December 31, 2007
For
the seven months ended December 31, 2007, SACROC’s gross production averaged
26.5 thousand barrels per day and Yates’ gross production averaged 27.4 thousand
barrels per day. SACROC contributed approximately 56% of earnings before
DD&A for the total oil and gas producing activities. The earnings before
DD&A in the seven months ended December 31, 2007 were positively affected by
(i) strong average crude oil and natural gas plant product prices, (ii) strong
oil production at the Yates field unit and (iii) a favorable realized
weighted-average price per barrel in the SACROC field unit gas processing
operations. The period’s results were also positively affected by valuation
adjustments of $106.0 million for derivative contracts on crude oil
hedges.
Partially
offsetting these factors was a reduced average carbon dioxide realized sales
price resulting from the December 2006 expiration of a large volume high-priced
sales contract.
With
respect to crude oil, overall sales volumes were stable, but the segment
benefited from a strong realized weighted-average price per barrel. With respect
to natural gas liquids, low sales volumes were more than offset by a favorable
realized weighted-average price per barrel.
Five
Months Ended May 31, 2007
The
segment’s sales and transportation activities were adversely affected by a
decrease in average carbon dioxide prices. A significant portion of the decrease
in average carbon dioxide prices is timing related, as some of the segment’s
carbon dioxide contracts are tied to crude oil prices in prior periods, and the
2007 contracts had been tied to lower crude oil prices, relative to 2006. These
decreases in carbon dioxide prices were only partially offset by slightly higher
carbon dioxide sales volumes related to increased carbon dioxide production from
the McElmo Dome source field.
66
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Highlights
surrounding oil and gas producing activities for the five months ended May 31,
2007 include (i) increases in oil production at the Yates field unit, (ii)
favorable weighted-average price per barrel and (iii) solid earnings from
natural gas liquids sales volumes and prices, largely due to increased
recoveries at the SACROC gas processing operations.
Terminals–KMP
|
Successor
Company
|
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
|
$ | 1,109.0 | $ | 1,173.6 | $ | 599.2 | $ | 364.5 | ||||||||
|
Operating
expenses(a)
|
(536.8 | ) | (631.8 | ) | (344.2 | ) | (192.2 | ) | ||||||||
|
Other
income (expense)(b)
|
25.0 | (6.4 | ) | 3.3 | 3.0 | |||||||||||
|
Goodwill
impairment(c)
|
- | (676.6 | ) | - | - | |||||||||||
|
Earnings
from equity investments
|
0.7 | 2.7 | 0.6 | - | ||||||||||||
|
Other,
net-income
|
3.7 | 1.7 | 0.7 | 0.3 | ||||||||||||
|
Income
tax expense(d)
|
(5.2 | ) | (19.7 | ) | (15.9 | ) | (3.3 | ) | ||||||||
|
Earnings
(loss) before depreciation, depletion and amortization expense and
amortization of excess cost of equity investments
|
$ | 596.4 | $ | (156.5 | ) | $ | 243.7 | $ | 172.3 | |||||||
|
Bulk
transload tonnage (MMtons)(e)
|
78.0 | 103.0 | 62.5 | 33.7 | ||||||||||||
|
Ethanol
(MMBbl)
|
32.9 | 30.7 | 15.4 | 10.2 | ||||||||||||
|
Liquids
leaseable capacity (MMBbl)
|
56.4 | 54.2 | 47.5 | 43.6 | ||||||||||||
|
Liquids
utilization %
|
96.6 | % | 97.5 | % | 95.9 | % | 97.5 | % | ||||||||
__________
|
(a)
|
2009
and 2008 amounts include a $0.9 million increase in expense and a $0.6
million decrease in expense, respectively, associated with environmental
liability adjustments. 2009 amount also includes a $0.5 million
decrease in expense associated with legal liability adjustments related to
a litigation matter involving the Staten Island liquids terminal, a $0.3
million decrease in expense related to hurricane clean-up and repair
activities and 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. 2008 amount also includes a $5.3 million increase
in expense related to hurricane clean-up and repair activities, a combined
$2.8 million increase in expense from both the settlement of certain
litigation matters related to the Elizabeth River bulk terminal and the
Staten Island liquids terminal, and other legal liability adjustments and
a $1.9 million increase in expense related to fire damage and repair
activities.
|
|
(b)
|
2009
amount includes gains of $24.6 million from hurricane and fire casualty
indemnifications. 2008 amount includes losses of $5.3 million
from asset write-offs related to fire damage, and losses of $0.8 million
from asset write-offs related to hurricane damage. 2009 and
2008 amounts include decreases of earnings of $2.6 million and $3.7
million, respectively, 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)
|
2008
amount includes a non-cash goodwill impairment charge of $676.6
million.
|
|
(d)
|
2009
amount includes a $0.9 million increase in expense related to hurricane
and fire casualty gains. 2008 amount includes a decrease in
expense (reflecting tax savings) of $0.4 million related to hurricane
clean-up and repair expenses and casualty losses.
|
|
(e)
|
Volumes
for acquired terminals are included for all
periods.
|
The
Terminals–KMP business segment includes the operations of petroleum, chemical
and other liquids terminal facilities (other than those included in the Products
Pipelines–KMP segment), and all of coal, petroleum coke, fertilizer, steel, ores
and other dry-bulk material services facilities.
Combined,
the certain items described in the footnotes to the table above increased
segment earnings before depreciation, depletion and amortization expenses by
$20.3 million in 2009, and decreased earnings before depreciation, depletion and
amortization by $695.4 million in 2008; accounting for increases in earnings
before depreciation, depletion and amortization expenses of $715.7 million in
2009, when compared with 2008. The segment’s remaining $37.2 million
(22%) increase in earnings before depreciation, depletion and amortization in
2009 compared to 2008 were driven by a combination of internal asset growth and
strategic business acquisitions.
Kinder
Morgan Energy Partners has made and continues to seek terminal acquisitions in
order to gain access to new markets and to complement and/or enlarge its
existing terminal operations and since the beginning of 2007, it has invested
approximately $197.1 million in cash to acquire both terminal assets and equity
interests in terminal operations. Combined, these acquired operations
contributed incremental earnings before depreciation, depletion and amortization
of $4.6 million, revenues of $16.1million, and operating expenses of $11.5
million in 2009, and incremental earnings before depreciation,
67
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
depletion
and amortization of $30.4 million, revenues of $86.6 million, equity earnings of
$1.7 million, and operating expenses of $57.9 million in 2008.
All
of the incremental 2009 and 2008 amounts listed above represent the earnings,
revenues and expenses from acquired terminals’ operations during the additional
months of ownership in 2009 and 2008, respectively, and do not include increases
or decreases during the same months the assets were owned in the respective
prior year. For more information on acquisitions, see Note 3 of the
accompanying Notes to Consolidated Financial Statements.
Following
is information for 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. The changes represent
increases and decreases in terminal results at various locations for bulk and
liquids terminal operations owned during identical periods in both pairs of
comparable years. These terminal operations are grouped into regions
based on geographic location and/or primary operating function. This
structure allows management to organize and evaluate segment performance and to
help make operating decisions and allocate resources.
Year Ended December 31, 2009
versus Year Ended December 31, 2008
|
EBDA
Increase/(Decrease)
|
Revenues
Increase/(Decrease)
|
|||||||||||||||
|
(In
millions, except percentages)
|
||||||||||||||||
|
Lower
River (Louisiana)
|
$ | 24.8 | 106 | % | $ | (9.5 | ) | (9 | ) % | |||||||
|
Gulf
Coast
|
16.6 | 12 | % | 18.5 | 11 | % | ||||||||||
|
West
|
10.4 | 27 | % | 7.5 | 9 | % | ||||||||||
|
Texas
Petcoke
|
4.1 | 6 | % | (10.2 | ) | (7 | ) % | |||||||||
|
Mid
River
|
(10.2 | ) | (35 | ) % | (32.4 | ) | (36 | ) % | ||||||||
|
Ohio
Valley
|
(7.7 | ) | 36 | % | (16.9 | ) | (26 | ) % | ||||||||
|
Materials
Management (rail transloading)
|
(4.4 | ) | (24 | ) % | (12.8 | ) | (26 | ) % | ||||||||
|
All
others
|
(1.0 | ) | - | (25.7 | ) | (5 | ) % | |||||||||
|
Intrasegment
eliminations
|
- | - | 0.8 | 79 | % | |||||||||||
|
Total
Terminals - KMP
|
$ | 32.6 | 6 | % | $ | (80.7 | ) | (7 | ) % | |||||||
The
increase in earnings before depreciation, depletion and amortization expenses
from the Lower River (Louisiana) terminals was due mainly to both lower income
tax expenses in 2009 compared to 2008, and to higher earnings realized from both
the International Marine Terminals (“IMT”) facility, a Louisiana partnership
located in Port Sulphur, Louisiana and owned 66 2/3% by Kinder Morgan Energy
Partners, and the Geismar, Louisiana drumming facility, which began operations
in the first quarter of 2009. The drop in income tax expenses related
to overall lower taxable income in many of the tax paying terminal subsidiaries,
and the increase in earnings from IMT was largely due to lower year-over-year
operating expenses in 2009, which more than offset corresponding drops in
revenues resulting from less dockage, fleeting and barge
services. The terminal also recognized a $3.2 million property
casualty gain (on a vessel dock that was damaged in March 2008) in the second
quarter of 2009.
The
increase in earnings from the Gulf Coast terminals reflects favorable results
from the two large liquids terminal facilities located along the Houston Ship
Channel in Pasadena and Galena Park, Texas. The earnings increase was
driven by higher liquids warehousing revenues, mainly due to new and incremental
customer agreements (at higher rates) and to additional storage capacity, and
also to additional ancillary terminal services. Combined, the
Pasadena and Galena Park terminals brought an incremental 1.85 million barrels
of liquids tankage capacity online during 2009 (including incremental truck
loading capacity).
For
all terminals combined, total 2009 liquids throughput volumes were 1% higher
than 2008, primarily due to both completed expansion projects and to continued
strong demand for distillate and ethanol volumes. Expansion projects
completed since the end of 2008 increased the liquids terminals’ leasable
capacity to 56.4 million barrels, up 4% from a capacity of 54.2 million barrels
at the end of 2008. At the same time, the overall liquids utilization
capacity rate (the ratio of the actual leased capacity to the estimated
potential capacity) decreased by only 1% since the end of 2008.
The
increase in earnings in 2009 from the West region terminals was driven by
incremental contributions from the Kinder Morgan North 40 terminal, the crude
oil tank farm constructed near Edmonton, Alberta, Canada, and from the Vancouver
Wharves bulk marine terminal, located on the north shore of Vancouver, British
Columbia, Canada’s main harbor. Kinder Morgan Energy Partners
completed construction and placed the North 40 terminal into service in the
second quarter of 2008. The increase in earnings from the Vancouver
Wharves terminal was chiefly due to higher liquids revenues, due in part to
expanded liquids facilities that began operating in April 2009 and to continued
strong ship traffic during 2009 at the Port Metro Vancouver.
68
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
The
increase in earnings from the Texas petroleum coke operations was chiefly due to
higher earnings realized from the Port of Houston, Port of Beaumont and Houston
Refining operations. The combined earnings increase from these
operations was driven by higher petroleum coke throughput and production volumes
and higher handling rates in 2009. The higher volumes in 2009 was due
in part to a new petroleum coke customer contract that boosted volume at the
Port of Houston bulk facility, and in part to the negative impacts caused by
Hurricane Ike in the third quarter of 2008.
The
overall increase in segment earnings before depreciation, depletion and
amortization in 2009 compared to 2008 from terminals owned in both comparable
years was partly offset by lower earnings from the Mid River, Ohio Valley and
Materials Management terminals. The decrease in earnings from these
facilities was due primarily to decreased import/export activity, and to lower
business activity at various owned and/or operated rail and terminal sites that
are primarily involved in the handling and storage of steel and alloy
products.
Due
to the economic downturn that intensified in the last half of 2008, Kinder
Morgan Energy Partners experienced significant year-over-year volume and revenue
declines at various owned or operated terminal facilities in 2009, when compared
to 2008. For the Terminals–KMP segment combined, bulk traffic tonnage
decreased by 25.0 million tons (24%) in 2009 versus 2008 and relatedly, revenues
from terminals owned in both years decreased by $80.7 million
(7%). However, while the overall volume and revenue declines in 2009
have generally been broad-based across all of the bulk terminals, the rate of
decline has slowed—bulk tonnage decreased 28% in the first half of 2009 compared
to the first half of 2008—and since the start of the year the segment has taken
actions to manage costs and increase productivity. For all terminals
owned in both years, combined operating expenses decreased $97.9 million (16%)
in 2009 versus 2008. In addition to the effects from the declines in
bulk tonnage volumes described above, the expense reductions were generated by a
combination of aggressive cost management actions related to operating expenses,
certain productivity initiatives at various terminal sites, and year-over-year
declines in commodity and fuel costs.
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)
|
|||||||
|
Gulf
Coast
|
$ | 66.7 | $ | 43.3 | ||||
|
Northeast
|
35.6 | 28.1 | ||||||
|
Texas
Petcoke
|
30.9 | 22.5 | ||||||
|
Mid-Atlantic
|
24.2 | 14.6 | ||||||
|
West
|
19.8 | 3.8 | ||||||
|
Ferro
|
17.2 | 5.1 | ||||||
|
Lower
River (Louisiana)
|
14.9 | 18.5 | ||||||
|
All
others
|
34.4 | 36.4 | ||||||
|
Segment
Earnings Before DD&A
|
$ | 243.7 | $ | 172.3 | ||||
Revenues
by Major Segment Asset
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
Seven Months
Ended
December 31,
2007
|
Five Months
Ended
May 31, 2007
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Gulf
Coast
|
$ | 97.8 | $ | 64.0 | ||||
|
Northeast
|
59.5 | 43.2 | ||||||
|
Texas
Petcoke
|
68.5 | 43.8 | ||||||
|
Mid-Atlantic
|
59.0 | 38.4 | ||||||
|
West
|
43.4 | 9.5 | ||||||
|
Ferro
|
45.9 | 15.6 | ||||||
|
Lower
River (Louisiana)
|
61.6 | 49.6 | ||||||
|
All
others
|
164.4 | 101.0 | ||||||
|
Intrasegment
eliminations
|
(0.9 | ) | (0.6 | ) | ||||
|
Segment
Revenues
|
$ | 599.2 | $ | 364.5 | ||||
69
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Seven
Months Ended December 31, 2007
Combined,
the operations acquired in 2006 and 2007 referred to above contributed earnings
before DD&A of $28.4 million, revenues of $73.3 million, operating expenses
of $45.4 million and equity earnings of $0.5 million in the seven months ended
December 31, 2007. This segment’s earnings benefited from the two large Gulf
Coast liquids terminal facilities located along the Houston Ship Channel in
Pasadena and Galena Park, Texas, which contributed $18.1 million of combined
earnings before DD&A. The two terminals continued to benefit from both
recent expansions that have added new liquids tank and truck loading rack
capacity since 2006 and business from ethanol and biodiesel storage and transfer
activity. Strong earnings during the period also resulted from (i) $12.1 million
of earnings before DD&A contributed from the combined operations of the Argo
and Chicago, Illinois liquids terminals, due to strong ethanol throughput and
increased capacity in the liquids storage and handling business, (ii) $30.9
million of earnings before DD&A contributed from the Texas Petcoke
terminals, due largely to strong demand for petroleum coke at the Port of
Houston facility and (iii) $5.5 million of earnings before DD&A contributed
from the Pier IX bulk terminal, located in Newport News, Virginia, largely due
to a favorable demand for coal transfers and increasing rail
incentives.
Five
Months Ended May 31, 2007
Acquisitions
in 2006 and 2007 contributed $2.8 million in earnings before DD&A during the
five months ended May 31, 2007 were composed of (i) $2.0 million from Transload
Services, LLC and (ii) $0.8 million from Devco USA L.L.C. Segment earnings
before DD&A also included strong earnings contributions consisting of (i)
$5.9 million from the Shipyard River terminal located in Charleston, South
Carolina, (ii) $17.3 million from the Lower Mississippi (Louisiana) terminals
(which include its 66 2/3% ownership interest in the IMT partnership and the
Port of New Orleans liquids facility located in Harvey, Louisiana) and (iii)
$7.8 million from the combined operations of its Argo and Chicago, Illinois
liquids terminals. The increases from the Shipyard River terminal related to
completed expansion projects since the middle of 2006 that increased handling
capacity for imported coal volumes and the earnings increases from the Chicago
liquids facilities were driven by higher revenues, due to increased ethanol
throughput and incremental liquids storage and handling business.
Kinder
Morgan Canada–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
|
$ | 226.1 | $ | 198.9 | $ | 100.9 | $ | 62.0 | ||||||||
|
Operating
expenses
|
(72.5 | ) | (68.0 | ) | (44.3 | ) | (23.1 | ) | ||||||||
|
Goodwill
impairment(a)
|
- | - | - | (377.1 | ) | |||||||||||
|
Earnings
from equity investments
|
(4.1 | ) | 8.3 | 14.4 | 5.4 | |||||||||||
|
Interest
income and other, net-income (expense)(b)
|
23.9 | (6.2 | ) | 6.3 | 1.7 | |||||||||||
|
Income
tax expense(c)
|
(18.9 | ) | 19.0 | (18.5 | ) | (0.9 | ) | |||||||||
|
Earnings
(loss) before depreciation, depletion and amortization expense and
amortization of excess cost of equity investments
|
$ | 154.5 | $ | 152.0 | $ | 58.8 | $ | (332.0 | ) | |||||||
|
Transport
volumes (MMBbl)(d)
|
102.5 | 86.7 | 58.0 | 36.4 | ||||||||||||
__________
|
(a)
|
Amount
for the five months ended May 31, 2007 represents a non-cash goodwill
impairment charge; see Note 7 of the accompanying Notes to Consolidated
Financial Statements.
|
|
(b)
|
2008
amount includes a $12.3 million decrease in other non-operating
income, due to certain non-cash Trans Mountain regulatory accounting
adjustments.
|
|
(c)
|
2009
amount includes a $14.9 million increase in expense primarily due to
certain non-cash regulatory accounting adjustments to Trans Mountain’s
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 made by the Express pipeline
system. 2008 amount includes a $19.3 million decrease in
expense associated with favorable changes in Canadian income tax rates,
and a $6.6 million increase in expense due to certain non-cash Trans
Mountain regulatory accounting adjustments.
|
|
(d)
|
Represents
Trans Mountain pipeline system
volumes.
|
The
Kinder Morgan Canada–KMP segment includes operations we sold to Kinder Morgan
Energy Partners: (i) Trans Mountain pipeline system transferred effective April
30, 2007, (ii) one-third interest in the Express pipeline system
70
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
(“Express”)
transferred effective August 28, 2008 and (iii) Jet Fuel pipeline system (“Jet
Fuel”) transferred effective August 28, 2008. These operations had
been reported separately in previous reports. The information in the table above
reflects the results of operations for Trans Mountain, Express and Jet Fuel for
all periods presented.
The
certain items related to the Kinder Morgan Canada–KMP business segment and
described in the footnotes to the table above accounted for a decrease in
earnings before depreciation, depletion and amortization expenses of $11.6
million in 2009, when compared with 2008. The remaining $14.1 million
(9%) increase in segment earnings before depreciation, depletion and
amortization consisted of (i) higher earnings of $18.1 million (13%) from Trans
Mountain and (ii) higher earnings of $2.8 million (127%) from Jet Fuel. These
positive impacts were partially offset by lower earnings of $6.8 million (48%)
from Express.
The
increase in earnings from Trans Mountain in 2009 was driven by both higher
pipeline transportation revenues and higher net currency gains (included within
“Other, net income”), and partially offset by higher year-over-year income tax
expenses and lower income from allowances for capital funds used for pipeline
system construction costs. In 2009, Trans Mountain’s revenues
increased $26.1 million (13%) compared to 2008, driven by an 18% increase in
mainline delivery volumes resulting from both a significant increase in ship
traffic during 2009 at the Port Metro Vancouver and the completion of the Trans
Mountain Pipeline Anchor Loop expansion project in October 2008.
The
increase in earnings from Jet Fuel in 2009 was driven by both higher pipeline
transportation revenues and higher net currency gains (included within “Other,
net income”). In 2009, Jet Fuel’s revenues increased $1.1 million
(34%) compared to 2008.
The
lower earnings from Express was primarily due to lower equity earning from the
33 1/3% ownership interest in the Express pipeline system, higher year-over-year
income tax expense and higher net currency losses (included within “Other, net
income”) in 2009.
Seven
Months Ended December 31, 2007
During
seven months ended December 31, 2007, segment earnings before DD&A were
positively impacted by the completion of a pump station expansion on April 30,
2007 and its associated positive impact to revenue for the period.
Five
Months Ended May 31, 2007
During
the five months ended May 31, 2007, earnings before DD&A were adversely
affected by a $377.1 million goodwill impairment charge recorded against the
Trans Mountain asset. Slightly offsetting this negative impact to earnings was
the completion of a pump station expansion on April 30, 2007 and its associated
positive impact to revenue for the period.
NGPL
PipeCo LLC (“NGPL”)
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
||||||||||||||
|
2009
|
2008
|
2007
|
May
31, 2007
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Segment
earnings before DD&A
|
$ | 42.5 | $ | 129.8 | $ | 422.8 | $ | 267.4 | ||||||||
On
February 15, 2008, we sold an 80% ownership interest in our NGPL business
segment to Myria Acquisition Inc. (“Myria”) for approximately $5.9
billion. As a result of the sale, beginning February 15, 2008, 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.
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 only occur 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.
71
|
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 vs. 2008
The
$87.3 million (67.3%) decrease in segment earnings before DD&A between the
years ended December 31, 2009 and 2008 in the NGPL reportable segment was
primarily due to the February 15, 2008, sale of an 80% ownership interest in
NGPL to Myria Acquisition Inc. As a result of the sale, beginning February 15,
2008, we account for our 20% ownership interest in NGPL as an equity method
investment. Segment earnings before DD&A at the 100% asset
ownership level were $89.7 million for the period from January 1, 2008 to
February 14, 2008 and for the period February 15, 2008 to December 31, 2008 our
equity earnings were $40.1 million.
NGPL’s
net income, at the 100% ownership level, decreased by $17.4 million (8%) from
$230.4 million in 2008 to $213.0 million in 2009. Revenues decreased by $153.3
million (12%) from $1,288.6 million in 2008 to $1,135.3 million in 2009 due
principally to a decrease in natural gas prices. Gross profit (total revenues
less gas purchases and other costs of sales) decreased by $21.8 million (2%)
from $898.7 million in 2008 to $876.9 million in 2009. The decrease in gross
profit from 2008 to 2009 was attributable to (i) a $30.2 million reduction in
gross profit from operational natural gas sales due largely to lower natural gas
prices, (ii) $21.0 million of charges in 2009 to reduce the carrying value of
current storage gas inventories to reflect the reduced market price of natural
gas and (iii) a $4.3 million net reduction in other miscellaneous gross profit
items, offset by a $33.7 million increase from natural gas transportation and
storage services. NGPL’s results were also impacted in 2009, relative to 2008,
by (i) a $21.0 million decrease in operations and maintenance expenses due, in
part, to lower costs for transmission system integrity management programs,
lower electric power costs and 2009 insurance recoveries related to Hurricane
Ike, (ii) the inclusion in 2008 results of $5.6 million of net gains on sales of
land, (iii) a $2.8 million increase in interest expense, net of interest income,
(iv) a $0.5 million increase in pre-tax income from other miscellaneous income
and expenses items and (v) an $8.7 million increase in income tax expense due to
an increase in the effective tax rate applicable to state income taxes,
partially offset by a decrease in pre-tax earnings. NGPL’s operational natural
gas sales are primarily made possible by its collection of fuel in-kind pursuant
to its transportation tariffs and the sale of storage cushion gas volumes
resulting from storage system expansion projects. Its future revenues from
operational natural gas sales could be affected by, among other things, the
market price of natural gas, the volume of fuel collected in-kind pursuant to
its tariffs, including potential changes resulting from the current Section 5
proceeding discussed above, and its cushion gas available from future storage
system expansion projects.
Seven
Months Ended December 31, 2007
NGPL
revenues and earnings for the seven months ended December 31, 2007 were
positively impacted primarily by (i) $334.4 million of gross profit from
transportation and storage revenues, which reflects the positive impact of
re-contracting of transportation and storage services at higher rates and
increased contract volumes, and recent transportation and storage system
expansions, (ii) $116.0 million of gross profit from operational gas recoveries
and sales and (iii) $61.4 million of gross profit from cushion sales. Total
system throughput volumes of 1,027.2 trillion Btus during the seven months ended
December 31, 2007 did not have a significant direct impact on revenues or
earnings due to the fact that transportation revenues are derived primarily from
“firm” contracts in which shippers pay a “demand” fee to reserve a set amount of
system capacity for their use.
Five
Months Ended May 31, 2007
NGPL
revenues and earnings for the five months ended May 31, 2007 were positively
impacted primarily by $245.9 million of gross profit from transportation and
storage revenues, which reflects the positive impact of re-contracting of
transportation and storage services at higher rates and increased contract
volumes, and recent transportation and storage system expansions and (ii) $77.6
million of gross profit from operational gas recoveries and sales.
72
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
As
discussed in Note 15 of the accompanying Notes to Consolidated Financial
Statements, on January 25, 2008, we sold our interests in three natural
gas-fired power plants in Colorado to Bear Stearns, including the Thermo
Cogeneration Partnership and the Thermo Greeley facility. The closing of the
sale was effective January 1, 2008, and we received net proceeds of $63.1
million.
The
remaining operations for the Power segment are Triton Power Michigan LLC’s lease
and operation of the Jackson, Michigan 550-megawatt natural gas-fired electric
power plant (“Triton Power”) and a 105-megawatt natural gas-fired power plant in
Snyder, Texas that generates electricity for the CO2–KMP
segment’s SACROC operations, the plant’s sole customer.
|
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)
|
||||||||||||||||
|
Revenues(a)
|
$ | 40.4 | $ | 44.0 | $ | 40.2 | $ | 19.9 | |||||||||
|
Operating expenses and noncontrolling interests(a)
|
(35.6 | ) | (38.3 | ) | (34.8 | ) | (16.1 | ) | |||||||||
|
Equity in earnings of Thermo Cogeneration
Partnership(b)
|
- | - | 8.0 | 5.1 | |||||||||||||
|
Segment earnings before DD&A
|
$ | 4.8 | $ | 5.7 | $ | 13.4 | $ | 8.9 | |||||||||
__________
|
(a)
|
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 segment earnings before DD&A. See Note 18 of the accompanying Notes
to Consolidated Financial Statements for “Recent Accounting
Pronouncements.”
|
|
(b)
|
This
equity interest was part of the sale effective January 1, 2008 as
discussed above.
|
Year
Ended December 31, 2009 vs. 2008
Power’s
segment earnings before DD&A decreased by $0.9 million for the year ended
December 31, 2009 as compared to 2008, primarily due to lower operating fees at
the Snyder Plant, which we operate on behalf of the CO2–KMP
segment.
Seven
Months Ended December 31, 2007
Earnings
before DD&A for the seven months ended December 31, 2007 reflect the
positive impacts of (i) contributions of $2.0 million of earnings before
DD&A from Triton Power, (ii) $8.0 million of equity earnings from our
investment in Thermo Cogeneration Partnership and (iii) $1.4 million of earnings
from the Thermo Greeley facility associated with gas purchase and sale
agreements. These favorable impacts to earnings were partially offset by an
unfavorable impact to operating revenues associated with 2006 equipment
sales.
Five
Months Ended May 31, 2007
Earnings
before DD&A for the five months ended May 31, 2007 reflect an unfavorable
impact to revenues associated with 2006 equipment sales. These unfavorable
impacts to earnings were partially offset by (i) contributions of $1.3 million
of earnings from Triton Power, (ii) contributions of $1.2 million of earnings
from the Thermo Greeley facility associated with gas purchase and sales
agreements and (iii) our $5.1 million of equity earnings from our investment in
Thermo Cogeneration Partnership.
73
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Other
|
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)
|
|||||||||||||||
|
Kinder Morgan, Inc. general and administrative expense
|
$ | (42.7 | ) | $ | (54.6 | ) | $ | (33.2 | ) | $ | (138.6 | ) | ||||
|
Kinder Morgan Energy Partners general and administrative
expense
|
(330.3 | ) | (297.9 | ) | (142.4 | ) | (136.2 | ) | ||||||||
|
Terasen general and administrative expense
|
- | - | - | (8.8 | ) | |||||||||||
|
Consolidated general and administrative expense
|
$ | (373.0 | ) | $ | (352.5 | ) | $ | (175.6 | ) | $ | (283.6 | ) | ||||
|
Kinder Morgan, Inc. interest, net
|
$ | (164.4 | ) | $ | (240.1 | ) | $ | (357.9 | ) | $ | (70.4 | ) | ||||
|
Kinder Morgan Energy Partners interest, net
|
(409.0 | ) | (388.2 | ) | (236.4 | ) | (155.0 | ) | ||||||||
|
Terasen interest, net
|
- | - | - | (24.8 | ) | |||||||||||
|
Other, net (a)
|
(10.3 | ) | 4.7 | 7.6 | (4.4 | ) | ||||||||||
|
Unallocable interest and other, net
|
$ | (583.7 | ) | $ | (623.6 | ) | $ | (586.7 | ) | $ | (254.6 | ) | ||||
|
Kinder Morgan Management noncontrolling interests
|
$ | (53.6 | ) | $ | (80.5 | ) | $ | (35.8 | ) | $ | (17.1 | ) | ||||
|
Kinder Morgan Energy Partners noncontrolling interests
|
(210.0 | ) | (302.4 | ) | 7.3 | (75.1 | ) | |||||||||
|
Triton noncontrolling interests
|
(11.3 | ) | (13.0 | ) | (9.0 | ) | 2.3 | |||||||||
|
Other noncontrolling interests
|
(3.2 | ) | (0.2 | ) | (0.1 | ) | (0.8 | ) | ||||||||
|
Net income attributable to noncontrolling interests(b)
|
$ | (278.1 | ) | $ | (396.1 | ) | $ | (37.6 | ) | $ | (90.7 | ) | ||||
_____________
|
(a)
|
“Other,
net” primarily represents offset to noncontrolling interests and interest
income shown above and included in segment earnings.
|
|
(b)
|
2008
and 2007 periods restated for certain provisions concerning the accounting
and reporting for noncontrolling interests; see Note 2 of the accompanying
Notes to Consolidated Financial
Statements.
|
Year
Ended December 31, 2009 vs. 2008
Consolidated
general and administrative expense increased $20.5 million (5.8%) in 2009
compared to 2008. The $32.4 (10.9%) million increase in Kinder Morgan
Energy Partners’ general and administrative expense includes $15.8 million from
higher employee benefit and payroll tax expenses in 2009 and $10.7 million due
to fewer overhead expenses meeting the criteria for
capitalization. Kinder Morgan, Inc.’s general and administrative
expense, which decreased $11.9 million (21.8%), includes an $8.4 million
decrease in legal costs for 2009 as compared to 2008.
The
$39.9 million (6.4%) decrease in interest and other, net for 2009 relative to
2008, was primarily due from using $5.9 billion of proceeds received from the
sale of an 80% ownership interest in NGPL PipeCo LLC to pay down debt in early
2008; see Note 3 of the accompanying Notes to Consolidated Financial
Statements. This reduction in our interest expense was partially
offset by higher interest expense from increased debt balances at Kinder Morgan
Energy Partners required to support its capital expansion programs.
Net
income attributable to noncontrolling interests, which represents the allocation
of our consolidated net income attributable to all outstanding ownership
interests in our consolidated subsidiaries (primarily Kinder Morgan Energy
Partners) which are not held by us, decreased $118.0 million in 2009 (29.8%)
when compared to 2008. The decrease in our noncontrolling interests
was primarily due to our lower net income in 2009 from our consolidated
subsidiaries.
Seven
Months Ended December 31, 2007
Kinder
Morgan, Inc. general and administrative expense for the seven months ended
December 31, 2007 includes $19.4 million of compensation expense and Kinder
Morgan Energy Partners general and administrative expense includes $108.6
million of compensation expense and $28.8 million of outside
services.
Interest,
net for the seven months ended December 31, 2007 includes $179.6 million of
Kinder Morgan, Inc. interest expense related to additional debt incurred as part
of its Going Private transaction and $165.5 million of Kinder Morgan, Inc.
interest expense not related to the Going Private transaction.
Five
Months Ended May 31, 2007
Kinder
Morgan, Inc.’s general and administrative expense for the five months ended May
31, 2007 includes $114.8 million related to the Going Private
transaction. In addition, during the five months ended May 31, 2007
Kinder Morgan,
74
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Inc.
incurred $4.3 million in selling expenses associated with the sale of its (i)
U.S. based retail natural gas distribution and related operations, (ii) Terasen
Gas business and (iii) Terasen Pipelines (Corridor) Inc. Kinder Morgan Energy
Partners’ general and administrative expense for the five months ended May 31,
2007 includes $26.2 million allocated to it related to the Going Private
transaction.
Year
Ended December 31, 2009 vs. 2008
The
$21.2 million increase in tax expense to $325.6 million for 2009 as compared to
$304.4 million for 2008 is primarily due to (i) certain one–time non-cash
deferred tax expenses related to (a) the restructuring of certain subsidiaries
of Kinder Morgan Canada–KMP and us, (b) the treatment of Trans Mountain Pipeline
Inc., a subsidiary of Kinder Morgan Canada–KMP, as a non–regulated entity, (c)
the impact on deferred taxes of a decrease in Kinder Morgan Canada–KMP’s
Canadian tax rate in 2008 and (ii) higher state income taxes. The
increase is partially offset by (i) the tax impact on lower pretax earnings of
Kinder Morgan Management and Kinder Morgan Energy Partners’ domestic corporate
subsidiaries, (ii) an increase in nondeductible goodwill related to our
investment in Kinder Morgan Energy Partners, (iii) the impact on deferred taxes
of a decrease in our state tax rate, (iv) lower additions in 2009 to our
Uncertainty in Income Taxes (FIN 48) reserve, (v) lower adjustments in 2009 to
true-up our book tax provision to the federal and state tax returns filed and
(vi) small out-of-period adjustments related to current and deferred
taxes.
Seven
Months Ended December 31, 2007
The
seven months ended December 31, 2007 income tax expense from continuing
operations of $227.4 million consists of (i) $166.5 million of federal income
tax expense, (ii) $12.8 million related to Kinder Morgan Management
noncontrolling interests income tax expense, (iii) $ 27.6 million due to income
taxes on foreign earnings at different tax rates, (iv) $11.9 million
attributable to the net tax effects of consolidating Kinder Morgan Energy
Partners’ United States income tax provision and (v) $10.9 million of state
income taxes. The above income tax expense is net of $2.3 million of other
income tax items.
Five
Months Ended May 31, 2007
The
five months ended May 31, 2007 income tax expense from continuing operations of
$135.5 million consists of (i) $34.0 million federal income tax benefit on the
$97.2 million loss from continuing operations before income taxes, (ii) $16.6
million tax benefit from the Terasen acquisition financing structure and (iii)
$2.0 million of other income tax items. These tax benefits and credits were
offset by income tax expenses consisting of (i) $30.7 million of income taxes on
non-deductible fees associated with the Going Private transaction, (ii) $132.1
million of expense related to the Trans Mountain goodwill impairment of $377.1
million, which is not deductible for tax purposes, (iii) $6.2 million related to
Kinder Morgan Management noncontrolling interests income tax expense, (iv) $8.4
million due to income taxes on foreign earnings at different tax rates, (v) $4.0
million attributable to the net tax effects of consolidating Kinder Morgan
Energy Partners’ United States income tax provision and (vi) $6.7 million of
state income taxes.
See
Note 4 of the accompanying Notes to Consolidated Financial Statements for
additional information on income taxes.
A
capital loss carryforward can be utilized to reduce capital gain during the five
years succeeding the year in which a capital loss is incurred. We closed the
sale of Terasen Inc. to Fortis Inc. on May 17, 2007, for sales proceeds of
approximately $3.4 billion (C$3.7 billion) including cash and assumed debt. We
recorded a book gain on this disposition of $55.7 million in the second quarter
of 2007. The sale resulted in a capital loss of $998.6 million for tax purposes.
Approximately $223.3 million of the Terasen Inc. capital loss was utilized to
reduce capital gain principally associated with the sale of our U.S.-based
retail natural gas operations resulting in a tax benefit of approximately $82.2
million during 2007.
At
December 31, 2007, we had a remaining capital loss carryforward of $775.1
million, all of which was utilized to reduce the capital gain associated with
the sale of our 80% ownership interest in the NGPL PipeCo LLC business segment
and other dispositions, resulting in a tax benefit of approximately $279.5
million during 2008.
75
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
General
We
believe that we and our subsidiaries and investments, including Kinder Morgan
Energy Partners, have liquidity and access to financial resources, as
demonstrated through our results for the year ended December 31, 2009 as
discussed below, sufficient to meet future requirements for working capital,
debt repayment and capital expenditures associated with existing and future
expansion projects, along with payment of our dividends and Kinder Morgan Energy
Partners’ distributions.
|
|
·
|
We
have generated $1,587.5 in cash from operations during
2009;
|
|
|
·
|
In
2009, Kinder Morgan Energy Partners has demonstrated its continued access
to the equity market by raising approximately $1,155.6 million in net
proceeds from equity offerings in the aggregate of 22.9 million additional
common units;
|
|
|
·
|
Kinder
Morgan Energy Partners has demonstrated substantial flexibility in the
debt market by issuing $2 billion in principal amount of long-term senior
notes in 2009 that generated $1,980.7 million in net proceeds;
and
|
|
|
·
|
We
had available credit capacity of approximately $0.8 billion and Kinder
Morgan Energy Partners had available credit capacity of approximately $1.2
billion under existing bank credit facilities as of December 31,
2009.
|
The
primary cash requirements for us and our subsidiaries, in addition to normal
operating expenses, are for debt service, sustaining capital expenditures
(defined as capital expenditures, which do not increase the capacity of an
asset), expansion capital expenditures, Kinder Morgan Energy Partners’ quarterly
distributions to its public common unitholders and our stockholder
dividends. In addition to utilizing cash generated from operations,
Kinder Morgan Energy Partners’ cash requirements for expansion capital
expenditures can be met through borrowings under its senior unsecured revolving
bank credit facility, issuing long-term notes or additional common units, or the
proceeds from purchases of additional Kinder Morgan Energy Partners’ i-units by
Kinder Morgan Management with the proceeds from issuances of additional Kinder
Morgan Management shares. Our cash requirements continue to be met
through cash from our operations and borrowings under our secured revolving bank
credit facility.
As
described under Items 1 and 2 “Business and Properties—Environmental
Matters—Climate Change,” passage of any climate control legislation or other
regulatory initiatives that regulate or restrict emissions of greenhouse gases
could increase Kinder Morgan Energy Partners’ costs related to operating and
maintaining its facilities and require it to install new emission controls on
its facilities, acquire allowances for its greenhouse gas emissions, pay taxes
related to its greenhouse gas emissions and administer and manage a greenhouse
gas emissions program. Kinder Morgan Energy Partners is not able at this time to
estimate such increased costs; however, they could be significant.
Dividends
We
anticipate paying future quarterly dividends in amounts equal to our free cash
flow subject to any reserves we believe are necessary for non-recurring and/or
extraordinary items including the purchase of Kinder Morgan Energy Partners’
units. We define free cash flow as cash distributions and dividends
received less cash paid for interest, taxes, capital expenditures and general
and administrative expenses. Our dividend philosophy, as well as the declaration
and payment of dividends are subject to the sole discretion of our Board of
Directors, are reconsidered every quarter and could change at any
time. During the year ended December 31, 2009, we paid cash dividends
on our common stock totaling $650.0 million 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, which was paid on
February 16, 2010.
Credit
Ratings and Capital Market Liquidity
On
September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy
protection under the provisions of Chapter 11 of the U.S. Bankruptcy
Code. Lehman Brothers Commercial Bank was a lending institution that
provided $63.3 million of the commitments under Kinder Morgan Energy Partners’
$1.85 billion senior unsecured revolving bank credit facility. During the first
quarter of 2009, Kinder Morgan Energy Partners amended its facility to remove
Lehman Brothers Commercial Bank as a lender, thus reducing the facility by $63.3
million (see Note 8 of the accompanying Notes to Consolidated Financial
Statements). The commitments of the other banks remain unchanged, and
the facility is not defaulted.
On
October 13, 2008, Standard & Poor’s Rating Services revised its outlook on
Kinder Morgan Energy Partners’ long-term credit rating to negative from stable
(but affirmed its long-term credit rating at BBB), due to its previously
announced expected delay and cost increases associated with the completion of
the Rockies Express Pipeline project. At the same time, Standard
& Poor’s Rating Services lowered Kinder Morgan Energy Partners’ short-term
credit rating to A-3 from A-2. As a
76
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
result
of this revision to Kinder Morgan Energy Partners’ short-term credit rating and
the commercial paper market conditions, it has been unable to access commercial
paper borrowings.
On
February 25, 2010, Standard & Poor’s Rating Services updated its outlook on
Kinder Morgan Energy Partners’ long-term credit rating to stable from negative
(and affirmed its long-term credit rating at BBB), due to Kinder Morgan Energy
Partners’ completion of its large pipeline projects, the lower guaranteed debt
obligations and expected cash flows associated with these
projects. At the same time, Standard & Poor’s raised Kinder
Morgan Energy Partners’ short-term credit rating to A-2 from A-3.
On
May 6, 2009, Moody’s Investors Service downgraded Kinder Morgan Energy Partners’
commercial paper rating to Prime-3 from Prime-2 and assigned a negative outlook
to its long-term credit rating. The downgrade and negative outlook
were primarily related to increases in Kinder Morgan Energy Partners’
outstanding debt balance that have occurred since the beginning of
2009. However, Kinder Morgan Energy Partners continues to maintain an
investment grade credit rating, and all of its long-term credit ratings remain
unchanged since December 31, 2008. Furthermore, Kinder Morgan Energy
Partners expects that its financing and short-term liquidity needs will continue
to be met through borrowings made under its bank credit
facility. Nevertheless, Kinder Morgan Energy Partners’ ability to
satisfy its financing requirements or fund its planned capital expenditures will
depend upon its future operating performance, which will be affected by
prevailing economic conditions in the energy and terminals industries and other
financial and business factors, some of which are beyond its
control.
Additionally,
some of Kinder Morgan Energy Partners’ customers are experiencing, or may
experience in the future, severe financial problems that have had or may have a
significant impact on their creditworthiness. These financial
problems may arise from the current financial crises, changes in commodity
prices or otherwise. Kinder Morgan Energy Partners has and is working
to implement, to the extent allowable under applicable contracts, tariffs and
regulations, prepayments and other security requirements, such as letters of
credit, to enhance its credit position relating to amounts owed from these
customers. Kinder Morgan Energy Partners cannot provide assurance
that one or more of its current or future financially distressed customers will
not default on its obligations to it or that such a default or defaults will not
have a material adverse effect on its business, financial position, future
results of operations, or future cash flows; however, Kinder Morgan Energy
Partners believes it has provided adequate allowance for such
customers.
Short-term
Liquidity
Our
principal sources of short-term liquidity are our $1.0 billion secured revolving
bank credit facility, Kinder Morgan Energy Partners’ $1.85 billion senior
unsecured revolving bank credit facility and cash provided by
operations. These facilities can be used for the respective entity’s
general corporate or partnership purposes.
The
following represents the revolving credit facilities that were available to
Kinder Morgan, Inc. and Kinder Morgan Energy Partners, respectively, short-term
debt outstanding under the credit facilities and available borrowing capacity
under the facilities after deducting (i) outstanding letters of credit, (ii)
outstanding borrowings under the credit facilities and (iii) the lending
commitments made by Lehman Brothers Commercial Bank, which was cancelled in
connection with the Lehman Brothers bankruptcy (as discussed
above).
|
At
December 31, 2009
|
||||||||
|
Short-term
Debt
Outstanding
|
Available
Borrowing
Capacity
|
|||||||
|
(In
millions)
|
||||||||
|
Credit
Facilities
|
||||||||
|
Kinder
Morgan, Inc.
|
||||||||
|
$1.0
billion, six-year secured revolver, due May 2013
|
$ | 171.0 | $ | 758.8 | ||||
|
|
||||||||
|
Kinder
Morgan Energy Partners
|
||||||||
|
$1.85
billion, five-year unsecured revolver, due August
2010(a)
|
$ | 300.0 | $ | 1,203.8 | ||||
____________
(a)
Kinder Morgan Energy Partners plans to negotiate a renewal of its bank credit
facility before its maturity date.
Our
outstanding short-term debt as of December 31, 2009 was $768.7 million,
primarily consisting of (i) $300.0 million in outstanding borrowings under
Kinder Morgan Energy Partners’ credit facility, (ii) $251.9 million (including
$1.9 million of unamortized discounts and purchase accounting attributable to
the Going Private transaction) for Kinder Morgan Energy Partners’ 7.50% senior
notes that mature on November 1, 2010 and (iii) $171.0 million in outstanding
borrowings under our senior secured credit facility. Apart from our
current portion of debt and the fair value of derivative contracts, our
current
77
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
assets
exceed our current liabilities by approximately $86.0 million at December 31,
2009. Given our expected cash flows from operations, our unused debt
capacity of our credit facilities as discussed above, and based on our projected
cash needs in the near term, we do not expect any liquidity issues to
arise.
Capital
Expenditures
Our
sustaining capital expenditures for the year ended December 31, 2009 were $172.7
million (including approximately $0.2 million for Kinder Morgan Energy Partners’
proportionate share of Rockies Express’ sustaining capital
expenditures). Our forecasted expenditures for 2010 for sustaining
capital expenditures are approximately $208.3 million (including $0.1 million
for Kinder Morgan Energy Partners’ proportionate shares of the Rockies Express
Pipeline and Midcontinent Express Pipeline projects). Generally, we
fund our sustaining capital expenditures with our cash flows from
operations. In addition to utilizing cash generated from their own
operations, Rockies Express Pipeline LLC and Midcontinent Express Pipeline LLC
can each fund their own cash requirements for capital expenditures through
borrowings under their respective credit facilities, issuing their own long-term
notes, or with proceeds from contributions received from their equity
owners.
All
of our capital expenditures, with the exception of sustaining capital
expenditures, are discretionary. The discretionary capital
expenditures reflected in the accompanying Consolidated Statements of Cash Flows
for the years ended December 31, 2009 and 2008 were $1,151.8 million and
$2,361.4 million, respectively, primarily related to Kinder Morgan Energy
Partners. The year-to-year decrease in discretionary capital
expenditures in 2009 versus 2008 was mainly due to higher capital expenditures
made during 2008 on Kinder Morgan Energy Partners’ major natural gas pipeline
projects and on its Trans Mountain crude oil and refined petroleum products
pipeline system. Kinder Morgan Energy Partners is forecasting $824.8
million for discretionary capital expenditures in its 2010 budget.
In
addition to the discretionary capital expenditures, Kinder Morgan Energy
Partners contributed a combined $2,040.8 million in 2009 to the Rockies Express,
Midcontinent Express and Fayetteville Express natural gas pipeline projects (all
three reported as investments in the accompanying Consolidated Balance Sheets
and accounted for under the equity method of accounting), primarily to fund its
proportionate share of both construction and preconstruction costs and the
repayment of senior notes by Rockies Express Pipeline LLC in August 2009.
Generally, we and Kinder Morgan Energy Partners fund discretionary capital
expenditures and investment contributions through borrowings under our
respective bank credit facilities. To the extent this source of
funding is not sufficient for Kinder Morgan Energy Partners, it generally funds
additional amounts through the issuance of long-term notes or common units for
cash. During 2009, Kinder Morgan Energy Partners used sales of common
units and the issuance of senior notes to refinance portions of its short-term
borrowings under its bank credit facility.
Capital
Requirements for Recent Transactions
For
the years ended December 31, 2009 and 2008, Kinder Morgan Energy Partners’ net
cash outlays for the acquisition of assets and investments totaled $328.9 million and $16.8
million (net of a $23.4 million cash contribution Kinder Morgan Energy Partners
received in April 2008 from us as a result of a certain true-up provision in its
Trans Mountain acquisition agreement). All of Kinder Morgan Energy
Partners’ 2009 and 2008 asset acquisitions and divestitures are discussed
further in Note 3 of the accompanying Notes to Consolidated Financial
Statements.
78
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
The
following table summarizes our net cash flows from operating, investing and
financing activities for each period presented.
|
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)
|
|||||||||||||||
|
Net
Cash Provided by (Used in)
|
||||||||||||||||
|
Operating
activities
|
$ | 1,587.5 | $ | 1,396.8 | $ | 1,044.5 | $ | 603.0 | ||||||||
|
Investing
activities
|
(3,477.5 | ) | 3,210.0 | (15,751.1 | ) | 723.7 | ||||||||||
|
Financing
activities
|
1,931.0 | (4,628.1 | ) | 12,956.8 | 440.9 | |||||||||||
|
Effect
of Exchange Rate Changes on Cash
|
6.0 | (8.7 | ) | (2.8 | ) | 7.6 | ||||||||||
|
|
||||||||||||||||
|
Cash
Balance Included in Assets Held for Sale
|
- | - | (1.1 | ) | (2.7 | ) | ||||||||||
|
|
||||||||||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
$ | 47.0 | $ | (30.0 | ) | $ | (1,753.7 | ) | $ | 1,772.5 | ||||||
Year
Ended December 31, 2009 vs. 2008
Operating
Activities
The
net increase of $190.7 million (14%) in cash provided by operating activities in
the year ended December 31, 2009 compared to the respective 2008 period was
primarily attributable to:
|
|
▪
|
a
$557.6 million increase in cash from overall higher net income, net of
non-cash items;
|
|
|
▪
|
a
$35.4 million increase in cash related to higher distributions received
from equity investments in 2009—chiefly due to incremental distributions
received from Kinder Morgan Energy Partners’ equity investment in Rockies
Express Pipeline LLC. The additional distributions were mainly
due to the incremental earnings attributable to both the Rockies
Express-East natural gas pipeline segment, which began initial pipeline
service in June 2009, and the Rockies Express-West segment, which began
full operations in May 2008.
|
The
overall increase in year-to-year distributions from equity investments includes
a $43.0 million decrease in distributions received from the equity investment in
the Express pipeline system, primarily attributable to the June 2008 exchange of
a preferred equity interest in Express US Holdings LP for two subordinated notes
from US Holdings LP (discussed in Note 11 of the accompanying Notes to
Consolidated Financial Statements);
|
|
▪
|
$23.8
million of non cash expense associated with adjustments to long-term
receivables for Kinder Morgan Energy Partners’ environmental cost
recoveries recognized in the fourth quarter of
2009;
|
|
|
▪
|
a
$379.4 million increase in cash outflows relative to net changes in
working capital items, primarily driven by (i) timing differences that
resulted in lower net cash inflows from the collection and payment of
trade and related party receivables and payables (including collections
and payments on natural gas transportation and exchange imbalance
receivables and payables), (ii) higher payments in 2009 for both the
settlement of certain refined product imbalance liabilities owed to U.S.
military customers of the Products Pipelines–KMP business segment and
(iii) a net decrease in estimated current tax accruals;
and
|
|
|
▪
|
a
$46.0 million decrease in cash from settlements related to the early
termination of interest rate swap agreements, primarily attributable to
Kinder Morgan Energy Partners’ January 2009 termination of a
fixed-to-floating interest rate swap agreement having a notional principal
amount of $300 million and a maturity date of March 15, 2031, for which it
received $144.4 million, compared to $194.3 million it received in 2008
for the termination of two fixed-to-variable interest rate swap agreements
having a combined notional principal amount of $700
million.
|
Investing
Activities
The
net increase in cash used of $6,687.5 million in investing activities in the
year ended December 31, 2009 compared to the respective 2008 period was
primarily attributable to:
|
|
▪
|
a
$2,899.3 million cash inflow in 2008 for net cash proceeds received from
the sale of an 80% interest in NGPL PipeCo
LLC;
|
79
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
|
▪
|
a
$3,106.4 million cash inflow in 2008 for proceeds received from NGPL
PipeCo LLC restricted cash;
|
|
|
▪
|
a
$1,685.6 million increase in cash used due to higher contributions to
equity investees in 2009, relative to 2008. The increase was
primarily driven by incremental contributions to Rockies Express Pipeline
LLC, Midcontinent Express Pipeline LLC, and Fayetteville Express Pipeline
LLC to partially fund their respective Rockies Express, Midcontinent
Express, and Fayetteville Express Pipeline construction and/or
pre-construction costs, and the repayment of senior notes by Rockies
Express Pipeline LLC in August 2009. As discussed in Note 6 of
the accompanying Consolidated Financial Statements, Kinder Morgan Energy
Partners contributed a combined $2,040.8 million in 2009 compared to
$342.5 million in 2008 to partially fund its proportionate share of these
three pipeline projects;
|
|
|
▪
|
a
$281.3 million increase in cash used for the acquisition of assets and
investments, when compared to 2008. The increase was driven by
the $265.3 million Kinder Morgan Energy Partners paid to acquire the
natural gas treating business from Crosstex Energy, L.P. and Crosstex
Energy, Inc. effective October 1, 2009, and the $36.0 million Kinder
Morgan Energy Partners paid to acquire a 40% membership interest in
Endeavor Gathering LLC effective November 1,
2009;
|
|
|
▪
|
a
$126.7 million net increase in cash used for investments versus proceeds
from margin and restricted deposits in 2009 compared to
2008. The decrease in cash was primarily due to the return of
margin deposits in 2008, which were posted in a prior period. Margin money
is deposited with counterparties in order to maintain certain energy
commodity hedging positions and are associated largely with our
utilization of derivative contracts to hedge (offset) against the
volatility of energy commodity price risks. These margin deposits must be
posted and maintained daily, and provide financial security to ensure
performance on the hedging
contracts;
|
|
|
▪
|
a
$63.2 million decrease in cash received relative to 2008, due to lower net
proceeds received from the sales of investments, property, plant and
equipment, and other net assets (net of salvage and removal
costs). The decrease in cash sales proceeds was driven
primarily by $63.1 million received for the sale of our interest in three
natural gas-fired power plants in Colorado in the first quarter of
2008;
|
|
|
▪
|
a
$1,221.0 million decrease in cash used for capital expenditures—largely
due to Kinder Morgan Energy Partners’ higher investment undertaken in 2008
to construct its Kinder Morgan Louisiana Pipeline and to expand its Trans
Mountain crude oil and refined petroleum products pipeline
system;
|
|
|
▪
|
a
$219.2 million decrease in cash used due to Kinder Morgan Energy Partners’
receipt, in 2009, of the full repayment of a $109.6 million loan it made
in December 2008 to a single customer of its Texas intrastate natural gas
pipeline group;
|
|
|
▪
|
a
$27.6 million increase in cash relative to 2008, related to
returns of capital received from equity investments in excess of the
equity investees’ cumulative earnings, primarily consisting of (i) a $22.9
million increase from Kinder Morgan Energy Partners’ equity investments,
described following, and (ii) a $4.7 million increase from our equity
investment in NGPL PipeCo LLC.
On
November 13, 2009, Fayetteville Express Pipeline LLC entered into and then
made borrowings under a new $1.1 billion two and one-half year, unsecured
revolving credit facility due May 11, 2012. Fayetteville
Express Pipeline LLC then made distributions to its two member owners
(Energy Transfer Partners, L.P. and Kinder Morgan Energy Partners) to
reimburse them for prior contributions made to fund its pre-construction
costs for the Fayetteville Express Pipeline, and Kinder Morgan Energy
Partners received returns of capital totaling $112.0
million. Prior to the establishment of its credit facility,
Fayetteville Express Pipeline LLC funded its pipeline construction costs
with contributions from its member owners.
Similarly,
in February 2008, Midcontinent Express Pipeline LLC entered into and then
made borrowings under a new $1.4 billion three-year, unsecured revolving
credit facility due February 28, 2011. Midcontinent Express
Pipeline LLC then made distributions in excess of cumulative earnings to
its two member owners to reimburse them for prior contributions made to
fund its pipeline construction costs. Kinder Morgan Energy
Partners’ proportionate share of these distributions was $89.1
million.
|
Financing
Activities
The
net increase of $6,559.1 million in cash provided by financing activities in the
year ended December 31, 2009 compared to the respective 2008 period was
primarily attributable to:
|
|
▪
|
a
$6,763.5 million decrease in cash used for overall debt financing
activities, which include issuances and payments of debt and debt issuance
costs. The year-to-year decrease in cash used was primarily due
to (i) a $5,421.0 million decrease in cash used due to lower net
repayments of senior notes, discussed following; (ii) a $589.1 million
increase in cash due to net commercial paper repayments by Kinder Morgan
Energy Partners in 2008; (iii) a $452.4 million increase in cash from
lower net repayments under our bank credit facility and (iv) a $300.0
million increase in cash from incremental net borrowings under Kinder
Morgan Energy Partners’ bank credit facility in
2009.
|
80
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
|
|
The
year-to-year increases and decreases in cash inflows from commercial paper
and credit facility borrowings were related in part to Kinder Morgan
Energy Partners’ short-term credit rating downgrade discussed above in
“Credit Ratings and Capital Market Liquidity,” and in part to the
year-to-year changes in working capital items. The increase in
cash inflows from changes in senior notes outstanding primarily includes
(i) the combined $5,789.3 million of our Going Private debt that was
repaid in 2008 primarily using proceeds from the sale of an 80% interest
in NGPL PipeCo LLC and (ii) the net $1,730.7 million Kinder Morgan Energy
Partners received after issuing and repaying senior notes in 2009
(discussed in Note 8 of the accompanying Notes to Consolidated Financial
Statements) versus the combined $2,080.2 million Kinder Morgan Energy
Partners received from its three public offerings of senior notes in
2008. Kinder Morgan Energy Partners used the proceeds from its
first two 2008 offerings to reduce borrowings under its commercial paper
program and used the proceeds from the third 2008 debt offering and from
each of the 2009 offerings to reduce the borrowings under its revolving
bank credit facility;
|
|
|
▪
|
a
$594.1 million increase in cash from noncontrolling interests
contributions primarily related to Kinder Morgan Energy Partners’
issuances totaling approximately 22.9 million common units in 2009
receiving combined net proceeds (after underwriting commissions and
expenses) of $1,155.6 million versus issuances totaling approximately 10.7
million common units in 2008 receiving combined net proceeds (after
underwriting commissions and expenses) of $560.9
million;
|
|
|
▪
|
$650.0
million cash used in 2009 to pay
dividends;
|
|
|
▪
|
a
$113.7 million increase in cash used for noncontrolling interests
distributions, primarily due to an increase in Kinder Morgan Energy
Partners’ cash distributions to its common unit owners;
and
|
|
|
▪
|
a
$23.0 million decrease in cash inflows from net changes in cash book
overdrafts—resulting from timing differences on checks issued but not yet
presented for payment.
|
Off
Balance Sheet Arrangements
We
have invested in entities that are not consolidated in our financial
statements. As of December 31, 2009, our obligations with respect to
these investments, as well as our obligations with respect to related letters of
credit, are summarized below (dollars in millions):
|
Entity
|
Investment
Type
|
Our
Ownership
Interest
|
Remaining
Interest(s)
Ownership
|
Total
Entity
Assets(a)
|
Total
Entity
Debt
|
Kinder
Morgan Energy Partners’
Contingent
Share
of
Entity
Debt(b)
|
||||||||||||
|
Rockies
Express Pipeline LLC(c)
|
Limited
Liability
|
50%
|
ConocoPhillips
and Sempra Energy
|
$
|
6,606.2
|
$
|
2,970.8
|
(d)
|
$
|
836.4
|
||||||||
|
|
||||||||||||||||||
|
Fayetteville
Express Pipeline LLC(e)
|
Limited
Liability
|
50%
|
Energy
Transfer Partners, L.P.
|
$
|
406.1
|
$
|
355.0
|
$
|
177.5
|
|||||||||
|
|
||||||||||||||||||
|
Cortez
Pipeline Company
|
General
Partner
|
50%
|
(f)
|
$
|
76.1
|
$
|
152.8
|
$
|
76.4
|
(g)
|
||||||||
|
Midcontinent
Express Pipeline LLC(h)
|
Limited
Liability
|
50%
|
Energy
Transfer Partners, L.P.
|
$
|
2,227.1
|
$
|
828.3
|
(i)
|
$
|
14.8
|
(j)
|
|||||||
|
|
||||||||||||||||||
|
Nassau
County,
Florida
Ocean Highway
and
Port Authority(k)
|
N/A
|
N/A
|
Nassau
County, Florida Ocean Highway and Port Authority
|
N/A
|
N/A
|
$
|
19.8
|
|||||||||||
_________
|
(a)
|
Principally
property, plant and equipment.
|
|
(b)
|
Represents
the portion of the entity’s debt that Kinder Morgan Energy Partners may be
responsible for if the entity cannot satisfy the
obligation.
|
|
(c)
|
Rockies
Express Pipeline LLC is a limited liability company and the surviving
legal entity from its December 30, 2009 merger with its parent entity
West2East Pipeline LLC. As of December 31, 2009, the remaining
limited liability member interests in Rockies Express Pipeline LLC are
owned by ConocoPhillips (25%) and Sempra Energy (25%). Kinder
Morgan Energy Partners owned a 51% ownership interest in Rockies Express
Pipeline LLC from June 30, 2006 until December 1, 2009.
|
|
(d)
|
Amount
includes an aggregate carrying value of $1,298.1 million in fixed rate
senior notes issued by Rockies Express Pipeline LLC in a private offering
in June 2008. All payments of principal and interest in respect
of these senior notes are the sole obligation of Rockies
Express. Noteholders have no recourse against Kinder Morgan
Energy Partners or the other member owners of Rockies Express Pipeline LLC
for any failure by Rockies Express to perform or comply with its
obligations pursuant to the notes or the indenture.
|
|
(e)
|
Fayetteville
Express Pipeline LLC is a limited liability company and the owner of the
Fayetteville Express Pipeline.
|
81
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
(f)
|
The
remaining general partner interests are owned by ExxonMobil Cortez
Pipeline, Inc., an indirect wholly-owned subsidiary of Exxon Mobil
Corporation and Cortez Vickers Pipeline Company, an indirect subsidiary of
M.E. Zuckerman Energy Investors Incorporated.
|
|
(g)
|
Kinder
Morgan Energy Partners is severally liable for its percentage ownership
share (50%) of the Cortez Pipeline Company debt. As of December
31, 2009, Shell Oil Company shares Kinder Morgan Energy Partners’ several
guaranty obligations jointly and severally for $42.9 million of Cortez’s
debt balance; however, Kinder Morgan Energy Partners is obligated to
indemnify Shell for the liabilities it incurs in connection with such
guaranty. Accordingly, as of December 31, 2009 Kinder Morgan
Energy Partners has a letter of credit in the amount of $21.4 million
issued by JP Morgan Chase, in order to secure its indemnification
obligations to Shell for 50% of the Cortez debt balance of $42.9
million.
|
|
Further,
pursuant to a Throughput and Deficiency Agreement, the partners of Cortez
Pipeline Company are required to contribute capital to Cortez in the event
of a cash deficiency. The agreement contractually supports the
financings of Cortez Capital Corporation, a wholly-owned subsidiary of
Cortez Pipeline Company, by obligating the partners of Cortez Pipeline to
fund cash deficiencies at Cortez Pipeline, including anticipated
deficiencies and cash deficiencies relating to the repayment of principal
and interest on the debt of Cortez Capital Corporation. The
partners’ respective parent or other companies further severally guarantee
the obligations of the Cortez Pipeline owners under this
agreement.
|
|
|
(h)
|
Midcontinent
Express Pipeline LLC is a limited liability company and the owner of the
Midcontinent Express Pipeline. In January 2008, in conjunction
with the signing of additional binding pipeline transportation
commitments, Midcontinent Express Pipeline LLC and MarkWest Pioneer,
L.L.C. (a subsidiary of MarkWest Energy Partners, L.P.) entered into an
option agreement which provided MarkWest Pioneer, LLC a one-time right to
purchase a 10% ownership interest in Midcontinent Express Pipeline LLC
after the pipeline was fully constructed and placed into
service. In September 2009, MarkWest Pioneer, LLC declined to
exercise this option.
|
|
(i)
|
Amount
includes an aggregate carrying value of $798.8 million in fixed rate
senior notes issued by Midcontinent Express Pipeline LLC in a private
offering in September 2009. All payments of principal and
interest in respect of these senior notes are the sole obligation of
Midcontinent Express. Noteholders have no recourse against
Kinder Morgan Energy Partners or the other member owners of Midcontinent
Express Pipeline LLC for any failure by Midcontinent Express Pipeline LLC
to perform or comply with its obligations pursuant to the notes or the
indenture.
|
|
(j)
|
In
addition to Kinder Morgan Energy Partners’ contingent share of entity
debt, there is a letter of credit outstanding to support the construction
of the Midcontinent Express pipeline. As of December 31, 2009,
this letter of credit, issued by the Royal Bank of Scotland plc, had a
face amount of $33.3 million. Kinder Morgan Energy Partners’
contingent responsibility with regard to this outstanding letter of credit
was $16.7 million (50% of total face amount).
|
|
(k)
|
Arose
from Kinder Morgan Energy Partners’ Vopak terminal acquisition in July
2001. Nassau County, Florida Ocean Highway and Port Authority
is a political subdivision of the state of Florida. During
1990, Ocean Highway and Port Authority issued its Adjustable Demand
Revenue Bonds in the aggregate principal amount of $38.5 million for the
purpose of constructing certain port improvements located in Fernandino
Beach, Nassau County, Florida. A letter of credit was issued as
security for the Adjustable Demand Revenue Bonds and was guaranteed by the
parent company of Nassau Terminals LLC, the operator of the port
facilities. In July 2002, Kinder Morgan Energy Partners
acquired Nassau Terminals LLC and became guarantor under the letter of
credit agreement. In December 2002, Kinder Morgan Energy
Partners issued a $28 million letter of credit under its credit facilities
and the former letter of credit guarantee was terminated. As of
December 31, 2009, the face amount of this letter of credit outstanding
under Kinder Morgan Energy Partners’ credit facility was $19.8
million. Principal payments on the bonds are made on the first
of December each year and reductions are made to the letter of
credit.
|
For
additional information with regard to our and Kinder Morgan Energy Partners’
contingent debt obligations, see Note 12 of the accompanying Notes to
Consolidated Financial Statements.
Kinder
Morgan Energy Partners accounts for its investments in Rockies Express Pipeline
LLC, Fayetteville Express Pipeline LLC, Cortez Pipeline Company, and
Midcontinent Express Pipeline LLC under the equity method of
accounting. For the year ended December 31, 2009, Kinder Morgan
Energy Partners’ share of earnings, based on its ownership percentage and before
amortization of excess investment cost, if any, was $98.5 million from Rockies
Express Pipeline LLC, $3.6 million from Fayetteville Express Pipeline LLC, $22.3
million from Cortez Pipeline Company, and $14.7 million from Midcontinent
Express Pipeline LLC. Additional information regarding the nature and
business purpose of these investments is included in Note 6 of the accompanying
Notes to Consolidated Financial Statements.
82
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Contractual
Obligations and Commercial Commitments
|
Payments
due by period
|
||||||||||||||||||||
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Contractual
obligations
|
||||||||||||||||||||
|
Debt
borrowings-principal payments
|
$ | 13,715.5 | $ | 766.8 | $ | 3,778.4 | $ | 1,008.8 | $ | 8,161.5 | ||||||||||
|
Interest
payments(a)
|
10,601.2 | 843.0 | 1,469.3 | 1,210.3 | 7,078.6 | |||||||||||||||
|
Lease
obligations(b)
|
238.8 | 43.8 | 67.9 | 44.2 | 82.9 | |||||||||||||||
|
Pension
and postretirement welfare plans(c)
|
324.6 | 27.4 | 57.4 | 60.1 | 179.7 | |||||||||||||||
|
Other
obligations(d)
|
11.5 | 6.5 | - | 5.0 | - | |||||||||||||||
|
Total
|
$ | 24,891.6 | $ | 1,687.5 | $ | 5,373.0 | $ | 2,328.4 | $ | 15,502.7 | ||||||||||
|
Other
commercial commitments
|
||||||||||||||||||||
|
Standby
letters of credit(e)
|
$ | 438.8 | $ | 343.2 | $ | 95.6 | $ | - | $ | - | ||||||||||
|
Capital
expenditures(f)
|
$ | 260.4 | $ | 260.4 | $ | - | $ | - | $ | - | ||||||||||
____________
|
(a)
|
Interest
payment obligations exclude adjustments for interest rate swap
agreements.
|
|
(b)
|
Represents
commitments pursuant to the terms of operating lease
agreements.
|
|
(c)
|
Represents
expected benefit payments from pension and postretirement welfare plans as
of December 31, 2009.
|
|
(d)
|
For
the Less than 1 year column only, represents payments due under carbon
dioxide take-or-pay contracts and, for the 3-5 Years column only,
represents payments due pursuant to Kinder Morgan Energy Partners’
purchase and sale agreement with Megafleet Towing Co., Inc. for the
acquisition of certain marine vessels effective April 23,
2009.
|
|
(e)
|
The
$438.8 million in letters of credit outstanding as of December 31 2009
consisted of the following: (i) a $100 million letter of credit that
supports certain proceedings with the California Public Utilities
Commission involving refined products tariff charges on the intrastate
common carrier operations of Kinder Morgan Energy Partners Pacific
operations’ pipelines in the state of California, (ii) a combined $55.5
million in two letters of credit supporting Kinder Morgan Energy Partners’
pipeline and terminal operations in Canada, (iii) a combined $55.0 million
in two letters of credit supporting Kinder Morgan Energy Partners’ hedging
of energy commodity price risks, (iv) a combined $33.1 million in four
letters of credit required under provisions of our property and casualty,
worker’s compensation and general liability insurance policies, (v) Kinder
Morgan Energy Partners’ $30.3 million guarantee under letters of credit
totaling $45.5 million supporting Kinder Morgan Energy Partners’
International Marine Terminals Partnership Plaquemines, Louisiana Port,
Harbor, and Terminal Revenue Bonds, (vi) a $25.4 million letter of credit
supporting Kinder Morgan Energy Partners’ Kinder Morgan Liquids Terminals
LLC New Jersey Economic Development Revenue Bonds, (vii) a $24.1 million
letter of credit supporting Kinder Morgan Energy Partners’ Kinder Morgan
Operating L.P. “B” tax-exempt bonds, (viii) a $21.4 million letter of
credit supporting Kinder Morgan Energy Partners’ indemnification
obligations on the Series D note borrowings of Cortez Capital Corporation,
(ix) a combined total of $20.4 million of two letters of credit supporting
the subordination of operating fees payable to us for the operation of the
Jackson, Michigan power generation facility to payments due under the
operating lease of the facilities, (x) a $19.8 million letter of credit
supporting Nassau County, Florida Ocean Highway and Port Authority
tax-exempt bonds, (xi) a combined $17.0 million in eight letters of credit
supporting environmental and other obligations of Kinder Morgan Energy
Partners’ and its subsidiaries, (xii) a $16.2 million letter of credit to
fund the debt service reserve account required under Kinder Morgan Energy
Partners Express System’s trust indenture and (xiii) a $5.4 million letter
of credit supporting Kinder Morgan Energy Partners’ Arrow Terminals, L.P.
Illinois Development Revenue Bonds.
|
|
(f)
|
Represents
commitments for the purchase of plant, property and equipment as of
December 31, 2009.
|
|
Other
Contingent Commitments:
|
Contingency
|
Amount
of Contingent Liability
at
December 31, 2009
|
||
|
Guarantor
of the Bushton Gas processing plant lease(a)
|
Default
by ONEOK, Inc.
|
Total
$54.8 million; Averages $27.4 million per year through 2011
|
||
|
Jackson,
Michigan power plant incremental investment
|
Operational
performance
|
$3
to $8 million per year for 9 years beginning 2010 through
2018
|
||
|
Jackson,
Michigan power plant incremental investment
|
Cash
flow performance
|
Up
to a total of $25 million beginning in
2018
|
|
|
____________
|
|
(a)
|
In
conjunction with our sale of the Bushton gas processing facility to ONEOK,
Inc., at December 31, 1999, ONEOK, Inc. became primarily liable under the
associated operating lease and we became secondarily
liable. Should ONEOK, Inc. fail to make payments as required
under the lease, we would be required to make such payments, with recourse
only to ONEOK, Inc.
|
83
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
At
December 31, 2009, we owned, directly, and indirectly in the form of i-units
corresponding to the number of shares of Kinder Morgan Management we owned,
approximately 33.9 million limited partner units of Kinder Morgan Energy
Partners. These units, which consist of 16.4 million common units, 5.3 million
Class B units and 12.2 million i-units, represent approximately 11.4% of the
total limited partner interests of Kinder Morgan Energy Partners. In addition,
we are the sole common stockholder of the general partner of Kinder Morgan
Energy Partners, which holds an effective 2% interest in Kinder Morgan Energy
Partners and its operating partnerships. Together, our limited partner and
general partner interests represented approximately 13.2% of Kinder Morgan
Energy Partners’ total equity interests at December 31, 2009. As of the close of
the Going Private transaction, our limited partner interests and our general
partner interest represented an approximate 50% economic interest in Kinder
Morgan Energy Partners. This difference results from the existence of incentive
distribution rights held by the general partner shareholder.
Kinder
Morgan Energy Partners’ partnership agreement requires that it distribute 100%
of “Available Cash,” as defined in its partnership agreement, to its partners
within 45 days following the end of each calendar quarter in accordance with
their respective percentage interests. Available Cash consists generally of all
of Kinder Morgan Energy Partners’ cash receipts, including cash received by its
operating partnerships and net reductions in reserves, less cash disbursements
and net additions to reserves and amounts payable to the former general partner
of SFPP, L.P. (“SFPP”), in respect of its remaining 0.5% interest in
SFPP.
Kinder
Morgan Management, as the delegate of Kinder Morgan G.P., Inc., of which we
indirectly own all of the outstanding common equity, and the general partner of
Kinder Morgan Energy Partners, is granted discretion, subject to the approval of
Kinder Morgan G.P., Inc. in certain cases, to establish, maintain and adjust
reserves for the proper conduct of its business, which might include reserves
for matters such as future operating expenses, debt service, sustaining capital
expenditures and rate refunds and for distributions for the next four quarters.
These reserves are not restricted by magnitude, but only by type of future cash
requirements with which they can be associated. When Kinder Morgan Management
determines Kinder Morgan Energy Partners’ quarterly distributions, it considers
current and expected reserve needs along with current and expected cash flows to
identify the appropriate sustainable distribution level.
Pursuant
to Kinder Morgan Energy Partners’ partnership agreement, distributions to its
unitholders are characterized either as distributions of cash from operations or
as distributions of cash from interim capital transactions. This
distinction affects the distributions to owners of its common units,
Class B units and i-units relative to the distributions retained by Kinder
Morgan G.P., Inc. as general partner of Kinder Morgan Energy
Partners.
Cash from
Operations. Cash from operations generally refers to Kinder
Morgan Energy Partners’ cash balance on the date it commenced operations, plus
all cash generated by the operation of its business, after deducting related
cash expenditures, net additions to or reductions in reserves, debt service and
various other items.
Cash from Interim Capital
Transactions. Cash from interim capital transactions will
generally result only from Kinder Morgan Energy Partners’ distributions that are
funded from borrowings, sales of debt and equity securities and sales or other
dispositions of its assets for cash, other than inventory, accounts receivable
and other current assets and assets disposed of in the ordinary course of its
business.
Rule for Characterizing
Distributions. All available cash distributed by Kinder Morgan
Energy Partners from any source will be treated as distributions of cash from
operations until the sum of all available cash distributed equals the cumulative
amount of cash from operations actually generated from the date it commenced
operations through the end of the calendar quarter prior to that
distribution. Any distribution of available cash which, when added to
the sum of all prior distributions, is in excess of the cumulative amount of
cash from operations, will be considered a distribution of cash from interim
capital transactions until the initial common unit price is fully recovered as
described under “—Allocation of Distributions from Interim Capital
Transactions.” For purposes of calculating the sum of all
distributions of available cash, the total equivalent cash amount of all
distributions of i-units to Kinder Morgan Management, as the holder of all
i-units, will be treated as distributions of available cash, even though the
distributions to Kinder Morgan Management are made in additional i-units rather
than cash. Kinder Morgan Energy Partners retains this cash and uses
it in its business. To date, all of Kinder Morgan Energy Partners’
cash distributions have been treated as distributions of cash from
operations.
84
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Allocation of Distributions from
Operations. Kinder Morgan Energy Partners will distribute cash
from operations for each quarter effectively as follows:
|
|
·
|
first,
98% to the owners of all classes of units pro rata and 2% to Kinder Morgan
G.P., Inc. as general partner of Kinder Morgan Energy Partners until the
owners of all classes of units have received a total of $0.15125 per unit
in cash or equivalent i-units for such
quarter;
|
|
|
·
|
second,
85% of any available cash then remaining to the owners of all classes of
units pro rata and 15% to Kinder Morgan G.P., Inc. as general partner of
Kinder Morgan Energy Partners until the owners of all classes of units
have received a total of $0.17875 per unit in cash or equivalent i-units
for such quarter;
|
|
|
·
|
third,
75% of any available cash then remaining to the owners of all classes of
units pro rata and 25% to Kinder Morgan G.P., Inc. as general partner of
Kinder Morgan Energy Partners until the owners of all classes of units
have received a total of $0.23375 per unit in cash or equivalent i-units
for such quarter; and
|
|
|
·
|
fourth,
50% of any available cash then remaining to the owners of all classes of
units pro rata, to owners of common units in cash and to Kinder Morgan
Management as owners of i-units in the equivalent number of i-units, and
50% to Kinder Morgan G.P., Inc. as general partner of Kinder Morgan Energy
Partners.
|
During
the year ended December 31, 2009, Kinder Morgan Energy Partners paid
distributions of $4.20 per common unit, of which $740.2 million was paid to the
public holders (represented in noncontrolling interests) of Kinder Morgan Energy
Partners’ common units. On January 20, 2010, Kinder Morgan Energy Partners
declared a quarterly distribution of $1.05 per common unit for the quarterly
period ended December 31, 2009. The distribution was paid on February 12, 2010
to unitholders of record as of January 29, 2010.
Allocation of Distributions from
Interim Capital Transactions. Any distribution by Kinder
Morgan Energy Partners of available cash that would constitute cash from interim
capital transactions would be distributed effectively as follows:
|
|
·
|
98%
to all owners of common units and Class B units pro rata in cash and
to Kinder Morgan Management as the sole holder of i-units in equivalent
i-units; and
|
|
|
·
|
2%
to Kinder Morgan G.P., Inc. as the general partner of Kinder Morgan Energy
Partners, until Kinder Morgan Energy Partners has distributed cash from
this source in respect of a common unit outstanding since its original
public offering in an aggregate amount per unit equal to the initial
common unit price of $5.75, as adjusted for
splits.
|
As
cash from interim capital transactions is distributed, it would be treated as if
it were a repayment of the initial public offering price of the common
units. To reflect that repayment, the first three distribution levels
of cash from operations would be adjusted downward proportionately by
multiplying each distribution level amount by a fraction, the numerator of which
is the unrecovered initial common unit price immediately after giving effect to
that distribution and the denominator of which is the unrecovered initial common
unit price immediately prior to giving effect to that
distribution. For example, assuming the unrecovered initial common
unit price is $5.75 per common unit and if cash from the first interim capital
transaction of $2.375 per unit was distributed to owners of common units, then
the amount of the first three distribution levels would each be reduced to 50%
of its then current level. The unrecovered initial common unit price
generally is the amount by which the initial common unit price exceeds the
aggregate distribution of cash from interim capital transactions per common
unit.
When
the initial common unit price is fully recovered, then each of the first three
distribution levels will have been reduced to zero. Thereafter all distributions
of available cash from all sources will be treated as if they were cash from
operations and available cash will be distributed 50% to all classes of units
pro rata with the distribution to i-units being made instead in the form of
i-units and 50% to Kinder Morgan G.P., Inc.
Please
refer to Note 18 of the accompanying Notes to Consolidated Financial Statements
for information concerning recent accounting pronouncements.
This
report includes forward-looking statements. These forward-looking statements are
identified as any statement that does not relate strictly to historical or
current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,”
“projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,”
“expect,” “may,” or the negative of those terms or other variations of them or
comparable terminology. In particular, statements, express or implied,
concerning future actions, conditions or events, future operating results or the
ability to generate sales, income or cash flow or to service debt or to pay
dividends are forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions.
Future actions, conditions or events and future results of operations may
differ
85
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
materially
from those expressed in these forward-looking statements. Many of the factors
that will determine these results are beyond our ability to control or predict.
Specific factors that could cause actual results to differ from those in the
forward-looking statements include:
|
|
·
|
price
trends and overall demand for natural gas liquids, refined petroleum
products, oil, carbon dioxide, natural gas, electricity, coal, steel and
other bulk materials and chemicals in North
America;
|
|
|
·
|
economic
activity, weather, alternative energy sources, conservation and
technological advances that may affect price trends and demand;
|
|
|
·
|
changes
in tariff rates charged by our or those of Kinder Morgan Energy Partners’
pipeline subsidiaries implemented by the Federal Energy Regulatory
Commission, or other regulatory agencies or the California Public
Utilities Commission;
|
|
|
·
|
our
ability to acquire new businesses and assets and integrate those
operations into our existing operations, as well as the ability to expand
our facilities;
|
|
|
·
|
difficulties
or delays experienced by railroads, barges, trucks, ships or pipelines in
delivering products to or from Kinder Morgan Energy Partners’ terminals or
pipelines;
|
|
|
·
|
our
ability to successfully identify and close acquisitions and make
cost-saving changes in operations;
|
|
|
·
|
shut-downs
or cutbacks at major refineries, petrochemical or chemical plants, ports,
utilities, military bases or other businesses that use our services or
provide services or products to us;
|
|
|
·
|
changes
incrude oil and natural gas production from exploration and
production areas that we or Kinder Morgan Energy Partners serve, such as
the Permian Basin area of West Texas, the U.S. Rocky Mountains and the
Alberta, Canada oil sands;
|
|
|
·
|
changes
in laws or regulations, third-party relations and approvals and decisions
of courts, regulators and governmental bodies that may adversely affect
our business or ability to compete;
|
|
|
·
|
changes
in accounting pronouncements that impact the measurement of our results of
operations, the timing of when such measurements are to be made and
recorded, and the disclosures surrounding these
activities;
|
|
|
·
|
our
ability to offer and sell equity securities, and Kinder Morgan Energy
Partners’ ability to offer and sell equity securities and its ability to
sell debt securities or obtain debt financing in sufficient amounts to
implement that portion of our or Kinder Morgan Energy Partners’ business
plans that contemplates growth through acquisitions of operating
businesses and assets and expansions of
facilities;
|
|
|
·
|
our
indebtedness, which could make us vulnerable to general adverse economic
and industry conditions, limit our ability to borrow additional funds
and/or place us at competitive disadvantages compared to our competitors
that have less debt or have other adverse
consequences;
|
|
|
·
|
interruptions
of electric power supply to our facilities due to natural disasters, power
shortages, strikes, riots, terrorism, war or other
causes;
|
|
|
·
|
our
ability to obtain insurance coverage without significant levels of
self-retention of risk;
|
|
|
·
|
acts
of nature, sabotage, terrorism or other similar acts causing damage
greater than our insurance coverage
limits;
|
|
|
·
|
capital
and credit markets conditions, inflation and interest
rates;
|
|
|
·
|
the
political and economic stability of the oil producing nations of the
world;
|
|
|
·
|
national,
international, regional and local economic, competitive and regulatory
conditions and developments;
|
|
|
·
|
foreign
exchange fluctuations;
|
|
|
·
|
the
timing and extent of changes in commodity prices for oil, natural gas,
electricity and certain agricultural
products;
|
|
|
·
|
the
extent of Kinder Morgan Energy Partners’ success in discovering,
developing and producing oil and gas reserves, including the risks
inherent in exploration and development drilling, well completion and
other development activities;
|
|
|
·
|
engineering
and mechanical or technological difficulties that Kinder Morgan Energy
Partners may experience with operational equipment, in well completions
and workovers, and in drilling new
wells;
|
|
|
·
|
the
uncertainty inherent in estimating future oil and natural gas production
or reserves that Kinder Morgan Energy Partners may
experience;
|
|
|
·
|
the
ability to complete expansion projects on time and on
budget;
|
86
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
|
·
|
the
timing and success of Kinder Morgan Energy Partners’ and our business
development efforts; and
|
|
|
·
|
unfavorable
results of litigation and the fruition of contingencies referred to in the
accompanying Notes to Consolidated Financial
Statements.
|
The
foregoing list should not
be construed to be exhaustive. We believe the forward-looking statements in this
report are reasonable. However, there is no assurance that any of the
actions, events or results of the forward-looking statements will occur, or if
any of them do, what impact they will have on our results of operations or
financial condition. Because of these uncertainties, you should not put undue
reliance on any forward-looking statements. See Item 1A “Risk Factors” for a
more detailed description of these and other factors that may affect the
forward-looking statements. When considering forward-looking statements, one
should keep in mind the risk factors described in Item 1A “Risk Factors.” The
risk factors could cause our actual results to differ materially from those
contained in any forward-looking statement. Other than as required by applicable
law, we disclaim any obligation to update the above list or to announce publicly
the result of any revisions to any of the forward-looking statements to reflect
future events or developments.
Generally,
our market risk sensitive instruments and positions have been determined to be
“other than trading.” Our exposure to market risk as discussed below includes
forward-looking statements and represents an estimate of possible changes in
fair value or future earnings that would occur, assuming hypothetical future
movements in energy commodity prices or interest rates. Our views on market risk
are not necessarily indicative of actual results that may occur and do not
represent the maximum possible gains and losses that may occur, since actual
gains and losses will differ from those estimated based on actual fluctuations
in energy commodity prices or interest rates and the timing of
transactions.
We
are exposed to energy commodity market risk and other external risks, such as
weather-related risk, in the ordinary course of business. However, we take steps
to hedge, or limit our exposure to, these risks in order to maintain a more
stable and predictable earnings stream. Stated another way, we execute a hedging
strategy that seeks to protect us financially against adverse price movements
and serves to minimize potential losses. Our strategy involves the use of
certain energy commodity derivative contracts to reduce and minimize the risks
associated with unfavorable changes in the market price of natural gas, natural
gas liquids and crude oil. The derivative contracts we use include energy
products traded on the New York Mercantile Exchange and over-the-counter
markets, including, but not limited to, futures and options contracts, fixed
price swaps and basis swaps.
Fundamentally,
our hedging strategy involves taking a simultaneous position in the futures
market that is equal and opposite to our position, or anticipated position, in
the cash market (or physical product) in order to minimize the risk of financial
loss from an adverse price change. For example, as sellers of crude oil and
natural gas, we often enter into fixed price swaps and/or futures contracts to
guarantee or lock-in the sale price of our crude oil or the margin from the sale
and purchase of our natural gas at the time of market delivery, thereby directly
offsetting any change in prices, either positive or negative. A hedge is
successful when gains or losses in the cash market are neutralized by losses or
gains in the futures transaction.
Our
policies require that we only enter into derivative contracts with carefully
selected major financial institutions or similar counterparties based upon their
credit ratings and other factors, and we maintain strict dollar and term limits
that correspond to our counterparties’ credit ratings. While we enter into
derivative transactions only with investment grade counterparties and actively
monitor their credit ratings, it is nevertheless possible that losses will
result from counterparty credit risk in the future. The credit ratings of the
primary parties from whom we transact in energy commodity derivative contracts
(based on contract market values) are as follows (credit ratings per
Standard & Poor’s Rating Services):
|
Credit
Rating
|
|
|
J.
Aron & Company / Goldman Sachs
|
A
|
|
Morgan
Stanley
|
A
|
|
BNP
Paribas
|
AA
|
As
discussed above, our principal use of energy commodity derivative contracts is
to mitigate the market price risk associated with anticipated transactions for
the purchase and sale of natural gas, natural gas liquids and crude oil. Using
derivative contracts for this purpose helps provide us increased certainty with
regard to our operating cash flows and helps us undertake further capital
improvement projects, attain budget results and meet distribution targets to our
partners. We categorize such use of energy commodity derivative contracts as
cash flow hedges, because the derivative contract is used to hedge the
anticipated future cash flow of a transaction that is expected to occur but
whose value is uncertain. Cash flow
87
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
hedges
are defined as hedges made with the intention of decreasing the variability in
cash flows related to future transactions, as opposed to the value of an asset,
liability or firm commitment, and we are allowed special hedge accounting
treatment for such derivative contracts.
In
accounting for cash flow hedges, gains and losses on the derivative contracts
are reported in other comprehensive income, outside “Net Income” reported in the
accompanying Consolidated Statements of Operations, but only to the extent that
the gains and losses from the change in value of the derivative contracts can
later offset the loss or gain from the change in value of the hedged future cash
flows during the period in which the hedged cash flows affect net income. That
is, for cash flow hedges, all effective components of the derivative contracts’
gains and losses are recorded in other comprehensive income (loss), pending
occurrence of the expected transaction. Other comprehensive income (loss)
consists of those financial items that are included in “Accumulated other
comprehensive loss” in the accompanying Consolidated Balance Sheets but not
included in our net income. Thus, in highly effective cash flow hedges, where
there is no ineffectiveness, other comprehensive income changes by exactly as
much as the derivative contracts and there is no impact on earnings until the
expected transaction occurs.
All
remaining gains and losses on the derivative contracts (the ineffective portion)
are included in current net income. The ineffective portion of the gain or loss
on the derivative contracts is the difference between the gain or loss from the
change in value of the derivative contract and the effective portion of that
gain or loss. In addition, when the hedged forecasted transaction does
take place and affects earnings, the effective part of the hedge is also
recognized in the income statement, and the earlier recognized effective amounts
are removed from “Accumulated other comprehensive loss.” If the
forecasted transaction results in an asset or liability, amounts in “Accumulated
other comprehensive loss” should be reclassified into earnings when the asset or
liability affects earnings through cost of sales, depreciation, interest
expense, etc.
The
accumulated components of other comprehensive income are reported separately as
accumulated other comprehensive income or loss in the stockholders’ equity
section of the balance sheet. For us, the amounts included in
“Accumulated other comprehensive loss” in the accompanying Consolidated Balance
Sheets primarily include (i) the effective portion of the gains and losses on
cash flow hedging derivatives (which are primarily related to the derivative
contracts associated with our hedging of anticipated future cash flows from the
sales and purchases of natural gas, natural gas liquids and crude oil and (ii)
foreign currency translation adjustments (which result from translating all of
our foreign denominated assets and liabilities at current exchange rates, while
equity is translated by using historical or weighted-average exchange
rates).
The
total “Accumulated other comprehensive loss” balance of $167.9 million, included
within the Stockholders’ Equity section of the accompanying Balance Sheet as of
December 31, 2009, consisted of (i) $95.7 million representing unrecognized net
losses on energy commodity price risk management activities, (ii) $12.8 million
representing unrecognized net gains relating to foreign currency translation
adjustments and (iii) $85.0 million representing unrecognized net losses
relating to the employee benefit plans. The total “Accumulated other
comprehensive loss” balance of $53.4 million included in the accompanying
Consolidated Balance Sheet at December 31, 2008 consisted of (i) $82.4 million
representing unrecognized net gains on energy commodity price risk management
activities, (ii) $41.1 million representing unrecognized net losses relating to
foreign currency translation adjustments and (iii) $94.7 million representing
unrecognized net losses relating to the employee benefit plans.
In
future periods, as the hedged cash flows from our actual purchases and sales of
energy commodities affect our net income, the related gains and losses included
in our accumulated other comprehensive loss as a result of our hedging are
transferred to the income statement as well, effectively offsetting the changes
in cash flows stemming from the hedged risk.
We
measure the risk of price changes in the natural gas, natural gas liquids and
crude oil markets utilizing a value-at-risk model. Value-at-risk is a
statistical measure estimating the probability of portfolio losses over a given
holding period, within a certain level of statistical confidence. We utilize a
closed form model to evaluate risk on a quarterly basis. The value-at-risk
computations utilize a confidence level of 97.7% for the resultant price
movement and a holding period of one day is chosen for the calculation. The
confidence level used means that there is a 97.7% probability that the
mark-to-market losses for a single day will not exceed the value-at-risk number
presented. For each of the years ended December 31, 2009 and 2008,
our value-at-risk reached a high of $10.4 million and $1.8 million,
respectively, and a low of $2.6 million and $0.7 million, respectively.
Value-at-risk as of December 31, 2009 was $10.1 million, and averaged $7.6
million for 2009. Value-at-risk as of December 31, 2008 was $0.7 million, and
averaged $1.5 million for 2008. The increase in value-at-risk during
2009 largely results from our increased use of options to hedge crude oil
production.
Our
calculated value-at-risk exposure represents an estimate of the reasonably
possible net losses that would be recognized on our combined portfolio of
derivative contracts (including commodity futures and options contracts, fixed
price swaps, basis swaps and over-the-counter options) and corresponding
physical commodities assuming hypothetical movements in future market rates and
is not necessarily indicative of actual results that may occur. It does not
represent the maximum possible loss or any expected loss that may occur, since
actual future gains and losses will differ from those
88
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
estimated.
Actual gains and losses may differ from estimates due to actual fluctuations in
market rates, operating exposures and the timing thereof, as well as changes in
our portfolio of derivatives during the year. In addition, as discussed above,
we enter into these derivative contracts largely for the purpose of mitigating
the risks that accompany certain of our business activities and, therefore both
in the value-at-risk calculation and in reality, the change in the market value
of our portfolio of derivative contracts, is offset largely by changes in the
value of the underlying physical transactions. For more information on our risk
management activities, see Note 13 of the accompanying Notes to Consolidated
Financial Statements included in this report.
In
order to maintain a cost effective capital structure, it is our policy to borrow
funds using a mix of fixed rate debt and variable rate debt. The market risk
inherent in our debt instruments and positions is the potential change arising
from increases or decreases in interest rates as discussed below.
For
fixed rate debt, changes in interest rates generally affect the fair value of
the debt instrument, but not our earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact the fair
value of the debt instrument, but may affect our future earnings and cash flows.
Generally, we do not have an obligation to prepay fixed rate debt prior to
maturity and, as a result, interest rate risk and changes in fair value should
not have a significant impact on our fixed rate debt until we would be required
to refinance such debt.
As of December 31, 2009 and 2008, the carrying values of
our fixed rate debt were approximately $13,083.4 million and $11,355.4 million,
respectively. These amounts compare to fair values of $13,676.2 million and
$9,838.1 million as of December 31, 2009 and 2008, respectively. Fair
values were determined using quoted market prices where applicable, or future
cash flow discounted at market rates for similar types of borrowing
arrangements. A hypothetical 10% change in the average interest rates
applicable to such debt for 2009 and 2008, would result in changes of
approximately $731.0 million and $567.4 million, respectively, in the fair
values of these instruments.
The
carrying value and fair value of our variable rate debt, including associated
accrued interest and excluding the value of interest rate swap agreements
(discussed below), was $558.9 million and $95.1 million as of December 31, 2009
and 2008, respectively. A hypothetical 10% change of the weighted average
interest rate on all of our borrowings (approximately 47 basis points in 2009)
when applied to our outstanding balance of variable rate debt as of December 31,
2009 and 2008, including adjustments for notional swap amounts, would result in
changes of approximately $30.2 million and $15.8 million, respectively, in our
2009 and 2008 annual pre-tax earnings.
As
of December 31, 2009, we and our subsidiary, Kinder Morgan Energy Partners were
party to interest rate swap agreements with a combined notional principal amount
of $725.0 million and $5.2 billion, respectively. As of December 31, 2008, we
and our subsidiary Kinder Morgan Energy Partners were party to interest rate
swap agreements with notional principal amount of $2.8 billion. An interest rate
swap agreement is a contractual agreement entered into between two
counterparties under which each agrees to make periodic interest payments to the
other for an agreed period of time based upon a predetermined amount of
principal, which is called the notional principal amount. Normally at each
payment or settlement date, the party who owes more pays the net amount; so at
any given settlement date only one party actually makes a payment. The principal
amount is notional because there is no need to exchange actual amounts of
principal.
We
entered into our interest rate swap agreements for the purpose of transforming a
portion of the underlying cash flows related to our long-term fixed rate debt
securities into variable rate debt in order to achieve our desired mix of fixed
and variable rate debt. Since the fair value of our fixed rate debt varies with
changes in the market rate of interest, we enter into swap agreements to receive
a fixed and pay a variable rate of interest. Such swap agreements result in
future cash flows that vary with the market rate of interest and therefore,
hedge against changes in the fair value of our fixed rate debt due to market
rate changes.
As
of both December 31, 2009 and 2008, all of our interest rate swap agreements
represented fixed-for-variable rate swaps, where we agreed to pay our
counterparties a variable rate of interest on a notional principal amount,
comprised of principal amounts from various series of our long-term fixed rate
senior notes. In exchange, our counterparties agreed to pay us a fixed rate of
interest, thereby allowing us to transform our fixed rate liabilities into
variable rate obligations without the incurrence of additional loan origination
or conversion costs.
We
monitor our mix of fixed rate and variable rate debt obligations in light of
changing market conditions and from time to time may alter that mix by, for
example, refinancing balances outstanding under our variable rate debt with
fixed rate debt (or vice versa) or by entering into interest rate swap
agreements or other interest rate hedging agreements. In general, Kinder Morgan
Energy Partners attempts to maintain an overall target mix of approximately 50%
fixed rate debt and 50% of variable rate debt, and typically Kinder Morgan,
Inc., excluding Kinder Morgan Energy Partners, targets well below that level for
variable rate debt. Currently, approximately 29% of our debt,
excluding that of Kinder Morgan Energy Partners, is variable rate
debt.
89
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
As
of December 31, 2009 and 2008, our cash and investment portfolio included
approximately $13.2 million and $13.2 million, respectively, in fixed-income
debt securities. Because our investment in debt securities was made and will be
maintained in the future to directly offset the interest rate risk on a like
amount of long-term debt, a hypothetical 10% increase in interest rates would
not have a material effect on the fair market value of our portfolio. Also,
since we have the ability to liquidate this portfolio, we do not expect our
operating results or cash flows to be materially affected to any significant
degree by the effect of a sudden change in market interest rates on our
investment portfolio.
See
Notes 8 and 13 of the accompanying Notes to Consolidated Financial Statements
for additional information on activity related to our debt instruments and
interest rate swap agreements.
We
are exposed to foreign currency risk from our investments in businesses owned
and operated outside the United States. To mitigate this risk, we have a
receive-fixed-rate, pay-fixed-rate U.S. dollar to Canadian dollar cross-currency
interest rate swap agreement that has been designated as a hedge of our net
investment in Canadian operations. We measure our swap agreement at
fair value and we report them on our balance sheet as either an asset or
liability under hedge accounting.
A
1% change in the U.S. Dollar to Canadian Dollar exchange rate would impact the
fair value of these swap agreements by approximately $1.1 million.
The
information required in this Item 8 is included in this report as set forth in
the “Index to Financial Statements” on page 109.
None.
As
of December 31, 2009, our management, including our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule
13a-15(b) under the Securities Exchange Act of 1934. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon and as of
the date of the evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that the design and operation of our disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed in the reports we file and submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported as and when
required, and is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control – Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The
effectiveness of our internal control over financial reporting as of December
31, 2009, has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their attestation report, which
appears herein.
90
|
Item
9A.
|
Controls
and Procedures. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Certain businesses Kinder Morgan Energy
Partners acquired during 2009 were excluded from the scope of our management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2009. The excluded businesses consisted of the
following:
|
|
·
|
the
marine vessels Kinder Morgan Energy Partners acquired from Megafleet
Towing Co., Inc. effective April 23,
2009;
|
|
|
·
|
the
natural gas treating business Kinder Morgan Energy Partners acquired from
Crosstex Energy, L.P. and Crosstex Energy, Inc. effective October 1, 2009;
and
|
|
|
·
|
the
40% equity ownership interest in Endeavor Gathering LLC Kinder Morgan
Energy Partners acquired effective November 1,
2009.
|
These
businesses, in the aggregate, constituted 0.33% of our total revenues for 2009
and 1.20% of our
total assets as of December 31, 2009.
There
has been no change in our internal control over financial reporting during the
fourth quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
None.
91
|
Kinder
Morgan, Inc. Form 10-K
|
Set
forth below is certain information concerning our directors and executive
officers. Our directors are elected annually by, and may be removed by, Kinder
Morgan Midco Inc., as our sole common shareholder. Kinder Morgan Midco Inc. is
indirectly wholly owned by Kinder Morgan Holdco LLC. All of our officers serve
at the discretion of our Board of Directors. The ages set forth below are as of
December 31, 2009.
|
Name
|
Age
|
Position
|
|
Richard
D. Kinder
|
65
|
Director,
Chairman and Chief Executive Officer
|
|
C.
Park Shaper
|
41
|
Director
and President
|
|
Steven
J. Kean
|
48
|
Executive
Vice President and Chief Operating Officer
|
|
Kenneth
A. Pontarelli
|
46
|
Director
|
|
Kimberly
A. Dang
|
40
|
Vice
President and Chief Financial Officer
|
|
David
D. Kinder
|
35
|
Vice
President, Corporate Development and Treasurer
|
|
Joseph
Listengart
|
41
|
Vice
President, General Counsel and Secretary
|
|
Thomas
A. Martin
|
48
|
Vice
President, Natural Gas Pipelines
|
|
James
E. Street
|
53
|
Vice
President, Human Resources and
Administration
|
Richard D. Kinder is
Director, Chairman and Chief Executive Officer of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Kinder has served as
Director, Chairman and Chief Executive Officer of Kinder Morgan Management since
its formation in February 2001. He was elected Director, Chairman and Chief
Executive Officer of Kinder Morgan, Inc. in October 1999. He was elected
Director, Chairman and Chief Executive Officer of Kinder Morgan G.P., Inc. in
February 1997. Mr. Kinder was elected President of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in July 2004 and served as
President until May 2005. He has also served as Chief Manager, and as a member
of the Board of Managers, of Kinder Morgan Holdco LLC since May 2007. Mr. Kinder
is the uncle of David Kinder, Vice President, Corporate Development and
Treasurer of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Kinder
Morgan, Inc.
C. Park Shaper is Director
and President of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Kinder
Morgan, Inc. Mr. Shaper was elected President of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in May 2005. He served as
Executive Vice President of Kinder Morgan Management, Kinder Morgan G.P., Inc.
and Kinder Morgan, Inc. from July 2004 until May 2005. Mr. Shaper was elected
Director of Kinder Morgan Management and Kinder Morgan G.P., Inc. in January
2003 and of Kinder Morgan, Inc. in May 2007. He was elected Vice President,
Treasurer and Chief Financial Officer of Kinder Morgan Management upon its
formation in February 2001, and served as its Treasurer until January 2004, and
its Chief Financial Officer until May 2005. He was elected Vice President,
Treasurer and Chief Financial Officer of Kinder Morgan, Inc. in January 2000,
and served as its Treasurer until January 2004, and its Chief Financial Officer
until May 2005. Mr. Shaper was elected Vice President, Treasurer and Chief
Financial Officer of Kinder Morgan G.P., Inc. in January 2000, and served as its
Treasurer until January 2004 and its Chief Financial Officer until May 2005. He
has also served as President, and as a member of the Board of Managers, of
Kinder Morgan Holdco LLC since May 2007. He received a Masters of Business
Administration degree from the J.L. Kellogg Graduate School of Management at
Northwestern University. Mr. Shaper also has a Bachelor of Science degree in
Industrial Engineering and a Bachelor of Arts degree in Quantitative Economics
from Stanford University. Mr. Shaper is also a trust manager of Weingarten
Realty Investors.
Steven J. Kean is Executive
Vice President and Chief Operating Officer of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Kean was elected Executive Vice
President and Chief Operating Officer of Kinder Morgan Management, Kinder Morgan
G.P., Inc. and Kinder Morgan, Inc. in January 2006. He served as
President, Natural Gas Pipelines of Kinder Morgan Management and Kinder Morgan
G.P., Inc. from July 2008 to November 2009. He served as Executive
Vice President, Operations of Kinder Morgan Management, Kinder Morgan G.P., Inc.
and Kinder Morgan, Inc. from May 2005 to January 2006. He served as President,
Texas Intrastate Pipeline Group from June 2002 until May 2005. He served as Vice
President of Strategic Planning for the Kinder Morgan Gas Pipeline Group from
January 2002 until June 2002. He has also served as Chief Operating Officer, and
as a member of the Board of Managers, of Kinder Morgan Holdco LLC since May
2007. Mr. Kean received his Juris Doctor from the University of Iowa in May 1985
and received a Bachelor of Arts degree from Iowa State University in May
1982.
Kenneth A. Pontarelli is a
Director of Kinder Morgan, Inc. Mr. Pontarelli is a
Managing Director of Goldman Sachs & Co. See Item 12, “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” for
details regarding Goldman Sachs’ ownership of Kinder Morgan Holdco LLC units.
Mr. Pontarelli was elected Director of
92
|
Item
10. Directors,
Executive Officers and Corporate Governance
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Kinder
Morgan, Inc. upon the consummation of the Going Private transaction in May 2007.
He has also served as member of the Board of Managers of Kinder Morgan Holdco
LLC since May 2007. He joined Goldman Sachs & Co. in 1997 and was appointed
Managing Director in 2004. Mr. Pontarelli currently serves on the board of
directors of CVR Energy, Inc., CCS Inc., Cobalt International Energy, Inc. and
Energy Future Holdings Corp and Expro International Group Ltd. He received a
B.A. from Syracuse University and an M.B.A. from Harvard Business
School.
Kimberly A. Dang is Vice
President and Chief Financial Officer of Kinder Morgan Management, Kinder Morgan
G.P., Inc. and Kinder Morgan, Inc. Mrs. Dang was elected Chief Financial Officer
of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in
May 2005. She served as Treasurer of Kinder Morgan Management, Kinder Morgan
G.P., Inc. and Kinder Morgan, Inc. from January 2004 to May 2005. She was
elected Vice President, Investor Relations of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Kinder Morgan, Inc. in July 2002 and served in that role
until January 2009. From November 2001 to July 2002, she served as Director,
Investor Relations of Kinder Morgan Management, Kinder Morgan G.P., Inc. and
Kinder Morgan, Inc. She has also served as Chief Financial Officer of Kinder
Morgan Holdco LLC since May 2007. Mrs. Dang received a Masters in Business
Administration degree from the J.L. Kellogg Graduate School of Management at
Northwestern University and a Bachelor of Business Administration degree in
accounting from Texas A&M University.
David D. Kinder is Vice
President, Corporate Development and Treasurer of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Kinder was elected
Treasurer of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Kinder
Morgan, Inc. in May 2005. He was elected Vice President, Corporate Development
of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in
October 2002. He served as manager of corporate development for Kinder Morgan,
Inc. and Kinder Morgan G.P., Inc. from January 2000 to October 2002. He has also
served as Treasurer of Kinder Morgan Holdco LLC since May 2007. Mr. Kinder
graduated cum laude with a Bachelors degree in Finance from Texas Christian
University in 1996. Mr. Kinder is the nephew of Richard D. Kinder.
Joseph Listengart is Vice
President, General Counsel and Secretary of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Listengart was elected Vice
President, General Counsel and Secretary of Kinder Morgan Management upon its
formation in February 2001. He was elected Vice President and General Counsel of
Kinder Morgan G.P., Inc. and Vice President, General Counsel and Secretary of
Kinder Morgan, Inc. in October 1999. Mr. Listengart was elected Secretary of
Kinder Morgan G.P., Inc. in November 1998 and has been an employee of Kinder
Morgan G.P., Inc. since March 1998. He has also served as General Counsel and
Secretary of Kinder Morgan Holdco LLC since May 2007. Mr. Listengart received
his Masters in Business Administration from Boston University in January 1995,
his Juris Doctor, magna cum laude, from Boston University in May 1994, and his
Bachelor of Arts degree in Economics from Stanford University in June
1990.
Thomas A. Martin is Vice
President (President, Natural Gas Pipelines) of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Martin was elected Vice President
(President, Natural Gas Pipelines) of Kinder Morgan Management, Kinder Morgan
G.P., Inc. and Kinder Morgan, Inc. in November 2009. Mr. Martin
served as President, Texas Intrastate Pipeline Group from May 2005 until
November 2009. From April 2003 to May 2005 he
served as Vice President of Storage and Optimization for our Texas Intrastate
Pipeline Group. Mr. Martin received a Bachelor of Business
Administration degree from Texas A&M University.
James E. Street is Vice
President, Human Resources and Administration of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. Mr. Street was elected Vice
President, Human Resources and Administration of Kinder Morgan Management upon
its formation in February 2001. He was elected Vice President, Human Resources
and Administration of Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. in August
1999. Mr. Street received a Masters of Business Administration degree from the
University of Nebraska at Omaha and a Bachelor of Science degree from the
University of Nebraska at Kearney.
Mr.
Kinder’s experience as our Chief Executive Officer since 1997 and of Kinder
Morgan Management since its formation in 2001, combined with his significant
equity ownership of Kinder Morgan Holdco LLC, which indirectly owns all of our
common equity, uniquely qualify him to serve as the Chairman and a Director of
Kinder Morgan Management and us.
Mr.
Pontarelli’s over 10 years of experience as an investment banker and experience
as a director of both public and private companies provide him with an
understanding of strategic planning, management and financial matters applicable
to us.
Mr.
Shaper’s experience as our and Kinder Morgan Management’s President since 2005,
together with his experience as an executive officer of various Kinder Morgan
entities since 2000, provide him intimate knowledge of our operations, finances
and strategy.
93
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Item
10. Directors,
Executive Officers and Corporate Governance
(continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Our
board has no separate compensation committee. Mr. Richard D. Kinder as
Chief Manager of Kinder Morgan Holdco LLC makes compensation decisions with
respect to our executive officers. None of our executive officers served during
2008 on a board of directors of another entity which has employed any of the
members of our board.
Kinder
Morgan Midco Inc. is our sole common shareholder. As a result, Kinder
Morgan Midco Inc. elects all of our directors and our Board of Directors
does not have a nominating and governance committee or a committee that serves a
similar purpose.
Mr. Shaper
and Mr. Pontarelli comprise our audit committee, established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Our board
has determined that C. Park Shaper is an “audit committee financial expert.”
Mr. Shaper is also our President and is therefore not
independent.
We
make available free of charge within the “Investors” section of our Internet
website, at www.kindermorgan.com, our
code of business conduct and ethics (which applies to our senior financial and
accounting officers and our chief executive officer, among others). We intend to
disclose any amendments to our code of business conduct and ethics, and any
waiver from a provision of that code granted to our executive officers or
directors, that otherwise would be required to be disclosed on a Form 8-K,
on our website within four business days following such amendment or waiver. The
information contained on or connected to our Internet website is not
incorporated by reference into this report and should not be considered part of
any report that we file with or furnish to the Securities and Exchange
Commission.
Our
executive officers serve in the same capacities as executive officers of Kinder
Morgan G.P., Inc., the general partner of Kinder Morgan Energy
Partners, and of Kinder Morgan Management, the delegate of Kinder
Morgan G.P., Inc. Certain of our executive officers also serve in the
same capacities as officers of Kinder Morgan Holdco LLC, our privately
owned parent company. Except as identified otherwise, all information in this
Item 11 with respect to compensation of executive officers describes the total
compensation received by those persons in all capacities for services rendered
to us and our affiliates, including Kinder Morgan Energy Partners, Kinder
Morgan G.P., Inc., Kinder Morgan Management and Kinder Morgan
Holdco LLC. In this Item 11, “we,” “our” or “us” refers to Kinder Morgan,
Inc. and, where appropriate, Kinder Morgan Energy Partners, Kinder
Morgan G.P., Inc. and Kinder Morgan Management.
Our
board does not have a separately designated compensation committee.
Mr. Richard D. Kinder as Chief Manager of Kinder Morgan Holdco LLC makes
compensation decisions with respect to our executive officers; however,
increases in the compensation of our officers and other management personnel who
own units of Kinder Morgan Holdco LLC must be further approved by Kinder Morgan
Holdco LLC’s Board of Managers.
The
compensation committee of the Board of Directors of Kinder Morgan Management,
which committee is generally composed of three independent directors, determines
the compensation to be paid by Kinder Morgan Energy Partners to KMGP Services
Company, Inc.’s employees and Kinder Morgan Management’s and Kinder
Morgan G.P., Inc.’s executive officers. For further information
regarding KMGP Services Company, Inc., see “Narrative Description of
Business—Other” within Items 1 and 2 of this report. As described below, Kinder
Morgan Management’s compensation committee is aware of the compensation paid to
such officers by entities such as us and Kinder Morgan Holdco LLC, but
makes its compensation determinations in its sole discretion.
Compensation
Discussion and Analysis
Program
Objectives
We
seek to attract and retain executives who will help us achieve our primary
business strategy objective of growing the value of our portfolio of businesses.
To help accomplish this goal, we have designed an executive compensation program
that rewards individuals with competitive compensation that consists of a mix of
cash, benefit plans and long-term compensation, with a majority of executive
compensation tied to the “at risk” portions of the annual cash
bonus.
The
key objectives of our executive compensation program are to attract, motivate
and retain executives who will advance our overall business strategies and
objectives of growing the value of our portfolio of businesses. We believe that
an effective executive compensation program should link total compensation to
financial performance and to the attainment of short- and long-term strategic,
operational, and financial objectives. We also believe it should provide
competitive total compensation opportunities at a reasonable cost. In designing
our executive compensation program, we have recognized that our executives
94
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
have
a much greater portion of their overall compensation at-risk than do our other
employees; consequently, we have tried to establish the at-risk portions of our
executive total compensation at levels that recognize their much increased level
of responsibility and their ability to influence business results.
Currently,
our executive compensation program is principally comprised of two elements:
(i) base cash salary and (ii) possible annual cash bonus (reflected in
the Summary Compensation Table below as Non-Equity Incentive Plan Compensation).
In addition, we believe that the compensation of our (i) principal executive
officer, (ii) principal financial officer and (iii) three most highly
compensated executive officers (other than our principal executive officer and
principal financial officer) serving at fiscal year end 2009 and named below
(collectively referred to in this Item 11 as our named executive officers),
should be directly and materially tied to the financial performance of Kinder
Morgan Energy Partners and us. Therefore, the majority of our named executive
officers’ compensation is allocated to the “at risk” portion of our compensation
program—the annual cash bonus. Accordingly, for 2009, our executive compensation
was weighted toward the cash bonus, payable on the basis of the achievement of
(i) a free cash flow target (described more fully below) by us and
(ii) a cash distribution per common unit target by Kinder Morgan Energy
Partners.
We
pay our executive officers a base salary not to exceed $300,000. We
believe the base salaries paid to our executive officers continue to be below
the industry average for similarly positioned executives, based upon independent
salary surveys in which we participate, and we periodically compare our
executive compensation components with market information. The purpose of this
comparison is to ensure that our total compensation package operates
effectively, remains both reasonable and competitive with the energy industry,
and is generally comparable to the compensation offered by companies of similar
size and scope as us. We also keep abreast of current trends, developments, and
emerging issues in executive compensation, and if appropriate, will obtain
advice and assistance from outside legal, compensation or other
advisors.
We
have endeavored to design our executive compensation program and practices with
appropriate consideration of all tax, accounting, legal and regulatory
requirements. Section 162(m) of the Internal Revenue Code limits the
deductibility of certain compensation for our executive officers to $1.0 million
of compensation per year; however, if specified conditions are met, certain
compensation may be excluded from consideration of the $1.0 million limit. Since
the bonuses paid to our executive officers are paid under our Annual Incentive
Plan as a result of reaching designated financial targets established by
Mr. Richard D. Kinder and Kinder Morgan Management’s compensation
committee, we expect that all compensation paid to our executives would qualify
for deductibility under federal income tax rules. Though we are advised that
limited partnerships such as Kinder Morgan Energy Partners, and private
companies, such as us, are not subject to section 162(m), we and Kinder
Morgan Energy Partners have chosen to generally operate as if this code section
does apply to us and Kinder Morgan Energy Partners as a measure of appropriate
governance.
For
each of the years ended December 31, 2009, 2008 and 2007, no restricted
stock or options to purchase shares of us, units of Kinder Morgan Energy
Partners or shares of Kinder Morgan Management were granted to any of our named
executive officers; however, as a result of the 2007Going Private transaction,
Kinder Morgan Holdco LLC awarded members of our management Class A-1
and Class B units of Kinder Morgan Holdco LLC. While not awarded by us
or Kinder Morgan Energy Partners, Kinder Morgan Management’s compensation
committee was aware of the units awarded by Kinder Morgan Holdco LLC and took
these awards into account as components of the total compensation received by
our executive officers in 2007.
In
accordance with generally accepted accounting principles, Kinder Morgan
Holdco LLC is required to recognize compensation expense in connection with
the Class A-1 and Class B units over the expected life of such units.
As a subsidiary of Kinder Morgan Holdco LLC, we are, under accounting
rules, allocated a portion of this compensation expense, although none of us or
any of our subsidiaries have any obligation, nor do we expect to pay any amounts
in respect of such units. The Class A-1 and Class B units awarded to
members of our management may be viewed as a replacement of restricted stock as
a component of long-term executive compensation. For more information concerning
the Kinder Morgan Holdco LLC units, see “Elements of Compensation—Other
Compensation—Kinder Morgan Holdco LLC Units” below.
Behaviors
Designed to Reward
Our
executive compensation program is designed to reward individuals for advancing
our business strategies and the interests of our stakeholders, and we prohibit
engaging in any detrimental activities, such as performing services for a
competitor, disclosing confidential information or violating appropriate
business conduct standards. Each executive is held accountable to uphold and
comply with company guidelines, which require the individual to maintain a
discrimination-free workplace, to comply with orders of regulatory bodies, and
to maintain high standards of operating safety and environmental
protection.
Unlike
many companies, we have no executive perquisites, supplemental executive
retirement, non-qualified supplemental defined benefit/contribution, deferred
compensation or split dollar life insurance programs. Additionally, we do not
have employment agreements other than our agreement with our Chairman and Chief
Executive Officer, Richard D. Kinder, special severance agreements or change of
control agreements for our executives. Our executives are eligible for
the
95
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
same
severance policy as our workforce, which caps severance payments at an amount
equal to six months of salary. We have no executive company cars or executive
car allowances nor do we pay for financial planning services. Additionally, we
do not own any corporate aircraft and we do not pay for executives to fly first
class. We believe that we are currently below competitive levels for comparable
companies in this area of our overall compensation package; however, we have no
current plans to change our policy of not offering such executive benefits,
perquisite programs or special executive severance arrangements.
At
his request, Mr. Richard D. Kinder, our Chairman and Chief Executive
Officer, receives $1 of base salary per year and no other compensation from us.
Additionally, Mr. Kinder has requested that he receive no annual bonus or
other compensation from us (other than the unit awards by Kinder Morgan Holdco
LLC he received in 2007). Mr. Kinder does not have any deferred
compensation, supplemental retirement or any other special benefit, compensation
or perquisite arrangement with us. Each year Mr. Kinder reimburses us for
his portion of health care premiums and parking expenses. Mr. Kinder was
awarded Class B units by and in Kinder Morgan Holdco LLC in connection
with the Going Private transaction, and while we are, under accounting rules,
allocated compensation expense attributable to such Class B units, we have
no obligation, nor do we expect, to pay any amounts in connection with the
Class B units.
Elements
of Compensation
As
outlined above, our executive compensation program currently is principally
composed of two elements: (i) a base cash salary and (ii) a possible
annual cash bonus. Mr. Richard D. Kinder and Kinder Morgan Management’s
compensation committee review and approve annually the financial goals and
objectives of both us and Kinder Morgan Energy Partners that are relevant to the
compensation of our named executive officers.
Information
is solicited from relevant members of senior management regarding the
performance of our named executive officers, and determinations and
recommendations are made at the regularly scheduled first quarter board and
Kinder Morgan Management’s compensation committee meetings. If any of our
executive officers is also an executive officer of Kinder
Morgan G.P., Inc. or Kinder Morgan Management, the compensation
determination or recommendation (i) may be with respect to the aggregate
compensation to be received by such officer from us, Kinder Morgan Management,
and Kinder Morgan G.P., Inc. that is to be allocated among them, or
alternatively (ii) may be with respect to the compensation to be received
by such executive officers from us, Kinder Morgan Management or Kinder
Morgan G.P., Inc., as the case may be, in which case such compensation
will be allocated among us, on the one hand, and Kinder Morgan Management, and
Kinder Morgan G.P., on the other.
Base
Salary
Base
salary is paid in cash. Until October 2008, all of our named executive officers,
with the exception of our Chairman and Chief Executive Officer who receives $1
of base salary per year as described above, were paid a base salary of $200,000
per year. The cap for our executive officers’ base salaries has now been raised
to an annual amount not to exceed $300,000. Generally, we believe that our
executive officers’ base salaries are below base salaries for executives in
similar positions and with similar responsibilities at companies of comparable
size and scope, based upon independent salary surveys in which we
participate.
Possible
Annual Cash Bonus (Non-Equity Cash Incentive)
Our
possible annual cash bonuses are provided for under our Annual Incentive Plan,
which became effective January 18, 2005. The Annual Incentive Plan ends
after the 2009 bonus year; however, for the 2010 bonus year, our and Kinder
Morgan Management’s Board of Directors have approved a new Annual Incentive Plan
that mirrors the current plan. The overall purpose of our Annual Incentive Plan
is to increase our executive officers’ and our employees’ personal stake in the
continued success of Kinder Morgan Energy Partners and us by providing to them
additional incentives through the possible payment of annual cash bonuses. Under
the plan, annual cash bonuses are budgeted for at the beginning of each year and
may be paid to our executive officers and other employees depending on whether
we and our subsidiaries (including Kinder Morgan Energy Partners) meet certain
performance objectives. Assuming the performance objectives are met, the
budgeted pool of bonus dollars is further assessed and potentially decreased or
increased based on our and our subsidiaries’ (including Kinder Morgan Energy
Partners’) overall performance in a variety of areas, including safety and
environmental goals and regulatory compliance.
Once
the aggregate pool of bonus dollars is determined, further assessment is done at
the business segment level. Each business segment’s financial performance as
well as its safety and environmental goals and regulatory compliance are
assessed and factored, positively or negatively, into the amount of bonus
dollars allocated to that business segment. The business unit’s safety and
environmental goals and regulatory compliance are assessed against its
performance in these areas in previous years and industry benchmarks. These
assessments as well as individual performance factor into bonus awards at the
business segment level.
96
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Whether
we and our subsidiaries (including Kinder Morgan Energy Partners) have met our
overall performance objectives as well as how we have performed with respect to
a variety of areas such as safety and environmental goals and regulatory
compliance, negatively or positively, impacts the bonuses of our named executive
officers. Individual performance also impacts their bonuses. Our named executive
officers have different areas of responsibility that require different skill
sets. Consequently, many of the skills and aspects of performance taken into
account in determining the bonus awards for the respective named executive
officers differ based on their areas of responsibility. However, some skills,
such as working within a budget, are applicable for all of the executive
officers. While no formula is used in assessing individual performance, the
process of assessing the performance of each of the named executive officers is
consistent, with each such officer being assessed relative to the officer’s
performance of his or her job in preceding years as well as with respect to
specific matters assigned to the officer over the course of the year. Individual
performance, as described above, as well as safety and environmental goals and
regulatory compliance were taken into account with respect to the 2009
awards.
All
of our employees and the employees of our subsidiaries, including KMGP Services
Company, Inc., are eligible to participate in the plan, except employees
who are included in a unit of employees covered by a collective bargaining
agreement unless such agreement expressly provides for eligibility under the
plan. However, only eligible employees who are selected by Kinder Morgan
Management’s compensation committee will actually participate in the plan and
receive bonuses.
The
plan consists of two components: the executive plan component and the
non-executive plan component. Our Chairman and Chief Executive Officer and all
employees who report directly to the Chairman are eligible for the executive
plan component; however, as stated elsewhere in this “Compensation Discussion
and Analysis”, Mr. Richard D. Kinder, our Chairman and Chief Executive
Officer, has elected to not participate under the plan. As of December 31,
2009, excluding Mr. Richard D. Kinder, eleven of our current officers were
eligible to participate in the executive plan component. All other U.S. and
Canadian eligible employees were eligible for the non-executive plan
component.
Following
recommendations and determinations, Kinder Morgan Management’s compensation
committee establishes which of our employees will be eligible to participate
under the executive plan component of the plan. At or before the start of each
calendar year (or later, to the extent allowed under Internal Revenue Code
regulations), performance objectives for that year are identified. The
performance objectives are based on one or more of the criteria set forth in the
plan. A bonus opportunity is established for each executive officer, which is
the bonus the executive officer could earn if the performance objectives are
fully satisfied. A minimum acceptable level of achievement of each performance
objective may be set, below which no bonus is payable with respect to that
objective. Additional levels may be set above the minimum (which may also be
above the targeted performance objective), with a formula to determine the
percentage of the bonus opportunity to be earned at each level of achievement
above the minimum. Performance at a level above the targeted performance
objective may entitle the executive officer to earn a bonus in excess of 100% of
the bonus opportunity. However, the maximum payout to any individual
under the plan for any year is $2.0 million, and Kinder Morgan Management’s
compensation committee has the discretion to reduce the bonus amounts payable by
us in any performance period.
Performance
objectives may be based on one or more of the following criteria:
|
|
·
|
our
EBITDA less capital spending, or the EBITDA less capital spending of one
of our subsidiaries or business
units;
|
|
|
·
|
our
free cash flow or the free cash flow of one of our subsidiaries or
business units;
|
|
|
·
|
our
net income or the net income of one of our subsidiaries or business
units;
|
|
|
·
|
our
revenues or the revenues of one of our subsidiaries or business
units;
|
|
|
·
|
our
unit revenues minus unit variable costs or the unit revenues minus unit
variable costs of one of our subsidiaries or business
units;
|
|
|
·
|
our
return on capital, return on equity, return on assets, or return on
invested capital, or the return on capital, return on equity, return on
assets, or return on invested capital of one of our subsidiaries or
business units;
|
|
|
·
|
our
free cash flow, cash flow return on assets or cash flows from operating
activities, or the cash flow return on assets or cash flows from operating
activities of one of our subsidiaries or business
units;
|
|
|
·
|
our
capital expenditures or the capital expenditures of one of our
subsidiaries or business units;
|
|
|
·
|
our
operations and maintenance expense or general and administrative expense,
or the operations and maintenance expense or general and administrative
expense of one of our subsidiaries or business
units;
|
|
|
·
|
our
debt-equity ratios and key profitability ratios, or the debt-equity ratios
and key profitability ratios of one of our subsidiaries or business units;
or
|
|
|
·
|
Kinder
Morgan Energy Partners’ distribution per
unit
|
Two
financial performance objectives were set for 2009 under both the executive plan
component and the non-executive plan component. The 2009 financial performance
objectives were (i) $4.20 in cash distributions per common unit by
Kinder
97
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Morgan
Energy Partners, (ii) $646 million free cash flow by us, which were
distributions received from Kinder Morgan Energy Partners (including value
received in the form of Kinder Morgan Management units) and NGPL less cash
taxes, cash interest and general and administrative expenses and (iii) improving
our environmental, health, and safety performance objectives by beating industry
average incident rates and improving our incident rates compared to our previous
three year averages. Kinder Morgan Energy Partners’ targets were the same as its
previously disclosed 2009 budget expectations. At the end of 2009 the extent to
which the financial performance objectives had been attained and the extent to
which the bonus opportunity had been earned under the formula previously
established by Kinder Morgan Management’s compensation committee was
determined.
The
2009 bonuses for our executive officers were overwhelmingly based on whether the
established financial performance objectives were met. Other factors, such as
individual over performance or under performance, were considered. With respect
to using these other factors in assessing performance, Kinder Morgan
Management’s compensation committee did not find it practicable to, and did not,
use a “score card”, or quantify or assign relative weight to the specific
criteria considered. The amount of a downward or upward adjustment, subject to
the maximum bonus opportunity that was established at the beginning of the year,
was not subject to a formula. Specific aspects of an individual’s performance
were not identified in advance. Rather, the adjustment was based on Kinder
Morgan Management’s compensation committee’s judgment, giving consideration to
the totality of the record presented, including the individual’s performance,
and the magnitude of any positive or negative factors.
The
table below sets forth the bonus opportunities that could have been payable by
us and Kinder Morgan Energy Partners collectively to our executive officers for
100% achievement of the performance objectives established for 2009. The amount
of the portion of the bonus actually paid by us to any executive officer under
the plan may be reduced from the amount of any bonus opportunity open to such
executive officer. Because payments under the plan for our executive officers
are determined by comparing actual performance to the performance objectives
established each year for eligible executive officers chosen to participate for
that year, it is not possible to accurately predict any amounts that will
actually be paid under the executive plan portion of the plan over the life of
the plan. Kinder Morgan Management’s compensation committee set bonus
opportunities under the plan for 2009 for the executive officers at dollar
amounts in excess of that which were expected to actually be paid under the
plan. The actual payout amounts under the Non-Equity Incentive Plan Awards made
for 2009 (paid in 2010) are set forth in the Summary Compensation Table in the
column entitled “Non-Equity Incentive Plan Compensation.”
Kinder
Morgan, Inc. Annual Incentive Plan
Bonus
Opportunities for 2009
|
Name
and Principal Position
|
Dollar
Value
|
|||
|
Richard
D. Kinder, Chairman and Chief Executive Officer
|
$
|
-
|
(a)
|
|
|
Kimberly
A. Dang, Vice President and Chief Financial Officer
|
1,000,000
|
(b)
|
||
|
Steven
J. Kean, Executive Vice President and Chief Operating
Officer
|
1,500,000
|
(c)
|
||
|
Joseph
Listengart, Vice President, General Counsel and Secretary
|
1,000,000
|
(b)
|
||
|
C.
Park Shaper, Director and President
|
1,500,000
|
(c)
|
||
____________
|
(a)
|
Declined
to participate.
|
|
(b)
|
Under
the plan, for 2009, if neither of the targets was met, no bonus
opportunities would have been provided; if one of the targets was met,
$500,000 in bonus opportunities would have been available; if both of the
targets had been exceeded by 10%, $1,500,000 in bonus opportunities would
have been available. The Kinder Morgan Management compensation
committee may, in its sole discretion, reduce the award payable by us to
any participant for any reason.
|
|
(c)
|
Under
the plan, for 2009, if neither of the targets was met, no bonus
opportunities would have been provided; if one of the targets was met,
$750,000 in bonus opportunities would have been available; if both of the
targets had been exceeded by 10%, $2,000,000 in bonus opportunities would
have been available. The Kinder Morgan Management compensation committee
may, in its sole discretion, reduce the award payable by us to any
participant for any reason.
|
We
may amend the plan from time to time without shareholder approval except as
required to satisfy the Internal Revenue Code or any applicable securities
exchange rules. The plan ended with the 2009 bonus, which was paid in February
2010.
Other
Compensation
Kinder Morgan, Inc. Savings
Plan. The Kinder Morgan, Inc. Savings Plan is a defined contribution
401(k) plan. The plan permits all of our full-time employees and those of KMGP
Services Company, Inc., including the named executive officers, to
contribute between 1% and 50% of base compensation, on a pre-tax basis, into
participant accounts. For more information on this plan, see Note 9 “Employee
Benefits—Kinder Morgan Savings Plan” to the accompanying Notes to Consolidated
Financial Statements. As a result of a cost savings effort in 2009, all officers
with the position of vice president or higher, including our named executive
officers, were suspended from receiving any company contributions commencing
February 15, 2009. Company contributions for these employees were
reinstated effective February 1, 2010.
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Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Kinder Morgan, Inc. Cash Balance
Retirement Plan. Employees of ours and KMGP Services Company, Inc.,
including our named executive officers, are also eligible to participate in a
Cash Balance Retirement Plan. For more information on this plan, see Note 9
“Employee Benefits—Cash Balance Retirement Plan” to the accompanying Notes to
Consolidated Financial Statements. As a result of a cost savings effort in 2009,
all company contributions to the plan were suspended from April 12, 2009 through
December 31, 2009. Company contributions were reinstated effective
January 1, 2010.
The
following table sets forth the estimated actuarial present value of each named
executive officer’s accumulated pension benefit as of December 31, 2009,
under the provisions of the Cash Balance Retirement Plan. With respect to our
named executive officers, the benefits were computed using the same assumptions
used for financial statement purposes, assuming current remuneration levels
without any salary projection, and assuming participation until normal
retirement at age sixty-five. These benefits are subject to federal and state
income taxes, where applicable, but are not subject to deduction for social
security or other offset amounts.
|
Pension
Benefits
|
||||||||||||||
|
Name
|
Plan
Name
|
Current
Credited
Yrs
of
Service
|
Present
Value of
Accumulated
Benefit(a)
|
Contributions
During
2009(b)
|
||||||||||
|
Richard
D. Kinder
|
Cash
Balance
|
9
|
$
|
-
|
$
|
-
|
||||||||
|
Kimberly
A. Dang
|
Cash
Balance
|
8
|
43,936
|
4,243
|
||||||||||
|
Steven
J. Kean
|
Cash
Balance
|
8
|
55,162
|
4,683
|
||||||||||
|
Joseph
Listengart
|
Cash
Balance
|
9
|
65,349
|
5,082
|
||||||||||
|
C.
Park Shaper
|
Cash
Balance
|
9
|
65,349
|
5,082
|
||||||||||
____________
|
(a)
|
The
present values in the Pension Benefits table are based on certain
assumptions, including a 6.0% discount rate, 5.0% cash balance interest
crediting rate, and a lump sum calculated using the IRS 2010 Mortality
Tables. We assumed benefits would commence at normal retirement age, which
is 65. No death or turnover was assumed prior to retirement
date.
|
|
(b)
|
Contributions
were made from January 1, 2009 through April 12, 2009. The plan
suspended contributions for the remainder of 2009; however, individual
accounts were credited with interest for the entire twelve month
period.
|
Kinder Morgan Holdco LLC Units.
In connection with the Going Private transaction, some of our directors
and executive officers received Class A-1 and Class B units of Kinder Morgan
Holdco LLC, our parent company. Mr. Pontarelli did not receive Kinder Morgan
Holdco LLC units. Generally, Kinder Morgan Holdco LLC has three classes of
units—Class A units, Class A-1 units and Class B units.
The
Class B units were awarded by Kinder Morgan Holdco LLC to members of our
management in consideration of their services to or for the benefit of Kinder
Morgan Holdco LLC. The Class B units represent interests in the profits of
Kinder Morgan Holdco LLC following the return of capital for the holders of
Class A units and the achievement of predetermined performance targets over
time. The Class B units will performance vest in increments up to a maximum of
20% of all profits distributions that would otherwise be payable with respect to
the Class A units and Class A-1 units, based on the achievement of predetermined
performance targets. The Class B units are subject to time based vesting, and
with respect to any holder thereof, will vest 33 1/3% on each of the third,
fourth and fifth year anniversary of the issuance of such Class B units to such
holder. The amended and restated limited liability company agreement of Kinder
Morgan Holdco LLC also includes provisions with respect to forfeiture of Class B
units upon termination for cause, Kinder Morgan Holdco LLC’s call rights upon
termination and other related provisions relating to an employee’s tenure. The
allocation of the Class B units among our management was determined prior to
closing by Mr. Richard D. Kinder, and approved by other, non-management
investors in Kinder Morgan Holdco LLC.
The
Class A-1 units were awarded by Kinder Morgan Holdco LLC to members of our
management (other than Mr. Richard D. Kinder) who reinvested their equity
interests in Kinder Morgan Holdco LLC in connection with the Going Private
transaction in consideration of their services to or for the benefit of Kinder
Morgan Holdco LLC. Class A-1 units entitle a holder thereof to receive
distributions from Kinder Morgan Holdco LLC in an amount equal to distributions
paid on Class A units (other than distributions on the Class A units that
represent a return of the capital contributed in respect of such Class A units),
but only after the Class A units have received aggregate distributions in an
amount equal to the amount of capital contributed in respect of the Class A
units.
Other Potential Post-Employment
Benefits. On October 7, 1999, Mr. Richard D. Kinder entered
into an employment agreement with us pursuant to which he agreed to serve as our
Chairman and Chief Executive Officer. His employment agreement provides for a
term of three years and one year extensions on each anniversary of
October 7th.
Mr. Kinder, at his initiative, accepted an annual salary of $1 to
demonstrate his belief in our and Kinder Morgan Energy Partners’ long term
viability. Mr. Kinder continues to accept an annual salary of $1, and he
receives no other compensation from us. Mr. Kinder was awarded Class B
units by and in Kinder Morgan Holdco LLC in connection with the Going
Private transaction, and while we, as a subsidiary of Kinder Morgan
Holdco LLC, are allocated compensation expense attributable to such
Class B units, we have no obligation, nor do we expect, to pay any amounts
in connection with the Class B units.
99
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
We
believe that Mr. Kinder’s employment agreement contains provisions that are
beneficial to us and our subsidiaries and accordingly, Mr. Kinder’s
employment agreement is extended annually at the request of our and Kinder
Morgan Management’s Board of Directors. For example, with limited exceptions,
Mr. Kinder is prevented from competing in any manner with us or any of our
subsidiaries, while he is employed by us and for 12 months following the
termination of his employment with us. The agreement contains provisions that
address termination with and without cause, termination as a result of change in
duties or disability, and death. At his current compensation level, the maximum
amount that would be paid to Mr. Kinder or his estate in the event of his
termination is three times $750,000, or $2.25 million. This payment would
be made if Mr. Kinder were terminated by us without cause or if
Mr. Kinder terminated his employment with us as a result of a change in
duties (as defined in the employment agreement). There are no employment
agreements or change-in-control arrangements with any of our other executive
officers.
Summary
Compensation Table
The
following table shows compensation paid or otherwise awarded to (i) our
principal executive officer, (ii) our principal financial officer and
(iii) our three most highly compensated executive officers (other than our
principal executive officer and principal financial officer) serving at fiscal
year end 2009 (collectively referred to as our “named executive officers”) for
services rendered to us, our subsidiaries or our affiliates, including Kinder
Morgan Energy Partners and Kinder Morgan Holdco LLC (collectively referred
to as the “Kinder Morgan affiliated entities”) during fiscal years 2009, 2008
and 2007.
The
amounts in the columns below, except the column entitled “Unit Awards by Kinder
Morgan Holdco LLC”, represent the total compensation paid or awarded to our
named executive officers by all the Kinder Morgan affiliated entities, and as a
result the amounts are in excess of the compensation expense allocated to,
recognized and paid by us for services rendered to us. The amounts in the column
entitled “Unit Awards by Kinder Morgan Holdco LLC” consist of the portion
of the grant date fair value of the Kinder Morgan Holdco LLC Class A-1
and Class B units received by our named executive officers, which was
allocated to us for financial reporting purposes. As a subsidiary of Kinder
Morgan Holdco LLC, we are allocated a portion of the compensation expense
recognized by Kinder Morgan Holdco LLC with respect to such units, although
none of us or any of our subsidiaries have any obligation, nor do we expect, to
pay any amounts in respect of such units and none of our named executive
officers has received any payments in respect of such units.
|
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||||||||||||||||||
|
Name and
Principal Position
|
Year
|
Salary
|
Bonus
|
Non-Equity
Incentive Plan
Compensation
|
Change
in Pension
Value
|
All Other
Compensation
|
Unit Awards
by Kinder
Morgan
Holdco LLC
|
Total
|
||||||||||||||||||||||||
|
Richard
D. Kinder
|
2009 | $ | 1 | $ | - | $ | - | - | $ | - | $ | - | $ | 1 | ||||||||||||||||||
|
Director,
Chairman and
|
2008 | 1 | - | - | - | - | - | 1 | ||||||||||||||||||||||||
|
Chief
Executive Officer
|
2007 | 1 | - | - | - | - | 9,200,000 | 9,200,001 | ||||||||||||||||||||||||
|
Kimberly
A. Dang
|
2009 | 257,692 | - | 550,000 | 4,243 | 3,115 | - | 815,050 | ||||||||||||||||||||||||
|
Vice
President and
|
2008 | 223,077 | - | 440,000 | 8,285 | 11,863 | - | 683,225 | ||||||||||||||||||||||||
|
Chief
Financial Officer
|
2007 | 200,000 | - | 400,000 | 7,294 | 32,253 | 672,409 | 1,311,956 | ||||||||||||||||||||||||
|
Steven
J. Kean
|
2009 | 257,692 | - | 1,250,000 | 4,683 | 4,251 | - | 1,516,626 | ||||||||||||||||||||||||
|
Executive
Vice President
|
2008 | 223,077 | - | 1,150,000 | 8,755 | 13,007 | - | 1,394,839 | ||||||||||||||||||||||||
|
and
Chief Operating Officer
|
2007 | 200,000 | - | 1,100,000 | 7,767 | 147,130 | 2,708,095 | 4,162,992 | ||||||||||||||||||||||||
|
Joseph
Listengart
|
2009 | 257,692 | - | 925,000 | 5,082 | 2,866 | - | 1,190,640 | ||||||||||||||||||||||||
|
Vice
President, General
|
2008 | 223,077 | - | 900,000 | 9,188 | 11,629 | - | 1,143,894 | ||||||||||||||||||||||||
|
Counsel
and Secretary
|
2007 | 200,000 | - | 1,000,000 | 8,194 | 102,253 | 1,706,963 | 3,017,410 | ||||||||||||||||||||||||
|
C.
Park Shaper
|
2009 | 257,692 | - | 1,300,000 | 5,082 | 3,971 | - | 1,566,745 | ||||||||||||||||||||||||
|
Director
and President
|
2008 | 223,077 | - | 1,200,000 | 9,188 | 12,769 | - | 1,445,034 | ||||||||||||||||||||||||
| 2007 | 200,000 | - | 1,200,000 | 8,194 | 155,953 | 4,296,125 | 5,860,272 | |||||||||||||||||||||||||
____________
|
(a)
|
Represents
amounts paid according to the provisions of the Kinder Morgan, Inc. Annual
Incentive Plan. Amounts were earned in the fiscal year
indicated but were paid in the next fiscal year.
|
|
(b)
|
Represents
the 2009, 2008 and 2007, as applicable, change in the actuarial present
value of accumulated defined pension benefit (including unvested benefits)
according to the provisions of Kinder Morgan, Inc.’s Cash Balance
Retirement Plan.
|
|
(c)
|
Amounts
include value of contributions to the Kinder Morgan, Inc. Savings Plan (a
401(k) plan), value of group-term life insurance exceeding $50,000,
taxable parking subsidy and, for 2007 only, dividends paid on unvested
restricted stock awards. Amounts in 2009, 2008 and 2007
representing the value of contributions to the Kinder Morgan, Inc. Savings
Plan are $2,308, $11,154 and $10,000, respectively. For 2009,
Mrs. Dang also has $226 in imputed income from company provided cell
phone. Amounts in 2007 representing the value of dividends paid
on unvested restricted stock awards are as follows: for Mrs. Dang $21,875;
for Mr. Kean $136,500; for Mr. Listengart $91,875; and for Mr. Shaper
$144,375.
|
|
(d)
|
Such
amounts represent the grant date fair value of the Class A-1 and Class B
units of Kinder Morgan Holdco LLC received by the named executive
officers. None of our named executive officers has received any
payments in connection with such units, and none of us or our subsidiaries
are obligated, nor do we expect, to pay any amounts in respect of such
units. See “Elements of Compensation—Other Compensation—Kinder
Morgan Holdco LLC Units” above for further discussion of these
units.
|
100
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
rants
of Plan-Based Awards
The
following supplemental compensation table shows compensation details on the
value of all non-guaranteed and non-discretionary incentive awards granted
during 2009 to our named executive officers. The table includes awards made
during or for 2009. The information in the table under the caption “Estimated
Future Payouts Under Non-Equity Incentive Plan Awards” represents the threshold,
target and maximum amounts payable under the Kinder Morgan, Inc. Annual
Incentive Plan for performance in 2009. Amounts actually paid under that plan
for 2009 are set forth in the Summary Compensation Table (above) under the
caption “Non-Equity Incentive Plan Compensation.” There will not be any
additional payouts under the Annual Incentive Plan for 2009.
|
Estimated
Future Payouts Under
Non-Equity Incentive Plan
Awards(a)
|
||||||||||||
|
Name
|
Threshold
|
Target
|
Maximum
|
|||||||||
|
Richard
D. Kinder
|
$ | - | $ | - | $ | - | ||||||
|
Kimberly
A. Dang
|
500,000 | 1,000,000 | 1,500,000 | |||||||||
|
Steven
J. Kean
|
750,000 | 1,500,000 | 2,000,000 | |||||||||
|
Joseph
Listengart
|
500,000 | 1,000,000 | 1,500,000 | |||||||||
|
C.
Park Shaper
|
750,000 | 1,500,000 | 2,000,000 | |||||||||
____________
|
(a)
|
See
“Elements of Compensation—Possible Annual Cash Bonus (Non-Equity Cash
Incentive)” above for further discussion of these
awards.
|
Outstanding
Equity Awards at Fiscal Year-End
The
only unvested equity awards outstanding at the end of fiscal 2009 were the
Class B units of Kinder Morgan Holdco LLC awarded in 2007 by Kinder
Morgan Holdco LLC to the named executive officers. As a subsidiary of
Kinder Morgan Holdco LLC, we are allocated a portion of the compensation
expense recognized by Kinder Morgan Holdco LLC with respect to such units,
although none of us or any of our subsidiaries have any obligation, nor do we
expect to pay any amounts in respect of such units.
|
Stock
Awards
|
||||||
|
Name
|
Type
of units
|
Number
of units
that
have not vested
|
Market
value of
units
of stock that
have
not vested(a)
|
|||
|
Richard
D. Kinder
|
Class
B units
|
791,405,452
|
N/A
|
|||
|
Kimberly
A. Dang
|
Class
B units
|
49,462,841
|
N/A
|
|||
|
Steven
J. Kean
|
Class
B units
|
158,281,090
|
N/A
|
|||
|
Joseph
Listengart
|
Class
B units
|
79,140,545
|
N/A
|
|||
|
C.
Park Shaper
|
Class
B units
|
217,636,499
|
N/A
|
|||
|
(a)
|
Because
the Class B units are equity interests of Kinder Morgan
Holdco LLC, a private limited liability company, the market value of
such interests is not readily determinable. None of our named executive
officers has received any payments in connection with such units, and none
of us or our subsidiaries are obligated, nor do we expect, to pay any
amounts in respect of such units. See “Elements of Compensation—Other
Compensation—Kinder Morgan Holdco LLC Units” above for further discussion
of these units.
|
Risks
Associated with Compensation Practices
KMGP
Services Company, Inc., Kinder Morgan, Inc. and Kinder Morgan Canada Inc. employ
all persons necessary for the operation of our business, and in our opinion, our
compensation policies and practices for all persons necessary for the operation
of our business do not create risks that are reasonably likely to have a
material adverse effect on our business, financial position, results of
operations or cash flows.
Director
Compensation
Compensation Committee Interlocks
and Insider Participation. Our board has no separate compensation
committee. Mr. Richard D. Kinder as Chief Manager of Kinder Morgan Holdco
LLC makes compensation decisions with respect to our executive officers.
Mr. Kinder has not served during 2008 on a board of directors of another
entity which has employed any of the members of our current board.
Directors Fees. None of our
directors receive compensation in their capacity as directors. All directors are
reimbursed for reasonable travel and other expenses incurred in attending all
board and/or committee meetings.
101
|
Item
11. Executive
Compensation (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
Compensation
Committee Report
Because
our Board of Directors does not have a separate compensation committee or other
committee performing equivalent functions, our Board of Directors has reviewed
and discussed the above Compensation Discussion and Analysis for fiscal year
2009 with management. Based on this review and discussion, the Board has
concluded that this Compensation Discussion and Analysis should be included in
this annual report on Form 10-K for the fiscal year 2009.
Board of
Directors:
Richard
D. Kinder
Kenneth
A. Pontarelli
C.
Park Shaper
102
Kinder
Morgan, Inc. Form 10-K
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
Security
Ownership
Kinder
Morgan Midco Inc., an indirect wholly owned subsidiary of Kinder Morgan
Holdco LLC, owns 100% of our outstanding common stock. The following tables
set forth information as of January 31, 2010, regarding the
beneficial ownership of Kinder Morgan Energy Partners’ common units, Kinder
Morgan Management’s shares and Kinder Morgan Holdco LLC’s units by all of our
directors, each of the named executive officers identified in Item 11 “Executive
Compensation” and by all of our directors and executive officers as a
group. Unless otherwise noted, the address of each person below is
c/o Kinder Morgan, Inc., 500 Dallas Street, Suite 1000, Houston, Texas
77002.
Amount and Nature of Beneficial
Ownership(a)
|
Kinder
Morgan Energy
Partners
Common Units
|
Kinder
Morgan
Management
Shares
|
|||||||||||||||
|
Name
|
Number
of Units
(b)
|
Percent
of
Class
|
Number
of
Shares
(c)
|
Percent
of
Class
|
||||||||||||
|
Richard
D. Kinder (d)
|
315,979 | * | 144,464 | * | ||||||||||||
|
C.
Park Shaper
|
4,000 | * | 30,652 | * | ||||||||||||
|
Kenneth
A. Pontarelli
|
1,000 | * | - | - | ||||||||||||
|
Steven
J. Kean
|
1,780 | * | 2,118 | * | ||||||||||||
|
Joseph
Listengart
|
5,498 | * | 1,414 | * | ||||||||||||
|
Kimberly
A. Dang
|
121 | * | 519 | * | ||||||||||||
|
Directors
and Executive Officers as a group (9 persons) (e)
|
340,564 | * | 202,985 | * | ||||||||||||
____________
*Less
than 1%.
|
(a)
|
Except
as noted otherwise, each beneficial owner has sole voting power and sole
investment power over the units and shares listed.
|
|
(b)
|
As
of January 31, 2010, Kinder Morgan Energy Partners had 207,310,563 common
units issued and outstanding.
|
|
(c)
|
As
of January 31, 2010, Kinder Morgan Management had 85,538,263 issued and
outstanding shares representing limited liability company interests,
including two voting shares owned by Kinder
Morgan G.P., Inc.
|
|
(d)
|
Includes
7,879 common units and 1,000 Kinder Morgan management shares owned by
Mr. Kinder’s spouse. Mr. Kinder disclaims any and all beneficial
or pecuniary interest in these common units and shares.
|
|
(e)
|
Includes
2,450 restricted common units. Also includes 7,879 common units
and 1,000 Kinder Morgan Management shares owned by an executive’s spouse
and 786 Kinder Morgan Management shares held by one of our executives for
his children. The respective executives disclaim any beneficial
ownership in 7,879 common units and 1,786 Kinder Morgan Management
shares.
|
Amount and Nature of Beneficial
Ownership (a)
|
Name
|
Kinder
Morgan
Holdco
LLC
Class
A Units
|
%
of Class
A Units
(b)
|
Kinder
Morgan
Holdco
LLC
Class
A-1
Units
|
%
of Class
A-1 Units
(c)
|
Kinder
Morgan
Holdco
LLC
Class
B Units
|
%
of Class
B Units
(d)
|
|||||||||
|
Richard
D. Kinder (e)
|
2,424,000,000
|
30.6
|
%
|
-
|
-
|
%
|
791,405,452
|
40.0
|
%
|
||||||
|
C.
Park Shaper (f)
|
13,598,785
|
*
|
7,799,775
|
28.3
|
%
|
217,636,499
|
11.0
|
%
|
|||||||
|
Steven
J. Kean (g)
|
6,684,149
|
*
|
3,833,788
|
13.9
|
%
|
158,281,090
|
8.0
|
%
|
|||||||
|
Kimberly
A. Dang (h)
|
750,032
|
*
|
430,191
|
1.6
|
%
|
49,462,841
|
2.5
|
%
|
|||||||
|
Joseph
Listengart (i)
|
6,059,449
|
*
|
3,475,483
|
12.6
|
%
|
79,140,545
|
4.0
|
%
|
|||||||
|
Kenneth
A. Pontarelli (j)
|
1,997,795,088
|
25.2
|
%
|
-
|
-
|
-
|
-
|
||||||||
|
Directors
and Executive Officers as a group (9 persons)
|
4,454,118,070
|
56.3
|
%
|
18,539,303
|
67.2
|
%
|
1,420,572,786
|
71.8
|
%
|
||||||
__________
*Less
than 1%.
|
(a)
|
Except
as noted otherwise, each beneficial owner has sole voting power and sole
investment power over the units and shares listed.
|
|
(b)
|
As
of January 31, 2010, Kinder Morgan Holdco LLC had 7,914,367,913
Class A Units issued and outstanding.
|
|
(c)
|
As
of January 31, 2010, Kinder Morgan Holdco LLC had 27,225,694
Class A-1 Units issued and outstanding and 345,042 phantom
Class A-1 Units issued and outstanding. The phantom Class A-1
Units were issued to Canadian management employees.
|
|
(d)
|
As
of January 31, 2010, Kinder Morgan Holdco LLC had 1,933,997,073
Class B Units issued and outstanding and 44,516,557 phantom
Class B Units issued and outstanding. The phantom Class B Units
were issued to Canadian management employees.
|
|
(e)
|
Includes
522,372 Class A units owned by Mr. Kinder’s wife.
Mr. Kinder disclaims any and all beneficial or pecuniary interest in
the Class A units held by his wife. Also includes 263,801,817
Class B Units that Mr. Kinder transferred to a limited
partnership. Mr. Kinder may be deemed to be the beneficial owner of
these transferred Class B Units, because Mr. Kinder controls the
voting and disposition power of these Class B Units, but he disclaims
ninety-nine percent of any beneficial and pecuniary interest in them.
Mr. Kinder contributed 23,994,827 shares of Kinder Morgan, Inc.
common stock and his wife contributed 5,173 shares of Kinder Morgan, Inc.
common stock to Kinder Morgan Holdco LLC that were valued for
purposes of Kinder Morgan Holdco LLC’s limited liability agreement at
$2,423,477,628 and $522,372, respectively, in exchange for their
respective Class A units. The Class B
units
|
103
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
received
by Mr. Kinder had a grant date fair value as calculated in accordance
with the accounting provisions governing share-based compensation of
$9,200,000.
|
|
|
(f)
|
Includes
217,636,499 Class B Units that Mr. Shaper transferred to a
limited partnership. Mr. Shaper may be deemed to be the beneficial
owner of these transferred Class B Units because he controls the
voting and disposition power of these Class B Units, but he disclaims
approximately twenty-two percent of any beneficial and pecuniary interest
in them. Mr. Shaper made a cash investment of $13,598,785 of his
after-tax proceeds from the conversion in the Going Private transaction of
82,500 shares of Kinder Morgan, Inc. restricted stock and options to
acquire 197,969 shares of Kinder Morgan, Inc. common stock in exchange for
his Class A units. The Class A-1 units and Class B units
received by Mr. Shaper had an aggregate grant date fair value as
calculated in accordance with the accounting provisions governing
share-based compensation of $4,296,125.
|
|
(g)
|
Mr. Kean
made a cash investment of $6,684,149 of his after-tax proceeds from the
conversion in the Going Private transaction of 78,000 shares of Kinder
Morgan, Inc. restricted stock and options to acquire 25,533 shares of
Kinder Morgan, Inc. common stock in exchange for his Class A units.
The Class A-1 units and Class B units received by Mr. Kean
had an aggregate grant date fair value as calculated in accordance with
the accounting provisions governing share-based compensation of
$2,708,095.
|
|
(h)
|
Includes
49,462,841 Class B Units that Mrs. Dang transferred to a limited
partnership. Mrs. Dang may be deemed to be the beneficial owner of
these transferred Class B Units because Mrs. Dang has voting and
disposition power of these Class B Units, but she disclaims ten
percent of any beneficial and pecuniary interest in them. Mrs. Dang
made a cash investment of $750,032 of her after-tax proceeds from the
conversion in the Going Private transaction of 8,000 shares of Kinder
Morgan, Inc. restricted stock and options to acquire 24,750 shares of
Kinder Morgan, Inc. common stock in exchange for her Class A units.
The Class A-1 units and Class B units received by Mrs. Dang
had an aggregate grant date fair value as calculated in accordance with
the accounting provisions governing share-based compensation of
$672,409.
|
|
(i)
|
Mr. Listengart
made a cash investment of $6,059,449 of his after-tax proceeds from the
conversion in the Going Private transaction of 52,500 shares of Kinder
Morgan, Inc. restricted stock and options to acquire 48,459 shares of
Kinder Morgan, Inc. common stock in exchange for his Class A units.
The Class A-1 units and Class B units received by
Mr. Listengart had an aggregate grant date fair value as calculated
in accordance with the accounting provisions governing share-based
compensation of $1,706,963.
|
|
(j)
|
Consists
of 240,454,180 units owned by GS Capital Partners V Fund, L.P., a
Delaware limited partnership; 124,208,587 units owned by GS Capital
Partners V Offshore Fund, L.P., a Cayman Islands exempted limited
partnership; 82,455,031 units owned by GS Capital Partners V
Institutional, L.P., a Delaware limited partnership; 9,533,193 units
owned by GS Capital Partners V GmbH & Co. KG, a German
limited partnership; 233,596,750 units owned by GS Capital Partners VI
Fund, L.P., a Delaware limited partnership; 194,297,556 units owned
by GS Capital Partners VI Offshore Fund, L.P., a Cayman Islands
exempted limited partnership; 64,235,126 units owned by GS Capital
Partners VI Parallel, L.P., a Delaware limited partnership; 8,302,031
units owned by GS Capital Partners VI GmbH & Co. KG, a
German limited partnership; 250,215,732 units owned by Goldman Sachs KMI
Investors, L.P., a Delaware limited partnership; 344,448,791 units
owned by GSCP KMI Investors, L.P., a Delaware limited partnership;
49,873,203 units owned by GSCP KMI Investors Offshore, L.P., a Cayman
Islands exempted limited partnership; 100,534,014 units owned by GS Global
Infrastructure Partners I, L.P., a Delaware limited partnership;
10,740,192 units owned by GS Institutional Infrastructure Partners
I, L.P., a Delaware limited partnership; and 284,900,702 units owned
by GS Infrastructure Knight Holdings, L.P., a Delaware limited
partnership (collectively the “GS Entities”). The GS Entities, of which
affiliates of The Goldman Sachs Group, Inc. (“GSG”) are the general
partner, managing general partner or investment manager, share voting and
investment power with certain of its respective affiliates.
Mr. Pontarelli is a managing director of Goldman,
Sachs & Co. (“GS”), which is a direct and indirect wholly
owned subsidiary of GSG. Each of GS, GSG and Mr. Pontarelli disclaims
beneficial ownership of the equity interests and the units held directly
or indirectly by the GS Entities except to the extent of their pecuniary
interest therein, if any. GS, a FINRA member, is an investment banking
firm that regularly performs services such as acting as a financial
advisor and serving as principal or agent in the purchase and sale of
securities. In the future, GS may be called upon to provide similar or
other services for us or our affiliates. Each of Mr. Pontarelli, GS
and GSG has a mailing address of c/o Goldman, Sachs & Co.,
85 Broad Street, 10th Floor, New York, NY 10004. GSG’s affiliates
that are registered broker-dealers (including specialists and market
makers) may from time to time engage in brokerage and trading activities
with respect to our securities or those of our affiliates. J.
Aron & Company, a wholly-owned subsidiary of GSG, in its ordinary
course of business, may enter into commodity hedging transactions with us
or our affiliates.
|
Equity
Compensation Plan Information
The
following table sets forth information regarding our equity compensation
plans as of December 31, 2009. Specifically, the table provides information
regarding Kinder Morgan Energy Partners’ Common Unit Compensation Plan for
Non-employee Directors, described in Note 12 of the accompanying Notes to
Consolidated Financial Statements.
|
Plan
category
|
Number
of securities
remaining
available for
future
issuance under equity
compensation
plans
|
|||
|
Equity
compensation plans approved by security holders
|
-
|
|||
|
Equity
compensation plans not approved by security holders
|
74,682
|
|||
|
Total
|
74,682
|
|||
104
Kinder
Morgan, Inc. Form 10-K
Related
Transactions
Our
policy is that (i) employees must obtain authorization from the appropriate
business unit president of the relevant company or head of corporate function
and (ii) directors, business unit presidents, executive officers and heads
of corporate functions must obtain authorization from the non-interested members
of the audit committee of the applicable board of directors, for any business
relationship or proposed business transaction in which they or an immediate
family member has a direct or indirect interest, or from which they or an
immediate family member may derive a personal benefit (a “related party
transaction”). The maximum dollar amount of related party transactions that may
be approved as described above in this paragraph in any calendar year is
$1.0 million. Any related party transactions that would bring the total
value of such transactions to greater than $1.0 million must be referred to
the audit committee of the appropriate board of directors for approval or to
determine the procedure for approval.
For
information regarding our related party transactions, see Note 11 of the
accompanying Notes to Consolidated Financial Statements.
Director
Independence
Subsequent
to the Going Private transaction, our common stock is no longer registered with
the SEC or traded on any national securities exchange. However, based upon the
listing standards of the New York Stock Exchange, Mr. Pontarelli would be
considered an “independent” director. Mr. Richard Kinder, our Chairman and
Chief Executive Officer, in his role as Chief Manager of Kinder Morgan Holdco
LLC, makes compensation decisions with respect to our executive
officers. We do not have a nominating committee or a committee that
serves a similar purpose.
The
following sets forth fees billed for the audit and other services provided by
PricewaterhouseCoopers LLP (in dollars):
|
Year
Ended December 31,
|
|||||
|
2009
|
2008
|
||||
|
Audit
fees (a)
|
$
|
4,521,218
|
$
|
4,875,799
|
|
|
Tax
fees (b)
|
2,421,694
|
2,568,523
|
|||
|
Total
|
$
|
6,942,912
|
$
|
7,444,322
|
|
|
_____________
|
|
(a)
|
Includes
fees for integrated audit of annual financial statements and internal
control over financial reporting, reviews of the related quarterly
financial statements, and reviews of documents filed with the Securities
and Exchange Commission.
|
|
(b)
|
Includes
fees for professional services rendered for tax return review services and
Internal Revenue Service assistance, and for general state, local and
foreign tax compliance and consulting services. For 2009 and 2008, amounts
include fees of $2,231,537 and $2,113,318, respectively, billed to Kinder
Morgan Energy Partners for professional services rendered for tax
processing and preparation of Forms K-1 for its
unitholders.
|
All
services rendered by PricewaterhouseCoopers LLP are permissible under applicable
laws and regulations, and were pre-approved by our audit committee. Pursuant to
the charter of our audit committee, the committee’s primary purposes include the
following: (i) to select, appoint, engage, oversee, retain, evaluate and
terminate our external auditors, (ii) to pre-approve all audit and non-audit
services, including tax services, to be provided, consistent with all applicable
laws, to us by our external auditors and (iii) to establish the fees and other
compensation to be paid to our external auditors. The audit committee has
reviewed the external auditors’ fees for audit and non audit services for fiscal
year 2009. The audit committee has also considered whether such non audit
services are compatible with maintaining the external auditors’ independence and
has concluded that they are compatible at this time.
Furthermore,
the audit committee will review the external auditors’ proposed audit scope and
approach as well as the performance of the external auditors. It also has direct
responsibility for and sole authority to resolve any disagreements between our
management and our external auditors regarding financial reporting, will
regularly review with the external auditors any problems or difficulties the
auditors encountered in the course of their audit work, and will, at least
annually, use its reasonable efforts to obtain and review a report from the
external auditors addressing the following (among other items): (i) the
auditors’ internal quality-control procedures, (ii) any material issues raised
by the most recent internal quality-control review, or peer review, of the
external auditors, (iii) the independence of the external auditors and (iv) the
aggregate fees billed by our external auditors for each of the previous two
fiscal years.
105
|
Item
14. Principal
Accounting Fees and Services (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
(a)
|
(1)
|
Financial
Statements
|
Reference
is made to the index of financial statements and supplementary data under Item 8
in Part II.
|
(2)
|
Financial
Statement Schedules
|
Schedule
II - Valuation and Qualifying Accounts is omitted because the required
information is shown in Note 2 of the accompanying Notes to Consolidated
Financial Statements.
The
financial statements, including the notes thereto, of Kinder Morgan Energy
Partners, a consolidated subsidiary of Kinder Morgan, Inc., are incorporated
herein by reference to pages 112 through 195 of Kinder Morgan Energy Partners’
Annual Report on Form 10-K for the year ended December 31, 2009.
|
(3)
|
Exhibits
|
Any
references made to K N Energy, Inc. in the exhibit listing that follows is a
reference to the former name of Kinder Morgan, Inc. and is made because the
exhibit being listed and incorporated by reference was originally filed before
October 7, 1999, the date of change in the Registrant’s name.
Exhibit
Number Description
|
2.1
|
—
|
Agreement
and Plan of Merger dated August 28, 2006, among Kinder Morgan, Inc.,
Kinder Morgan Holdco LLC and Kinder Morgan Acquisition Co. (filed as
Exhibit 2.1 to Kinder Morgan, Inc.’s Current Report on Form 8-K filed on
August 28, 2006 and incorporated herein by reference)
|
|
|
3.1
|
—
|
Amended
and Restated Articles of Incorporation of Kinder Morgan, Inc. and
amendments thereto (filed as Exhibit 3.1 to Kinder Morgan, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and
incorporated herein by reference)
|
|
|
3.2
|
—
|
Bylaws
of Kinder Morgan, Inc. (filed as Exhibit 3.2 to Kinder Morgan, Inc.’s
Current Report on Form 8-K filed on June 5, 2007 and incorporated herein
by reference)
|
|
|
4.1
|
—
|
Indenture
dated as of September 1, 1988, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company of Chicago (filed as Exhibit 4(a)
to Kinder Morgan, Inc.’s Annual Report on Form 10-K/A, Amendment No. 1
(File No. 1-06446) filed on May 23, 2000 and incorporated herein by
reference)
|
|
|
4.2
|
—
|
First
supplemental indenture dated as of January 15, 1992, between
K N Energy, Inc. and Continental Illinois National Bank and
Trust Company of Chicago (filed as Exhibit 4.2 to the Registration
Statement on Form S-3 (File No. 33-45091) of K N Energy, Inc. filed on
January 17, 1992 and incorporated herein by reference)
|
|
|
4.3
|
—
|
Second
supplemental indenture dated as of December 15, 1992, between
K N Energy, Inc. and Continental Bank, National Association
(filed as Exhibit 4(c) to Kinder Morgan, Inc.’s Annual Report on Form
10-K/A, Amendment No. 1 (File No. 1-06446) filed on May 23, 2000 and
incorporated herein by reference)
|
|
|
4.4
|
—
|
Indenture
dated as of November 20, 1993, between K N Energy, Inc. and Continental
Bank, National Association (filed as Exhibit 4.1 to the Registration
Statement on Form S-3 (File No. 33-51115) of K N Energy, Inc. filed on
November 19, 1993 and incorporated herein by reference)
|
|
|
4.5
|
—
|
Registration
Rights Agreement among Kinder Morgan Management, LLC, Kinder Morgan Energy
Partners, L.P. and Kinder Morgan, Inc. dated May 18, 2001 (filed as
Exhibit 4.7 to Kinder Morgan, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2002 (File No. 1-06446) and incorporated herein by
reference)
|
|
|
4.6
|
—
|
Form
of Indenture dated as of August 27, 2002 between Kinder Morgan, Inc. and
Wachovia Bank, National Association, as Trustee (filed as Exhibit 4.1 to
Kinder Morgan, Inc.’s Registration Statement on Form S-4 (File No.
333-100338) filed on October 4, 2002 and incorporated herein by
reference)
|
106
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
4.7
|
—
|
Form
of First Supplemental Indenture dated as of December 6, 2002 between
Kinder Morgan, Inc. and Wachovia Bank, National Association, as Trustee
(filed as Exhibit 4.2 to Kinder Morgan, Inc.’s Registration Statement on
Form S-4 (File No. 333-102873) filed on January 31, 2003 and incorporated
herein by reference)
|
|
|
4.8
|
—
|
Form
of 6.50% Note (included in the Indenture filed as Exhibit 4.6 hereto and
incorporated herein by reference)
|
|
|
4.9
|
—
|
Form
of Senior Indenture between Kinder Morgan, Inc. and Wachovia Bank,
National Association, as Trustee (filed as Exhibit 4.2 to Kinder Morgan,
Inc.’s Registration Statement on Form S-3 (File No. 333-102963) filed on
February 4, 2003 and incorporated herein by reference)
|
|
|
4.10
|
—
|
Form
of Senior Note of Kinder Morgan, Inc. (included in the Form of Senior
Indenture filed as Exhibit 4.9 hereto and incorporated herein by
reference)
|
|
|
4.11
|
—
|
Form
of Subordinated Indenture between Kinder Morgan, Inc. and Wachovia Bank,
National Association, as Trustee (filed as Exhibit 4.4 to Kinder Morgan,
Inc.’s Registration Statement on Form S-3 (File No. 333-102963) filed on
February 4, 2003 and incorporated herein by reference)
|
|
|
4.12
|
—
|
Form
of Subordinated Note of Kinder Morgan, Inc. (included in the Form of
Subordinated Indenture filed as Exhibit 4.11 hereto and incorporated
herein by reference)
|
|
|
4.13
|
—
|
Indenture
dated as of December 9, 2005, among Kinder Morgan Finance Company, LLC,
Kinder Morgan, Inc. and Wachovia Bank, National Association, as Trustee
(filed as Exhibit 4.1 to Kinder Morgan, Inc.’s Current Report on Form 8-K
filed on December 15, 2005 and incorporated herein by
reference)
|
|
|
4.14
|
—
|
Forms
of Kinder Morgan Finance Company, LLC notes (included in the Indenture
filed as Exhibit 4.13 hereto and incorporated herein by
reference)
|
|
|
4.15
|
—
|
Certificate
of the President and the Vice President and Chief Financial Officer of
Kinder Morgan Management, LLC and Kinder Morgan G.P., Inc., on behalf of
Kinder Morgan Energy Partners, L.P., establishing the terms of the 6.00%
senior notes due 2017 and 6.50% senior notes due 2037 (filed as Exhibit
1.01 to Kinder Morgan Energy Partners, L.P.’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2007 and incorporated herein by
reference)
|
|
|
4.16
|
—
|
Certificate
of the Vice President and Treasurer and the Vice President and Chief
Financial Officer of Kinder Morgan Management, LLC and Kinder Morgan G.P.,
Inc., on behalf of Kinder Morgan Energy Partners, L.P., establishing the
terms of the 5.85% senior notes due 2012 (filed as Exhibit 4.2 to Kinder
Morgan Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007 and incorporated herein by
reference)
|
|
|
4.17
|
—
|
Certificate
of the Vice President and Treasurer and the Vice President and Chief
Financial Officer of Kinder Morgan Management, LLC and Kinder Morgan G.P.,
Inc., on behalf of Kinder Morgan Energy Partners, L.P., establishing the
terms of the 6.95% Senior Notes due 2038 (filed as Exhibit 4.2 to Kinder
Morgan Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007 and incorporated herein by
reference)
|
|
|
4.18
|
—
|
Certificate
of the Vice President and Treasurer and the Vice President and Chief
Financial Officer of Kinder Morgan Management, LLC and Kinder Morgan G.P.,
Inc., on behalf of Kinder Morgan Energy Partners, L.P., establishing the
terms of the 5.95% Senior Notes due 2018 (filed as Exhibit 4.28 to Kinder
Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for 2007 and
incorporated herein by reference)
|
|
|
4.19
|
—
|
Indenture
dated as of December 21, 2007, between NGPL PipeCo LLC and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.1 to Kinder Morgan,
Inc.’s Current Report on Form 8-K filed on December 21, 2007 and
incorporated herein by reference)
|
|
|
4.20
|
—
|
Forms
of notes of NGPL PipeCo LLC (included in the Indenture filed as Exhibit
4.19 hereto and incorporated herein by reference)
|
|
|
4.21
|
—
|
Certificate
of the Vice President and Treasurer and the Vice President and Chief
Financial Officer of Kinder Morgan Management, LLC and Kinder Morgan G.P.,
Inc., on behalf of Kinder Morgan Energy Partners, L.P., establishing the
terms of the 9.00% Senior Notes due 2019 (filed as Exhibit 4.29 to Kinder
Morgan Energy Partners, L.P.’s Annual Report on Form 10-K for 2008 and
incorporated herein by reference)
|
|
|
4.22
|
—
|
Certain
instruments with respect to the long-term debt of Kinder Morgan, Inc. and
its consolidated subsidiaries that relate to debt that does not exceed 10%
of the total assets of Kinder Morgan, Inc. and its consolidated
subsidiaries are omitted pursuant to Item 601(b) (4) (iii) (A) of
Regulation S-K, 17 C.F.R. sec.229.601. Kinder Morgan, Inc. hereby agrees
to furnish supplementally to the Securities and Exchange Commission a copy
of each such instrument upon
request.
|
107
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Kinder
Morgan, Inc. Form 10-K
|
|
10.1*
|
—
|
2010
Annual Incentive Plan of Kinder Morgan, Inc.
|
|
|
10.2
|
—
|
Employment
Agreement dated October 7, 1999, between Kinder Morgan, Inc. and Richard
D. Kinder (filed as Exhibit 99.D of the Schedule 13D filed by Mr. Kinder
on November 16, 1999 and incorporated herein by
reference)
|
|
|
10.3
|
—
|
Form
of Purchase Provisions between Kinder Morgan Management, LLC and Kinder
Morgan, Inc. (included as Annex B to the Second Amended and Restated
Limited Liability Company Agreement of Kinder Morgan Management, LLC filed
as Exhibit 3.1 to Kinder Morgan Management, LLC’s Current Report on Form
8-K filed on May 30, 2007 and incorporated herein by
reference)
|
|
|
10.4
|
—
|
Credit
Agreement, dated as of May 30, 2007, among Kinder Morgan, Inc. and Kinder
Morgan Acquisition Co., as the borrower, the several lenders from time to
time parties thereto, and Citibank, N.A., as administrative agent and
collateral agent (filed as Exhibit 4.1 to Kinder Morgan, Inc.’s Current
Report on Form 8-K, filed on June 5, 2007 and incorporated herein by
reference)
|
|
|
10.5
|
—
|
Form
of Indemnification Agreement between Kinder Morgan, Inc. and each member
of the Special Committee of the Board of Directors (filed as Exhibit 10.1
to Kinder Morgan, Inc.’s Current Report on Form 8-K filed on June 16, 2006
and incorporated herein by reference)
|
|
|
10.6
|
—
|
Acquisition
Agreement dated as of February 26, 2007, by and among Kinder Morgan, Inc.,
3211953 Nova Scotia Company and Fortis Inc. (filed as Exhibit 1.01 to
Kinder Morgan, Inc.’s Current Report on Form 8-K filed on March 1, 2007
and incorporated herein by reference)
|
|
|
10.8
|
—
|
Purchase
Agreement, dated as of December 10, 2007, between Kinder Morgan, Inc. and
Myria Acquisition Inc. (filed as Exhibit 10.1 to Kinder Morgan, Inc.’s
Current Report on Form 8-K filed on December 11, 2007 and incorporated
herein by reference)
|
|
|
21.1*
|
—
|
Subsidiaries
of the Registrant
|
|
|
31.1*
|
—
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2*
|
—
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1*
|
—
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2*
|
—
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
99.1
|
—
|
The
financial statements of Kinder Morgan Energy Partners, L.P. and
subsidiaries (incorporated by reference to pages 112 through 195 of the
Annual Report on Form 10-K of Kinder Morgan Energy Partners, L.P. for the
year ended December 31, 2009)
|
|
|
99.2*
|
—
|
Estimates
of the net reserves and future net revenues as of December 31, 2009 to
Kinder Morgan CO2
Company, L.P.’s interests in certain oil and gas properties located in the
state of Texas.
|
__________
*Filed
herewith.
108
|
Kinder
Morgan, Inc. Form 10-K
|
|
KINDER
MORGAN, INC. AND SUBSIDIARIES
|
|
|
Page
|
|
|
|
|
|
109
|
|
|
112
|
|
|
113
|
|
|
114
|
|
|
115
|
|
|
117
|
|
|
119
|
|
|
|
109
Kinder
Morgan, Inc. Form 10-K
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
and
Stockholders of Kinder Morgan, Inc.:
In
our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income, of stockholders’
equity and of cash flows present fairly, in all material respects, the financial
position of Kinder Morgan, Inc. and its subsidiaries (the “Company”) at December
31, 2009 and 2008, and the results of their operations and their cash flows for
each of the years ended December 31, 2009 and 2008 and the period from June 1,
2007 to December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal
Control over Financial Reporting (not presented herein) appearing in Item 9A of
the Company’s 2009 Annual Report on Form 10-K. Our responsibility is
to express opinions on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As
described in Management’s Report on Internal Control Over Financial Reporting,
management has excluded:
|
·
|
The
terminal assets acquired from Megafleet Towing Co., Inc, effective April
23, 2009;
|
|
·
|
The
natural gas treating business acquired from Crosstex Energy, L.P. and
Crosstex Energy, Inc., effective October 1, 2009;
and
|
|
·
|
The
40% equity ownership interest in Endeavor Gathering LLC, acquired
effective November 1, 2009
|
110
|
Kinder
Morgan, Inc. Form 10-K
|
(the
“Acquired Businesses”) from its assessment of internal control over financial
reporting as of December 31, 2009 because each of these businesses were acquired
by the Company in purchase business combinations during 2009. We have
also excluded the Acquired Businesses from our audit of internal control over
financial reporting. These Acquired Businesses’ total assets and
total revenues, in the aggregate, represent 1.20% and 0.33%, respectively, of
the related consolidated financial statement amounts as of and for the year
ended December 31, 2009.
As
discussed in Note 2 (to the financial statements in the Company’s Current Report
on Form 8-K filed on September 18, 2009 which is not presented herein), the
Company changed the manner in which it accounts for noncontrolling interests
effective January 1, 2009.
PricewaterhouseCoopers
LLP
Houston,
Texas
March
5, 2010
111
|
Kinder
Morgan, Inc. Form 10-K
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
and
Stockholders of Kinder Morgan, Inc.:
In
our opinion, the accompanying consolidated statements of operations, of
comprehensive income, of stockholders’ equity and of cash flows present fairly,
in all material respects, the results of their operations and their cash flows
for the period from January 1, 2007 to May 31, 2007 of Kinder Morgan, Inc. and
its subsidiaries (the “Company”) in conformity with accounting principles
generally accepted in the United States of America. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
As
discussed in Note 2 (to the financial statements in the Company’s Current Report
on Form 8-K filed on September 18, 2009 which is not presented herein), the
Company changed the manner in which it accounts for noncontrolling interests
effective January 1, 2009.
PricewaterhouseCoopers
LLP
Houston,
Texas
March
28, 2008, except with respect to Note 15 (to the financial statements in the
Company’s Registration Statement on Form S-1 filed on January 16, 2009 which is
not presented herein), for which the date is January 8, 2009 and to the change
in the Company’s accounting for noncontrolling interests as discussed in Note 2
(to the financial statements in the Company’s Current Report on Form 8-K filed
on September 18, 2009 which is not presented herein), as to which the date is
September 18, 2009.
112
|
Kinder
Morgan, Inc. Form 10-K
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
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)
|
|||||||||||||||
|
Revenues
|
||||||||||||||||
|
Natural
gas sales
|
$ | 3,137.2 | $ | 7,705.8 | $ | 3,623.1 | $ | 2,430.6 | ||||||||
|
Services
|
2,739.1 | 2,904.0 | 2,049.8 | 1,350.5 | ||||||||||||
|
Product
sales and other
|
1,308.9 | 1,485.0 | 721.8 | 384.0 | ||||||||||||
|
Total
Revenues
|
7,185.2 | 12,094.8 | 6,394.7 | 4,165.1 | ||||||||||||
|
|
||||||||||||||||
|
Operating
Costs, Expenses and Other
|
||||||||||||||||
|
Gas
purchases and other costs of sales
|
3,068.5 | 7,744.0 | 3,656.6 | 2,490.4 | ||||||||||||
|
Operations
and maintenance
|
1,159.9 | 1,318.0 | 943.3 | 476.1 | ||||||||||||
|
Depreciation,
depletion and amortization
|
1,070.2 | 918.4 | 472.3 | 261.0 | ||||||||||||
|
General
and administrative
|
373.0 | 352.5 | 175.6 | 283.6 | ||||||||||||
|
Taxes,
other than income taxes
|
137.0 | 191.4 | 110.1 | 74.4 | ||||||||||||
|
Goodwill
impairment expense
|
- | 4,033.3 | - | 377.1 | ||||||||||||
|
Other
expense (income)
|
(30.6 | ) | 9.3 | (6.0 | ) | (2.3 | ) | |||||||||
|
Total
Operating Costs, Expenses and Other
|
5,778.0 | 14,566.9 | 5,351.9 | 3,960.3 | ||||||||||||
|
Operating
Income (Loss)
|
1,407.2 | (2,472.1 | ) | 1,042.8 | 204.8 | |||||||||||
|
|
||||||||||||||||
|
Other
Income (Expense)
|
||||||||||||||||
|
Earnings
from equity investments
|
221.9 | 201.1 | 56.8 | 40.7 | ||||||||||||
|
Amortization
of excess cost of equity investments
|
(5.8 | ) | (5.7 | ) | (3.4 | ) | (2.4 | ) | ||||||||
|
Interest,
net
|
(573.4 | ) | (628.3 | ) | (594.3 | ) | (250.2 | ) | ||||||||
|
Other,
net
|
49.5 | 7.0 | 11.6 | 0.6 | ||||||||||||
|
Total
Other Income (Expense)
|
(307.8 | ) | (425.9 | ) | (529.3 | ) | (211.3 | ) | ||||||||
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
1,099.4 | (2,898.0 | ) | 513.5 | (6.5 | ) | ||||||||||
|
Income
Taxes
|
(325.6 | ) | (304.3 | ) | (227.4 | ) | (135.5 | ) | ||||||||
|
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
Income (Loss)
|
774.1 | (3,203.2 | ) | 284.6 | 156.6 | |||||||||||
|
Net
Income Attributable to Noncontrolling Interests
|
(278.1 | ) | (396.1 | ) | (37.6 | ) | (90.7 | ) | ||||||||
|
Net
Income (Loss) Attributable to Kinder Morgan, Inc.
|
$ | 496.0 | $ | (3,599.3 | ) | $ | 247.0 | $ | 65.9 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
113
|
Kinder
Morgan, Inc. Form 10-K
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
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)
|
|||||||||||||||
|
Kinder
Morgan, Inc.
|
||||||||||||||||
|
Net
income (loss)
|
$ | 496.0 | $ | (3,599.3 | ) | $ | 247.0 | $ | 65.9 | |||||||
|
Other
comprehensive income (loss), net of tax
(see Note 10)
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for
hedging purposes
|
(138.7 | ) | 212.0 | (249.6 | ) | (21.3 | ) | |||||||||
|
Reclassification
of change in fair value of derivatives to net
income
|
(39.4 | ) | 117.1 | - | 10.3 | |||||||||||
|
Foreign
currency translation adjustments
|
53.9 | (68.7 | ) | 27.6 | 40.1 | |||||||||||
|
Benefit
plan adjustments
|
2.8 | (66.5 | ) | (28.4 | ) | 9.7 | ||||||||||
|
Benefit
plan amortization
|
6.9 | 0.4 | (0.2 | ) | 1.0 | |||||||||||
|
Total
other comprehensive income (loss)
|
(114.5 | ) | 194.3 | (250.6 | ) | 39.8 | ||||||||||
|
Total
comprehensive income (loss)
|
381.5 | (3,405.0 | ) | (3.6 | ) | 105.7 | ||||||||||
|
Noncontrolling
Interests
|
||||||||||||||||
|
Net
income
|
278.1 | 396.1 | 37.6 | 90.7 | ||||||||||||
|
Other
comprehensive income (loss), net of tax
(see Note 10)
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for
hedging purposes
|
(208.8 | ) | 295.4 | (389.0 | ) | (50.1 | ) | |||||||||
|
Reclassification
of change in fair value of derivatives to net
income
|
45.7 | 301.1 | 137.2 | 56.5 | ||||||||||||
|
Foreign
currency translation adjustments
|
114.9 | (149.6 | ) | 40.3 | 18.8 | |||||||||||
|
Benefit
plan adjustments
|
(1.2 | ) | 1.9 | (1.4 | ) | (0.2 | ) | |||||||||
|
Benefit
plan amortization
|
0.1 | (0.3 | ) | - | - | |||||||||||
|
Total
other comprehensive income (loss)
|
(49.3 | ) | 448.5 | (212.9 | ) | 25.0 | ||||||||||
|
Total
comprehensive income (loss)
|
228.8 | 844.6 | (175.3 | ) | 115.7 | |||||||||||
|
Total
|
||||||||||||||||
|
Net
income (loss)
|
774.1 | (3,203.2 | ) | 284.6 | 156.6 | |||||||||||
|
Other
comprehensive income (loss), net of tax
(see Note 10)
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for
hedging purposes
|
(347.5 | ) | 507.4 | (638.6 | ) | (71.4 | ) | |||||||||
|
Reclassification
of change in fair value of derivatives to net
income
|
6.3 | 418.2 | 137.2 | 66.8 | ||||||||||||
|
Foreign
currency translation adjustments
|
168.8 | (218.3 | ) | 67.9 | 58.9 | |||||||||||
|
Benefit
plan adjustments
|
1.6 | (64.6 | ) | (29.8 | ) | 9.5 | ||||||||||
|
Benefit
plan amortization
|
7.0 | 0.1 | (0.2 | ) | 1.0 | |||||||||||
|
Total
other comprehensive income (loss)
|
(163.8 | ) | 642.8 | (463.5 | ) | 64.8 | ||||||||||
|
Total
comprehensive income (loss)
|
$ | 610.3 | $ | (2,560.4 | ) | $ | (178.9 | ) | $ | 221.4 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
114
|
Kinder
Morgan, Inc. Form 10-K
|
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
millions)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 165.6 | $ | 118.6 | ||||
|
Restricted
deposits
|
52.5 | - | ||||||
|
Accounts,
notes and interest receivable, net
|
921.6 | 992.5 | ||||||
|
Inventories
|
71.9 | 44.2 | ||||||
|
Gas
in underground storage
|
43.5 | - | ||||||
|
Fair
value of derivative contracts
|
20.8 | 115.2 | ||||||
|
Other
current assets
|
109.7 | 46.7 | ||||||
|
Total
Current Assets
|
1,385.6 | 1,317.2 | ||||||
|
Property,
plant and equipment, net
|
16,803.5 | 16,109.8 | ||||||
|
Investments
|
3,695.6 | 1,827.4 | ||||||
|
Notes
receivable
|
190.6 | 178.1 | ||||||
|
Goodwill
|
4,744.3 | 4,698.7 | ||||||
|
Other
intangibles, net
|
259.8 | 251.5 | ||||||
|
Fair
value of derivative contracts
|
293.3 | 828.0 | ||||||
|
Deferred
charges and other assets
|
213.6 | 234.2 | ||||||
|
Total
Assets
|
$ | 27,586.3 | $ | 25,444.9 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Current
portion of debt
|
$ | 768.7 | $ | 302.5 | ||||
|
Cash
book overdrafts
|
36.6 | 45.2 | ||||||
|
Accounts
payable
|
620.8 | 849.8 | ||||||
|
Accrued
interest
|
292.1 | 241.9 | ||||||
|
Accrued
taxes
|
58.6 | 152.1 | ||||||
|
Deferred
revenues
|
76.1 | 41.2 | ||||||
|
Fair
value of derivative contracts
|
272.0 | 129.5 | ||||||
|
Accrued
other current liabilities
|
194.6 | 252.5 | ||||||
|
Total
Current Liabilities
|
2,319.5 | 2,014.7 | ||||||
|
Long-term
Liabilities and Deferred Credits
|
||||||||
|
Long-term
Debt
|
||||||||
|
Outstanding
|
12,779.7 | 11,055.8 | ||||||
|
Preferred
interest in general partner of Kinder Morgan Energy
Partners
|
100.0 | 100.0 | ||||||
|
Value
of interest rate swaps
|
361.0 | 971.0 | ||||||
|
Total
Long-term Debt
|
13,240.7 | 12,126.8 | ||||||
|
Deferred
income taxes
|
2,039.9 | 2,081.3 | ||||||
|
Fair
value of derivative contracts
|
469.6 | 92.2 | ||||||
|
Other
long-term liabilities and deferred credits
|
670.5 | 653.0 | ||||||
|
Total
Long-Term Liabilities and Deferred Credits
|
16,420.7 | 14,953.3 | ||||||
|
Total
Liabilities
|
18,740.2 | 16,968.0 | ||||||
|
Commitments
and Contingencies (Notes 12 and 16)
|
||||||||
|
Stockholders’
Equity
|
||||||||
|
Common
stock – authorized and outstanding – 100 shares, par value
$0.01 per share
|
- | - | ||||||
|
Additional
paid-in capital
|
7,845.7 | 7,810.0 | ||||||
|
Retained
deficit
|
(3,506.3 | ) | (3,352.3 | ) | ||||
|
Accumulated
other comprehensive loss
|
(167.9 | ) | (53.4 | ) | ||||
|
Total
Kinder Morgan, Inc. Stockholder’s Equity
|
4,171.5 | 4,404.3 | ||||||
|
Noncontrolling
interests
|
4,674.6 | 4,072.6 | ||||||
|
Total
Stockholders’ Equity
|
8,846.1 | 8,476.9 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 27,586.3 | $ | 25,444.9 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
115
|
Kinder
Morgan, Inc. Form 10-K
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
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)
|
|||||||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||||||
|
Net
income (loss)
|
$ | 774.1 | $ | (3,203.2 | ) | $ | 284.6 | $ | 156.6 | |||||||
|
Adjustments
to reconcile net income to net cash from
operating activities
|
||||||||||||||||
|
Loss
(income) from discontinued operations, net of tax
|
(0.3 | ) | 0.9 | 11.9 | (287.9 | ) | ||||||||||
|
Loss
on early extinguishment of debt
|
- | 23.6 | - | 4.4 | ||||||||||||
|
Depreciation,
depletion and amortization
|
1,070.2 | 918.4 | 476.2 | 264.9 | ||||||||||||
|
Impairment
of goodwill
|
- | 4,033.3 | - | 377.1 | ||||||||||||
|
Deferred
income taxes
|
59.0 | (496.4 | ) | (89.8 | ) | 138.7 | ||||||||||
|
Amortization
of excess cost of equity investments
|
5.8 | 5.7 | 3.4 | 2.4 | ||||||||||||
|
Income
from the allowance for equity funds used
during construction
|
(22.7 | ) | (10.9 | ) | - | - | ||||||||||
|
(Income)
loss from the sale or casualty of property, plant and equipment and
other net assets
|
(30.4 | ) | 9.2 | (6.3 | ) | (4.4 | ) | |||||||||
|
Earnings
from equity investments
|
(221.9 | ) | (201.1 | ) | (57.7 | ) | (41.5 | ) | ||||||||
|
Mark-to-market
interest rate swap gain
|
- | (19.8 | ) | - | - | |||||||||||
|
Distributions
from equity investments
|
277.0 | 241.6 | 86.5 | 48.2 | ||||||||||||
|
Proceeds
from (payment for) termination of interest rate
swap agreements
|
146.0 | 192.0 | (2.2 | ) | 51.9 | |||||||||||
|
Pension
contributions in excess of expense
|
(7.7 | ) | - | - | - | |||||||||||
|
Changes
in components of working capital
|
||||||||||||||||
|
Accounts
receivable
|
47.6 | 60.6 | (64.3 | ) | (31.9 | ) | ||||||||||
|
Inventories
|
(20.0 | ) | (7.9 | ) | (8.1 | ) | (1.7 | ) | ||||||||
|
Other
current assets
|
(93.6 | ) | (16.9 | ) | (13.9 | ) | (83.7 | ) | ||||||||
|
Accounts
payable
|
(180.5 | ) | (99.3 | ) | 68.7 | 26.3 | ||||||||||
|
Accrued
interest
|
50.2 | 0.7 | 65.9 | (22.5 | ) | |||||||||||
|
Accrued
taxes
|
(131.0 | ) | 109.0 | 142.5 | (114.0 | ) | ||||||||||
|
Accrued
liabilities
|
(125.0 | ) | (119.1 | ) | (35.5 | ) | (59.6 | ) | ||||||||
|
Rate
reparations, refunds and other litigation reserve
adjustments
|
2.5 | (13.7 | ) | 140.0 | - | |||||||||||
|
Other,
net
|
(11.3 | ) | (9.1 | ) | 45.8 | 69.9 | ||||||||||
|
Cash
Flows Provided by Continuing Operations
|
1,588.0 | 1,397.6 | 1,047.7 | 493.2 | ||||||||||||
|
Net
Cash Flows (Used in) Provided by Discontinued Operations
|
(0.5 | ) | (0.8 | ) | (3.2 | ) | 109.8 | |||||||||
|
Net
Cash Provided by Operating Activities
|
1,587.5 | 1,396.8 | 1,044.5 | 603.0 | ||||||||||||
|
Cash
Flows From Investing Activities
|
||||||||||||||||
|
Purchase
of Predecessor Stock
|
- | - | (11,534.3 | ) | - | |||||||||||
|
Proceeds
from sale of 80% interest in NGPL PipeCo LLC, net of $1.1 cash
sold
|
- | 2,899.3 | - | - | ||||||||||||
|
Proceeds
from (investments in) NGPL PipeCo LLC restricted cash
|
- | 3,106.4 | (3,030.0 | ) | - | |||||||||||
|
Acquisitions
of assets and equity investments
|
(328.9 | ) | (47.6 | ) | (122.0 | ) | (42.1 | ) | ||||||||
|
Repayments
from (loans to) customers
|
109.6 | (109.6 | ) | - | - | |||||||||||
|
Capital
expenditures
|
(1,324.3 | ) | (2,545.3 | ) | (1,287.0 | ) | (652.8 | ) | ||||||||
|
Sale
or casualty of property, plant and equipment, investments and
other net assets, net of removal costs
|
47.9 | 111.1 | 301.3 | 6.5 | ||||||||||||
|
(Investments
in) net proceeds from margin deposits
|
(18.5 | ) | 71.0 | (39.3 | ) | (54.8 | ) | |||||||||
|
Investments
in Restricted deposits
|
(37.2 | ) | - | - | - | |||||||||||
|
Contributions
to investments
|
(2,051.8 | ) | (366.2 | ) | (246.4 | ) | (29.7 | ) | ||||||||
|
Distributions
from equity investments in excess of
cumulative earnings
|
125.7 | 98.1 | - | - | ||||||||||||
|
Other,
net
|
- | (7.2 | ) | 10.0 | 8.4 | |||||||||||
|
Net
Cash Flows (Used in) Provided by Continuing
Investing Activities
|
(3,477.5 | ) | 3,210.0 | (15,947.7 | ) | (764.5 | ) | |||||||||
|
Net
Cash Flows Provided by Discontinued
Investing Activities
|
- | - | 196.6 | 1,488.2 | ||||||||||||
|
Net
Cash (Used in) Provided by Investing Activities
|
$ | (3,477.5 | ) | $ | 3,210.0 | $ | (15,751.1 | ) | $ | 723.7 | ||||||
116
|
Kinder
Morgan, Inc. Form 10-K
|
KINDER
MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
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)
|
|||||||||||||||
|
Cash
Flows From Financing Activities
|
||||||||||||||||
|
Issuance
of debt
|
$ | 7,920.8 | $ | 10,495.8 | $ | 13,038.9 | $ | 3,383.4 | ||||||||
|
Payment
of debt
|
(5,728.8 | ) | (15,136.5 | ) | (5,115.7 | ) | (2,933.3 | ) | ||||||||
|
Proceeds
from issuance of Kinder Morgan, G.P., Inc. preferred stock
|
- | - | 100.0 | - | ||||||||||||
|
Repayments
from related party
|
3.7 | 2.7 | 10.9 | 2.3 | ||||||||||||
|
Discount
(premium) on early extinguishment of debt
|
- | 69.2 | - | (4.2 | ) | |||||||||||
|
Debt
issue costs
|
(16.9 | ) | (15.9 | ) | (81.5 | ) | (13.1 | ) | ||||||||
|
(Decrease)
increase in cash book overdrafts
|
(8.5 | ) | 14.5 | (14.0 | ) | (14.9 | ) | |||||||||
|
Proceeds
from issuance of shares by Kinder Morgan Management, LLC
|
- | - | - | 297.9 | ||||||||||||
|
Excess
tax benefits from share-based payments
|
- | - | - | 56.7 | ||||||||||||
|
Cash
paid to share-based award holders due to Going Private
transaction
|
- | - | (181.1 | ) | - | |||||||||||
|
Contributions
from Successor Investors
|
- | - | 5,112.0 | - | ||||||||||||
|
Proceeds
from issuance of other common stock
|
- | - | - | 9.9 | ||||||||||||
|
Cash
dividends
|
(650.0 | ) | - | - | (234.9 | ) | ||||||||||
|
Contributions
from noncontrolling interests
|
1,155.6 | 561.5 | 342.9 | - | ||||||||||||
|
Distributions
to noncontrolling interests
|
(744.0 | ) | (630.3 | ) | (259.6 | ) | (248.9 | ) | ||||||||
|
Other,
net
|
(0.9 | ) | 10.9 | 4.0 | (0.1 | ) | ||||||||||
|
Net
Cash Provided by (Used in) Continuing Financing Activities
|
1,931.0 | (4,628.1 | ) | 12,956.8 | 300.8 | |||||||||||
|
Net
Cash Provided by Discontinued Financing Activities
|
- | - | - | 140.1 | ||||||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
1,931.0 | (4,628.1 | ) | 12,956.8 | 440.9 | |||||||||||
|
Effect
of Exchange Rate Changes on Cash and Cash Equivalents
|
6.0 | (8.7 | ) | (2.8 | ) | 7.6 | ||||||||||
|
Cash
Balance Included in Assets Held for Sale
|
- | - | (1.1 | ) | (2.7 | ) | ||||||||||
|
Increase
(decrease) in Cash and Cash Equivalents
|
47.0 | (30.0 | ) | (1,753.7 | ) | 1,772.5 | ||||||||||
|
Cash
and Cash Equivalents, beginning of period
|
118.6 | 148.6 | 1,902.3 | 129.8 | ||||||||||||
|
Cash
and Cash Equivalents, end of period
|
$ | 165.6 | $ | 118.6 | $ | 148.6 | $ | 1,902.3 | ||||||||
|
Noncash
Investing and Financing Activities
|
||||||||||||||||
|
Assets
acquired by the assumption or incurrence of liabilities
|
$ | 7.7 | $ | 4.8 | $ | 1.2 | $ | 18.5 | ||||||||
|
Assets
acquired by contributions from noncontrolling interests
|
$ | 5.0 | $ | - | $ | - | $ | 15.0 | ||||||||
|
Interest
expense recognized from early extinguishment of debt
|
$ | - | $ | 87.5 | $ | - | $ | - | ||||||||
|
Subordinated
notes acquired by exchange of preferred equity interest
|
$ | - | $ | 111.4 | $ | - | $ | - | ||||||||
|
Supplemental
Disclosures of Cash Flow Information
|
||||||||||||||||
|
Cash
paid during the period for interest (net of capitalized
interest)
|
$ | 572.8 | $ | 649.9 | $ | 586.5 | $ | 381.8 | ||||||||
|
Cash
paid during the period for income taxes
|
$ | 401.1 | $ | 657.3 | $ | 146.4 | $ | 133.3 | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
117
|
Kinder
Morgan, Inc. Form 10-K
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months Ended
|
Five
Months Ended
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
December
31,2007
|
May
31, 2007
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
100 | $ | - | 100 | $ | - | 100 | $ | - | 149,166,709 | $ | 745.8 | ||||||||||||||||||||
|
Employee benefit plans
|
- | - | - | - | - | - | 149,894 | 0.8 | ||||||||||||||||||||||||
|
Ending balance
|
100 | - | 100 | - | 100 | - | 149,316,603 | 746.6 | ||||||||||||||||||||||||
|
Additional Paid-in Capital
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
7,810.0 | 7,822.2 | - | 3,048.9 | ||||||||||||||||||||||||||||
|
MBO purchase price
|
- | - | 7,831.2 | - | ||||||||||||||||||||||||||||
|
Impact of Kinder Morgan Energy Partners’
equity transactions (Note 10)
|
28.1 | (19.8 | ) | (13.4 | ) | 3.4 | ||||||||||||||||||||||||||
|
A-1 and B unit amortization
|
7.6 | 7.6 | 4.4 | - | ||||||||||||||||||||||||||||
|
Employee benefit plans
|
- | - | - | 7.7 | ||||||||||||||||||||||||||||
|
Tax benefits from employee benefit plans
|
- | - | - | 56.7 | ||||||||||||||||||||||||||||
|
Deferred compensation (Note 12)
|
- | - | - | 21.9 | ||||||||||||||||||||||||||||
|
Ending balance
|
7,845.7 | 7,810.0 | 7,822.2 | 3,138.6 | ||||||||||||||||||||||||||||
|
Retained Earnings (Deficit)
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
(3,352.3 | ) | 247.0 | - | 778.7 | |||||||||||||||||||||||||||
|
Net income (loss)
|
496.0 | (3,599.3 | ) | 247.0 | 65.9 | |||||||||||||||||||||||||||
|
Cash dividends
|
(650.0 | ) | - | - | (234.9 | ) | ||||||||||||||||||||||||||
|
Initialization of income tax reserves (Note 4)
|
- | - | - | (4.8 | ) | |||||||||||||||||||||||||||
|
Ending balance
|
(3,506.3 | ) | (3,352.3 | ) | 247.0 | 604.9 | ||||||||||||||||||||||||||
|
Treasury Stock
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
- | - | - | - | - | - | (15,022,751 | ) | (915.9 | ) | ||||||||||||||||||||||
|
Employee benefit plans
|
- | - | - | - | - | - | (7,384 | ) | (0.5 | ) | ||||||||||||||||||||||
|
Ending balance
|
- | - | - | - | - | - | (15,030,135 | ) | (916.4 | ) | ||||||||||||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
(53.4 | ) | (247.7 | ) | 2.9 | (135.9 | ) | |||||||||||||||||||||||||
|
Change in fair value of derivatives utilized for
hedging purposes
|
(138.7 | ) | 212.0 | (249.6 | ) | (21.3 | ) | |||||||||||||||||||||||||
|
Reclassification of change in fair value of
derivatives to net income
|
(39.4 | ) | 117.1 | - | 10.3 | |||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
53.9 | (68.7 | ) | 27.6 | 40.1 | |||||||||||||||||||||||||||
|
Benefit plan adjustments
|
2.8 | (66.5 | ) | (28.4 | ) | 9.7 | ||||||||||||||||||||||||||
|
Benefit plan amortization
|
6.9 | 0.4 | (0.2 | ) | 1.0 | |||||||||||||||||||||||||||
|
Ending balance
|
(167.9 | ) | (53.4 | ) | (247.7 | ) | (96.1 | ) | ||||||||||||||||||||||||
|
Total Kinder Morgan, Inc. Stockholder’s Equity
|
100 | 4,171.5 | 100 | 4,404.3 | 100 | 7,821.5 | 134,286,468 | 3,477.6 | ||||||||||||||||||||||||
118
|
Kinder
Morgan, Inc. Form 10-K
|
KINDER
MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months Ended
|
Five
Months Ended
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
December
31,2007
|
May
31, 2007
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
|
Noncontrolling
interests
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 4,072.6 | $ | 3,314.0 | $ | 3,343.9 | $ | 3,095.4 | ||||||||||||||||||||||||
|
Impact from equity transactions of Kinder
Morgan Energy Partners
|
(43.8 | ) | (21.4 | ) | (12.9 | ) | (22.7 | ) | ||||||||||||||||||||||||
|
Issuance of shares by Kinder Morgan
Management, LLC
|
- | - | - | 317.0 | ||||||||||||||||||||||||||||
|
Gain on sale of discontinued operations
|
- | - | (56.1 | ) | ||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests
|
(745.5 | ) | (630.7 | ) | (260.5 | ) | (248.9 | ) | ||||||||||||||||||||||||
|
Contributions from noncontrolling interests
|
1,160.6 | 561.5 | 343.5 | 15.0 | ||||||||||||||||||||||||||||
|
Kinder Morgan Energy Partners’ TransMountain
Pipeline Acquisition
|
0.2 | - | (4.7 | ) | 72.1 | |||||||||||||||||||||||||||
|
Net income included in discontinued operations
|
- | - | 141.6 | - | ||||||||||||||||||||||||||||
|
Other
|
1.7 | 4.6 | (5.5 | ) | 0.3 | |||||||||||||||||||||||||||
|
Comprehensive income (loss)
|
||||||||||||||||||||||||||||||||
|
Net income
|
278.1 | 396.1 | 37.6 | 90.7 | ||||||||||||||||||||||||||||
|
Change in fair value of derivatives used for
hedging purposes
|
(208.8 | ) | 295.4 | (389.0 | ) | (50.1 | ) | |||||||||||||||||||||||||
|
Reclassification of change in fair value of
derivatives to net income
|
45.7 | 301.1 | 137.2 | 56.5 | ||||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
114.9 | (149.6 | ) | 40.3 | 18.8 | |||||||||||||||||||||||||||
|
Benefit plan adjustments
|
(1.2 | ) | 1.9 | (1.4 | ) | (0.2 | ) | |||||||||||||||||||||||||
|
Benefit plan amortization
|
0.1 | (0.3 | ) | - | - | |||||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
228.8 | 844.6 | (175.3 | ) | 115.7 | |||||||||||||||||||||||||||
|
Ending balance
|
4,674.6 | 4,072.6 | 3,314.0 | 3,343.9 | ||||||||||||||||||||||||||||
|
Total Stockholders’ Equity
|
100 | $ | 8,846.1 | 100 | $ | 8,476.9 | 100 | $ | 11,135.5 | 134,286,468 | $ | 6,821.5 | ||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
119
Kinder
Morgan, Inc. Form 10-K
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Organization
We
are a large energy transportation and storage company, operating or owning an
interest in approximately 37,000 miles of pipelines and approximately 180
terminals. We have both regulated and nonregulated
operations. We also own all the common equity of the general partner
of, and a significant limited partner interest in, Kinder Morgan Energy
Partners, L.P., a publicly traded pipeline limited partnership. We
are a wholly owned subsidiary of Kinder Morgan Holdco LLC, a private company
(formerly Knight Holdco LLC). Our executive offices are located at
500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone number is
(713) 369-9000. Unless the context requires otherwise, references to
“we,” “us,” “our,” or the “Company” are intended to mean Kinder Morgan, Inc. and
its consolidated subsidiaries. Unless the context requires otherwise,
references to “Kinder Morgan Energy Partners” and “KMP” are intended to mean
Kinder Morgan Energy Partners, L.P. and its consolidated
subsidiaries.
Kinder
Morgan Management, LLC, referred to in this report as “Kinder Morgan
Management,” is a publicly traded Delaware limited liability
company. Kinder Morgan G.P., Inc., the general partner of Kinder
Morgan Energy Partners and a wholly owned subsidiary of ours, owns all of Kinder
Morgan Management’s voting shares. Kinder Morgan Management, pursuant
to a delegation of control agreement, has been delegated, to the fullest extent
permitted under Delaware law, all of Kinder Morgan G.P., Inc.’s power and
authority to manage and control the business and affairs of Kinder Morgan Energy
Partners, subject to Kinder Morgan G.P., Inc.’s right to approve certain
transactions.
2. Summary
of Significant Accounting Policies
Basis
of Presentation
Our
accounting records are maintained in United States dollars, and all references
to dollars are United States dollars, except where stated
otherwise. Canadian dollars are designated as C$.
The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, and certain
amounts from prior years have been reclassified to conform to the current
presentation. Effective September 30, 2009, the Financial Accounting
Standards Boards’ Accounting Standards Codification became the single source of
generally accepted accounting principles, and in this report, we refer to the
Financial Accounting Standards Board as the FASB and the FASB Accounting
Standards Codification as the Codification.
Our
consolidated financial statements include the accounts of Kinder Morgan, Inc.
and our majority-owned subsidiaries, as well as those of (i) Kinder Morgan
Energy Partners, (ii) Kinder Morgan Management and (iii) Triton Power Company
LLC, in which we have a preferred investment. Except for Kinder Morgan Energy
Partners, Kinder Morgan Management and Triton Power Company LLC, investments in
50% or less owned operations are accounted for under the equity method. All
material intercompany transactions and balances have been
eliminated.
Notwithstanding
the consolidation of Kinder Morgan Energy Partners and its subsidiaries into our
financial statements, we are not liable for, and our assets are not available to
satisfy, the obligations of Kinder Morgan Energy Partners and/or its
subsidiaries and vice versa, except as discussed in the following
paragraph. Responsibility for payments of obligations reflected in
our or Kinder Morgan Energy Partners’ financial statements is a legal
determination based on the entity that incurs the liability.
In
conjunction with Kinder Morgan Energy Partners’ acquisition of certain natural
gas pipelines from us, we agreed to indemnify Kinder Morgan Energy Partners with
respect to approximately $733.5 million of its debt. We would be
obligated to perform under this indemnity only if Kinder Morgan Energy Partners’
assets were unable to satisfy its obligations.
Going
Private Transaction
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 its senior
management, most of whom are also senior officers of Kinder Morgan G.P., Inc.
and us 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
120
Kinder
Morgan, Inc. Form 10-K
transaction.
As a result of this transaction, the company became privately owned, our stock
ceased being traded on the New York Stock Exchange, and we adopted a new basis
of accounting for our assets and liabilities. The acquisition was accounted for
under the purchase method of accounting with the assets acquired and liabilities
assumed recorded at their fair market values as of the acquisition date,
resulting in a new basis of accounting effective with the closing of the Going
Private transaction.
Therefore,
in the accompanying Consolidated Financial Statements, transactions and balances
prior to the closing of the Going Private transaction (the amounts labeled
“Predecessor Company”) reflect the historical accounting basis in our assets and
liabilities, while the amounts subsequent to the closing (labeled “Successor
Company”) reflect the push down of the investors’ new accounting basis to our
financial statements. Hence, there is a blackline division on the financial
statements and relevant notes, which is intended to signify that the amounts
shown for periods prior to and subsequent to the Going Private transaction are
not comparable.
As
discussed above, effective with the closing of the Going Private transaction,
all of our assets and liabilities were recorded at their estimated fair market
values based on an allocation of the aggregate purchase price paid in the Going
Private transaction. To the extent that we consolidate less than wholly owned
subsidiaries (such as Kinder Morgan Energy Partners, Kinder Morgan Management
and Triton Power Company LLC), the reported assets and liabilities for these
entities have been given a new accounting basis only to the extent of our
economic ownership interest in those entities. Therefore, the assets and
liabilities of these entities are included in our financial statements, in part,
at a new accounting basis reflecting the investors’ purchase of our economic
interest in these entities (approximately 50% in the case of Kinder Morgan
Energy Partners and 14% in the case of Kinder Morgan Management). The remaining
percentage of these assets and liabilities, reflecting the continuing
noncontrolling ownership interest, is included at its historical accounting
basis. The purchase price paid in the Going Private transaction and the
allocation of that purchase price is as follows (in millions):
|
The
total purchase price consisted of the following
|
||||
|
Cash
paid
|
$ | 5,112.0 | ||
|
Kinder
Morgan, Inc. shares contributed
|
2,719.2 | |||
|
Equity
contributed
|
7,831.2 | |||
|
Cash
from issuances of long-term debt
|
4,696.2 | |||
|
Total
purchase price
|
$ | 12,527.4 | ||
|
|
||||
|
The
allocation of the purchase price is as follows
|
||||
|
Current
assets
|
$ | 1,551.2 | ||
|
Investments
|
897.8 | |||
|
Goodwill
|
13,786.1 | |||
|
Property,
plant and equipment, net
|
15,281.6 | |||
|
Deferred
charges and other assets
|
1,639.8 | |||
|
Current
liabilities
|
(3,279.5 | ) | ||
|
Deferred
income taxes
|
(2,392.8 | ) | ||
|
Other
long-term liabilities and deferred credits
|
(1,786.3 | ) | ||
|
Long-term
debt
|
(9,855.9 | ) | ||
|
Noncontrolling
interests
|
(3,314.6 | ) | ||
| $ | 12,527.4 | |||
The
following is a reconciliation of shares purchased and contributed and the Going
Private transaction purchase price (in millions except per share
information):
|
Number
of
Shares
|
Price
per
Share
|
Total
Value
|
||||||||||
|
Shares
purchased with cash
|
107.6 | $ | 107.50 | $ | 11,561.3 | |||||||
|
Shares
contributed
|
||||||||||||
|
Richard
D. Kinder
|
24.0 | $ | 101.00 | 2,424.0 | ||||||||
|
Other
Kinder Morgan, Inc. management and board members
|
2.7 | $ | 107.50 | 295.2 | ||||||||
|
Total
shares contributed
|
26.7 | 2,719.2 | ||||||||||
|
Total
shares outstanding as of May 31, 2007
|
134.3 | 14,280.5 | ||||||||||
|
Less:
portion of shares acquired using Kinder Morgan, Inc. cash on
hand
|
(1,756.8 | ) | ||||||||||
|
Add:
cash contributions by management at or after May 30, 2007
|
3.7 | |||||||||||
|
purchase
price
|
$ | 12,527.4 | ||||||||||
The
shares contributed by members of management and the board members other than
Richard D. Kinder who were investors in the Going Private transaction were
valued at $107.50 per share, the same as the amount per share paid to
the
121
Kinder
Morgan, Inc. Form 10-K
public
shareholders in the Going Private transaction. Richard D. Kinder agreed to value
the shares he contributed at $101.00 per share because Mr. Kinder agreed to
participate in the transaction at less than the merger price in order to help
increase the merger price for the other public shareholders.
Use
of Estimates
Certain
amounts included in or affecting our financial statements and related
disclosures must be estimated, requiring us to make certain assumptions with
respect to values or conditions which cannot be known with certainty at the time
our financial statements are prepared. These estimates and
assumptions affect the amounts we report for 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 evaluate these estimates on an ongoing basis,
utilizing historical experience, consultation with experts and other methods we
consider reasonable in the particular circumstances. Nevertheless,
actual results may differ significantly from our estimates. 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
addition, we believe that certain accounting policies are of more significance
in our financial statement preparation process than others, and set out below
are the principal accounting policies we apply in the preparation of our
consolidated financial statements.
Cash
Equivalents
We
define cash equivalents as all highly liquid short-term investments with
original maturities of three months or less.
Accounts
Receivable
The
amounts reported as “Accounts, notes and interest receivable, net” on the
accompanying Consolidated Balance Sheets as of December 31, 2009 and 2008
primarily consist of amounts due from third party payors (unrelated
entities). For information on receivables due to us from related
parties, see Note 11.
Our
policy for determining an appropriate allowance for doubtful accounts varies
according to the type of business being conducted and the customers being
served. Generally, we make periodic reviews and evaluations of the
appropriateness of the allowance for doubtful accounts based on a historical
analysis of uncollected amounts, and we record adjustments as necessary for
changed circumstances and customer-specific information. When
specific receivables are determined to be uncollectible, the reserve and
receivable are relieved.
In
addition, the balances of “Accrued other current liabilities” in the
accompanying Consolidated Balance Sheets include amounts related to customer
prepayments of approximately $10.9 million and $10.8 million as of December 31,
2009 and 2008, respectively.
Inventories
Our
inventories of products consist of natural gas liquids, refined petroleum
products, natural gas, carbon dioxide and coal. We report these
assets at the lower of weighted-average cost or market, and in December 2008, we
recognized a lower of cost or market adjustment of $12.9 million in the CO2–KMP
business segment. We report materials and supplies inventories at the
lower of cost or market.
As
of December 31, 2009, the value of natural gas in our underground storage
facilities under the weighted-average cost method was $43.5 million, and we
reported this amount separately as “Gas in underground storage” in the
accompanying Consolidated Balance Sheet. As of December 31, 2008, we
owed certain customers a total of $1.0 million for the value of natural gas
inventory stored in our underground storage facilities, and we reported this
amount within “Accounts payable” in the accompanying Consolidated Balance
Sheet.
Gas
Imbalances
We
value gas imbalances due to or due from interconnecting pipelines at the lower
of cost or market, per our quarterly imbalance valuation
procedures. Gas imbalances represent the difference between customer
nominations and actual gas receipts from, and gas deliveries to, our
interconnecting pipelines and shippers under various operational balancing and
shipper imbalance agreements. Natural gas imbalances are either
settled in cash or made up in-kind subject to the pipelines’ various tariff
provisions. As of December 31, 2009 and 2008, our gas imbalance
receivables, including both trade and related party receivables, totaled $14.0
million and $14.1 million, respectively, and we included these amounts within
“Other current assets” on the accompanying Consolidated Balance
Sheets. As of December 31, 2009 and 2008, our gas imbalance payables,
including both trade and related party payables, totaled $7.4 million and $12.4
million, respectively, and we included these amounts within “Accrued other
current liabilities” on the accompanying Consolidated Balance
Sheets.
122
Kinder
Morgan, Inc. Form 10-K
Property,
Plant and Equipment
Capitalization,
Depreciation and Depletion and Disposals
We
report property, plant and equipment at its acquisition cost. We
expense costs for maintenance and repairs in the period incurred. The
cost of property, plant and equipment sold or retired and the related
depreciation are removed from our balance sheet in the period of sale or
disposition, and we record any related gains and losses from sales or
retirements to income or expense accounts. For our pipeline system
assets, we generally charge the original cost of property sold or retired to
accumulated depreciation and amortization, net of salvage and cost of
removal. We do not include retirement gain or loss in income except
in the case of significant retirements or sales. Gains and losses on
minor system sales, excluding land, are recorded to the appropriate accumulated
depreciation reserve. Gains and losses for operating systems sales
and land sales are booked to income or expense accounts in accordance with
regulatory accounting guidelines.
We
compute depreciation using the straight-line method based on estimated economic
lives. Generally, we apply composite depreciation rates to functional
groups of property having similar economic characteristics. The rates
range from 1.6% to 12.5%, excluding certain short-lived assets such as
vehicles. Depreciation estimates are based on various factors,
including age (in the case of acquired assets), manufacturing specifications,
technological advances and historical data concerning useful lives of similar
assets. Uncertainties that impact these estimates included changes in
laws and regulations relating to restoration and abandonment requirements,
economic conditions, and supply and demand in the area. When assets
are put into service, we make estimates with respect to useful lives (and
salvage values where appropriate) that we believe are
reasonable. However, subsequent events could cause us to change our
estimates, thus impacting the future calculation of depreciation and
amortization expense. Historically, adjustments to useful lives have
not had a material impact on our aggregate depreciation levels from year to
year.
Our
oil and gas producing activities are accounted for under the successful efforts
method of accounting. Under this method costs that are incurred to
acquire leasehold and subsequent development costs are
capitalized. Costs that are associated with the drilling of
successful exploration wells are capitalized if proved reserves are
found. Costs associated with the drilling of exploratory wells that
do not find proved reserves, geological and geophysical costs, and costs of
certain non-producing leasehold costs are expensed as incurred. The
capitalized costs of our producing oil and gas properties are depreciated and
depleted by the units-of-production method. Other miscellaneous
property, plant and equipment are depreciated over the estimated useful lives of
the asset.
A
gain on the sale of property, plant and equipment used in our oil and
gas producing activities or in our bulk and liquids terminal activities is
calculated as the difference between the cost of the asset disposed of, net of
depreciation, and the sales proceeds received. A gain on an asset
disposal is recognized in income in the period that the sale is
closed. A loss on the sale of property, plant and
equipment is calculated as the difference between the cost of the asset disposed
of, net of depreciation, and the sales proceeds received or the maket value if
the asset is being held for sale. A loss is recognized when the asset
is sold or when the net cost of an asset held for sale is greater than the
market value of the asset.
In
addition, we engage in enhanced recovery techniques in which carbon dioxide is
injected into certain producing oil reservoirs. In some cases, the
acquisition cost of the carbon dioxide associated with enhanced recovery is
capitalized as part of our development costs when it is injected. The
acquisition cost associated with pressure maintenance operations for reservoir
management is expensed when it is injected. When carbon dioxide is
recovered in conjunction with oil production, it is extracted and re-injected,
and all of the associated costs are expensed as incurred. Proved
developed reserves are used in computing units of production rates for drilling
and development costs, and total proved reserves are used for depletion of
leasehold costs. The units-of-production rate is determined by
field.
As
discussed in “—Inventories” above, we own and maintain natural gas in
underground storage as part of our inventory. This component of our inventory
represents the portion of gas stored in an underground storage facility
generally known as “working gas,” and represents an estimate of the portion of
gas in these facilities available for routine injection and
withdrawal. In addition to this working gas, underground gas storage
reservoirs contain injected gas which is not routinely cycled but, instead,
serves the function of maintaining the necessary pressure to allow efficient
operation of the facility. This gas, generally known as “cushion
gas,” is divided into the categories of “recoverable cushion gas” and
“unrecoverable cushion gas,” based on an engineering analysis of whether the gas
can be economically removed from the storage facility at any point during its
life. The portion of the cushion gas that is determined to be
unrecoverable is considered to be a permanent part of the facility itself (thus,
part of our “Property, plant and equipment, net” balance in the accompanying
Consolidated Balance Sheets), and this unrecoverable portion is depreciated over
the facility’s estimated useful life. The portion of the cushion gas
that is determined to be recoverable is also considered a component of the
facility but is not depreciated because it is expected to ultimately be
recovered and sold.
123
Kinder
Morgan, Inc. Form 10-K
Impairments
We
measure long-lived assets that are to be disposed of by sale at the lower of
book value or fair value less the cost to sell, and we review for the impairment
of long-lived assets whenever events or changes in circumstances indicate that
our carrying amount of an asset may not be recoverable. We would
recognize an impairment loss when estimated future cash flows expected to result
from our use of the asset and its eventual disposition is less than its carrying
amount.
We
evaluate our oil and gas producing properties for impairment of value on a
field-by-field basis or, in certain instances, by logical grouping of assets if
there is significant shared infrastructure, using undiscounted future cash flows
based on total proved and risk-adjusted probable and possible
reserves. For the purpose of impairment testing, we use the forward
curve prices as observed at the test date; however, due to differences between
the forward curve and spot prices, the forward curve cash flows may differ from
the amounts presented in our supplemental information on oil and gas producing
activities disclosed in Note 20.
Oil
and gas producing properties deemed to be impaired are written down to their
fair value, as determined by discounted future cash flows based on total proved
and risk-adjusted probable and possible reserves or, if available, comparable
market values. Unproved oil and gas properties that are individually
significant are periodically assessed for impairment of value, and a loss is
recognized at the time of impairment. Due to the decline in crude oil
and natural gas prices during 2008, on December 31, 2008, we conducted an
impairment test on our oil and gas producing properties in the CO2–KMP
business segment and determined that no impairment was necessary.
Allowance
for Funds Used During Construction/Capitalized Interest
Included
in the cost of our qualifying property, plant and equipment is (i) an allowance
for funds used during construction (“AFUDC”) or upgrade for assets regulated by
the Federal Energy Regulatory Commission (“FERC”), or (ii) capitalized interest.
The primary difference between AFUDC and capitalized interest is that
AFUDC may include a component for equity funds, while capitalized interest does
not. AFUDC on debt, as well as capitalized interest, represents the
estimated cost of capital, from borrowed funds, during the construction period
that is not immediately expensed, but instead is treated as an asset
(capitalized) and amortized to expense over time in our income
statements.
Total
AFUDC on debt and capitalized interest on debt resulting from the capitalization
of interest expense in 2009 and 2008, seven months ended December 31, 2007 and
five months ended May 31, 2007 was $32.9 million, $49.5 million, $25.7
million and $12.3 million, respectively. Similarly, AFUDC
on equity represents an estimate of the cost of capital funded by equity
contributions, and in the years ended December 31, 2009 and 2008, seven months
ended December 31, 2007 and five months ended May 31, 2007, we also capitalized
approximately $22.7 million, $10.8 million, $7.8 million and $1.5 million,
respectively, of equity AFUDC.
Asset
Retirement Obligations
We
record liabilities for obligations related to the retirement and removal of
long-lived assets used in our businesses. We record, as liabilities,
the fair value of asset retirement obligations on a discounted basis when they
are incurred, which is typically at the time the assets are installed or
acquired. Amounts recorded for the related assets are increased by
the amount of these obligations. Over time, the liabilities increase
due to the change in their present value, and the initial capitalized costs are
depreciated over the useful lives of the related assets. The
liabilities are eventually extinguished when the asset is taken out of service.
For more information on our asset retirement obligations, see Note 5 “Property,
Plant and Equipment—Asset Retirement Obligations.”
Equity
Method of Accounting
We
account for investments greater than 20% in affiliates, which we do not control,
by the equity method of accounting. Under this method, our equity
investments are carried originally at our acquisition cost, increased by our
proportionate share of the investee’s net income, and decreased by our
proportionate share of the investee’s net losses and by dividends
received.
Goodwill
Goodwill
represents the excess of the cost of an acquisition price over the fair value of
the acquired net assets, and such amounts are reported separately as “Goodwill”
on the accompanying Consolidated Balance Sheets. The Company tests for
impairment of goodwill on an annual basis and at any other time if events occur
or circumstances indicate that the carrying amount of goodwill may not be
recoverable. See Note 7 for more information about Goodwill and our annual
impairment test.
124
Kinder
Morgan, Inc. Form 10-K
Revenue
Recognition Policies
We
recognize revenues as services are rendered or goods are delivered and, if
applicable, title has passed. We generally sell natural gas under
long-term agreements, with periodic price adjustments. In some cases,
we sell natural gas under short-term agreements at prevailing market
prices. In all cases, we recognize natural gas sales revenues when
the natural gas is sold to a purchaser at a fixed or determinable price,
delivery has occurred and title has transferred, and collectibility of the
revenue is reasonably assured. The natural gas we market is primarily
purchased gas produced by third parties, and we market this gas to power
generators, local distribution companies, industrial end-users and national
marketing companies. We recognize gas gathering and marketing
revenues in the month of delivery based on customer nominations and generally,
our natural gas marketing revenues are recorded gross, not net of cost of gas
sold.
In
addition to storing and transporting a significant portion of the natural gas
volumes we purchase and resell for our own account, we provide various types of
natural gas storage and transportation services for third-party
customers. The natural gas remains the property of these customers at
all times. In many cases (generally described as “firm service”), the
customer pays a two-part rate that includes (i) a fixed fee reserving the right
to transport or store natural gas in our facilities and (ii) a per-unit rate for
volumes actually transported or injected into/withdrawn from
storage. The fixed-fee component of the overall rate is recognized as
revenue in the period the service is provided. The per-unit charge is
recognized as revenue when the volumes are delivered to the customers’ agreed
upon delivery point, or when the volumes are injected into/withdrawn from our
storage facilities. In other cases (generally described as
“interruptible service”), there is no fixed fee associated with the services
because the customer accepts the possibility that service may be interrupted at
our discretion in order to serve customers who have purchased firm
service. In the case of interruptible service, revenue is recognized
in the same manner utilized for the per-unit rate for volumes actually
transported under firm service agreements. In addition to our firm
and interruptible transportation services, we also provide natural gas “park and
loan service” to assist customers in managing short-term gas surpluses or
deficits. Revenues are recognized as services are provided, based on
the terms negotiated under these contracts.
We
provide crude oil transportation services and refined petroleum products
transportation and storage services to customers. Revenues are
recorded when products are delivered and services have been provided, and
adjusted according to terms prescribed by the toll settlements with shippers and
approved by regulatory authorities.
We
recognize bulk terminal transfer service revenues based on volumes loaded and
unloaded. We recognize liquids terminal tank rental revenue ratably
over the contract period. We recognize liquids terminal throughput
revenue based on volumes received and volumes delivered. Liquids
terminal minimum take-or-pay revenue is recognized at the end of the contract
year or contract term depending on the terms of the contract. We
recognize transmix processing revenues based on volumes processed or sold, and
if applicable, when title has passed. We recognize energy-related
product sales revenues based on delivered quantities of product.
Revenues
from the sale of crude oil, natural gas liquids and natural gas production are
recorded using the entitlement method. Under the entitlement method,
revenue is recorded when title passes based on our net interest. We
record our entitled share of revenues based on entitled volumes and contracted
sales prices. Since there is a ready market for oil and gas
production, we sell the majority of our products soon after production at
various locations, at which time title and risk of loss pass to the
buyer. As a result, we maintain a minimum amount of product inventory
in storage.
Environmental
Matters
We
expense or capitalize, as appropriate, environmental expenditures that relate to
current operations. We expense expenditures that relate to an
existing condition caused by past operations, which do not contribute to current
or future revenue generation. We do not discount environmental
liabilities to a net present value, and we record environmental liabilities when
environmental assessments and/or remedial efforts are probable and we can
reasonably estimate the costs. Generally, our recording of these
accruals coincides with our completion of a feasibility study or our commitment
to a formal plan of action. We recognize receivables for anticipated
associated insurance recoveries when such recoveries are deemed to be
probable.
We
routinely conduct reviews of potential environmental issues and claims that
could impact our assets or operations. These reviews assist us in
identifying environmental issues and estimating the costs and timing of
remediation efforts. We also routinely adjust our environmental
liabilities to reflect changes in previous estimates. In making
environmental liability estimations, we consider the material effect of
environmental compliance, pending legal actions against us, and potential
third-party liability claims. Often, as the remediation evaluation
and effort progresses, additional information is obtained, requiring revisions
to estimated costs. These revisions are reflected in our income in
the period in which they are reasonably determinable. For more
information on our environmental disclosures, see Note 16.
125
Kinder
Morgan, Inc. Form 10-K
Legal
We
are subject to litigation and regulatory proceedings as the 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. 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, and we accrue for such amounts. 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 and all recorded legal liabilities
are revised as better information becomes available. For more
information on our legal disclosures, see Note 16.
Pensions
and Other Postretirement Benefits
We
fully recognize the overfunded or underfunded status of our consolidating
subsidiaries’ pension and postretirement benefit plans as either assets or
liabilities on our balance sheet. A plan’s funded status is the difference
between the fair value of plan assets and the plan's benefit obligation. We
record deferred plan costs and income—unrecognized losses and gains,
unrecognized prior service costs and credits, and any remaining unamortized
transition obligations—in accumulated other comprehensive income, until they are
amortized to expense. For more information on our pension and
postretirement benefit disclosures; see Note 9.
Noncontrolling
Interests
Noncontrolling
interests represents the outstanding ownership interests in our consolidated
subsidiaries that are not owned by us. On January 1, 2009, we adopted certain
provisions concerning the accounting and reporting for noncontrolling interests
included within the “Consolidation” Topic of the
Codification. Specifically, these provisions establish accounting and
reporting standards that require (i) the ownership interests in subsidiaries
held by parties other than the parent to be clearly identified, labeled, and
presented in the consolidated balance sheet within equity, but separate from the
parent’s equity and (ii) the equity amount of consolidated net income
attributable to the parent and to the noncontrolling interests to be clearly
identified and presented on the face of the consolidated income
statement.
The
adopted provisions apply prospectively, with the exception of the presentation
and disclosure requirements, which must be applied retrospectively for all
periods presented. Accordingly, our
consolidated net income and comprehensive income are now determined without
deducting amounts attributable to our noncontrolling interests. In
the accompanying Consolidated Statements of Operations, the noncontrolling
interests in the net income (or loss) of our consolidated subsidiaries is shown
as an allocation of our consolidated net income and is presented separately as
“Net income attributable to noncontrolling interests.” In the
accompanying Consolidated Balance Sheets, noncontrolling interests represents
the ownership interests in our consolidated subsidiaries’ net assets held by
parties other than us. It is presented separately as “Noncontrolling
interests” within “Stockholders’ Equity.”
Income
Taxes
Income
tax expense is recorded based on an estimate of the effective tax rate in effect
or to be in effect during the relevant periods. Deferred income tax assets and
liabilities are recognized for temporary differences between the basis of assets
and liabilities for financial reporting and tax purposes. Changes in tax
legislation are included in the relevant computations in the period in which
such changes are effective. Deferred tax assets are reduced by a valuation
allowance for the amount of any tax benefit we do not expect to be realized.
Note 4 contains information about our income taxes, including the components of
our income tax provision and the composition of our deferred income tax assets
and liabilities.
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.
Foreign
Currency Transactions and Translation
Foreign
currency transactions are those transactions whose terms are denominated in a
currency other than the currency of the primary economic environment in which
our reporting subsidiary operates, also referred to as its functional
currency. Transaction gains or losses result from a change in
exchange rates between (i) the functional currency, for example the Canadian
dollar for a Canadian subsidiary and (ii) the currency in which a foreign
currency transaction is denominated, for example the U.S. dollar for a Canadian
subsidiary. Foreign currency transaction gains and losses are included within
“Other Income (Expense) – Other, net” in the accompanying Consolidated
Statements of Operations.
126
Kinder
Morgan, Inc. Form 10-K
We
translate the assets and liabilities of each of our consolidating foreign
subsidiaries to U.S. dollars at year-end exchange rates. Income and
expense items are translated at weighted-average rates of exchange prevailing
during the year and stockholders’ equity accounts are translated by using
historical exchange rates. Translation adjustments result from
translating all assets and liabilities at current year-end rates, while
stockholders’ equity is translated by using historical and weighted-average
rates. The cumulative translation adjustments balance is reported as
a component of the “Accumulated other comprehensive loss” caption in the
accompanying Consolidated Balance Sheets.
Risk
Management Activities
We
utilize energy commodity derivative contracts for the purpose of mitigating our
risk resulting from fluctuations in the market price of natural gas, natural gas
liquids and crude oil. In addition, we enter into interest rate swap
agreements for the purpose of hedging the interest rate risk associated with our
debt obligations and cross-currency interest rate swap agreements to mitigate
foreign currency risk from our investments in businesses owned and operated
outside the United States. We measure our derivative contracts at
fair value and we report them on our balance sheet as either an asset or
liability. If the derivative transaction qualifies for and is
designated as a normal purchase and sale, it is exempted from fair value
accounting and is accounted for using traditional accrual
accounting.
Furthermore,
changes in our derivative contracts’ fair values are recognized currently in
earnings unless specific hedge accounting criteria are met. If a
derivative contract meets those criteria, the contract’s gains and losses are
allowed to offset related results on the hedged item in our income statement,
and we are required to both formally designate the derivative contract as a
hedge and document and assess the effectiveness of the contract associated with
the transaction that receives hedge accounting. Only designated
qualifying items that are effectively offset by changes in fair value or cash
flows during the term of the hedge are eligible to use the special accounting
for hedging.
Our
derivative contracts that hedge our energy commodity price risks involve our
normal business activities, which include the sale of natural gas, natural gas
liquids and crude oil, and we have designated these derivative contracts as cash
flow hedges—derivative contracts that hedge exposure to variable cash flows of
forecasted transactions—and the effective portion of these derivative contracts’
gain or loss is initially reported as a component of other comprehensive income
(outside earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of
the gain or loss is reported in earnings immediately. See Note 13 for
more information on our risk management activities and disclosures.
Accounting
for Regulatory Activities
Regulatory
assets and liabilities represent probable future revenues or expenses associated
with certain charges and credits that will be recovered from or refunded to
customers through the ratemaking process. The amount of regulatory
assets and liabilities reflected within “Deferred charges and other assets” and
“Other long-term liabilities and deferred credits,” respectively, in the
accompanying Consolidated Balance Sheets as of December 31, 2009 and 2008 are
not material.
Transfer
of Net Assets Between Entities Under Common Control
We
account for the transfer of net assets between entities under common control by
carrying forward the net assets recognized in the balance sheets of each
combining entity to the balance sheet of the combined entity, and no other
assets or liabilities are recognized as a result of the combination. Transfers
of net assets between entities under common control do not affect the income
statement of the combined entity.
Subsequent
Events
We
have evaluated subsequent events, which are events or transactions that occurred
after December 31, 2009 through the issuance of the accompanying Consolidated
Financial Statements.
3. Acquisitions
and Divestitures
Acquisitions
from Unrelated Entities
The
provisions of the Codification’s Topic 805, “Business Combinations,” are to be
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. Accordingly, we adopted the provisions of
Topic 805 on January 1, 2009.
Topic 805 requires that the acquisition method of accounting be used for
all business combinations, and an acquirer be identified for each business
combination.
127
Kinder
Morgan, Inc. Form 10-K
Significant
provisions of Topic 805 concern principles and requirements for how an acquirer
(i) recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interests in the
acquiree, (ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This
Topic also amends the provisions related to the initial recognition and
measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination. It requires
that acquired contingencies in a business combination be recognized at fair
value on the acquisition date if fair value can be reasonably estimated during
the allocation period. Otherwise, companies would typically account
for the acquired contingencies in accordance with the provisions of the
“Contingencies” Topic of the Codification. The adoption of Topic 805
did not have a material impact on our consolidated financial
statements.
During
2009, 2008 and 2007, Kinder Morgan Energy Partners completed the following
acquisitions from unrelated entities. For each of these acquisitions,
Kinder Morgan Energy Partners recorded all the acquired assets and assumed
liabilities at their estimated fair market values (not the acquired entity’s
book values) as of the acquisition date. The results of operations
from these acquisitions accounted for as business combinations are included in
the accompanying Consolidated Financial Statements from the acquisition
date.
|
Allocation
of Purchase Price
|
|||||||||||||||||||
|
(in
millions)
|
|||||||||||||||||||
|
Ref.
|
Date
|
Acquisition
|
Purchase
Price
|
Current
Assets
|
Property
Plant
&
Equipment
|
Deferred
Charges
&
Other
|
Goodwill
|
||||||||||||
|
(1)
|
1/07
|
Interest
in Cochin Pipeline
|
$
|
47.8
|
$
|
-
|
$
|
47.8
|
$
|
-
|
$
|
-
|
|||||||
|
(2)
|
5/07
|
Vancouver
Wharves Marine Terminal.
|
59.5
|
6.1
|
53.4
|
-
|
-
|
||||||||||||
|
(3)
|
9/07
|
Marine
Terminals, Inc. Assets.
|
102.1
|
0.2
|
60.8
|
22.5
|
18.6
|
||||||||||||
|
(4)
|
8/08
|
Wilmington,
North Carolina Liquids Terminal
|
12.7
|
-
|
5.9
|
-
|
6.8
|
||||||||||||
|
(5)
|
12/08
|
Phoenix,
Arizona Products Terminal
|
27.5
|
-
|
27.5
|
-
|
-
|
||||||||||||
|
(6)
|
4/09
|
Megafleet
Towing Co., Inc. Assets
|
21.7
|
-
|
7.1
|
4.0
|
10.6
|
||||||||||||
|
(7)
|
10/09
|
Crosstex
Energy, L.P. Natural Gas Treating Business
|
270.7
|
15.0
|
181.7
|
25.4
|
48.6
|
||||||||||||
|
(8)
|
11/09
|
Endeavor
Gathering LLC
|
36.0
|
-
|
-
|
36.0
|
-
|
||||||||||||
(1)
Interest in Cochin Pipeline
Effective
January 1, 2007, Kinder Morgan Energy Partners acquired the remaining
approximate 50.2% interest in the Cochin pipeline system that it did not already
own for an aggregate consideration of approximately $47.8 million, consisting of
$5.5 million in cash and a note payable having a fair value of $42.3
million. As part of the transaction, the seller also agreed to
reimburse Kinder Morgan Energy Partners for certain pipeline integrity
management costs over a five-year period in an aggregate amount not to exceed
$50 million. Upon closing, Kinder Morgan Energy Partners became the
operator of the pipeline. The Cochin Pipeline is a multi-product
liquids pipeline consisting of approximately 1,900 miles of pipe operating
between Fort Saskatchewan, Alberta, and Windsor, Ontario, Canada. Its
operations are included as part of the Products Pipelines–KMP business
segment.
(2)
Vancouver Wharves Terminal
On
May 30, 2007, Kinder Morgan Energy Partners purchased the Vancouver Wharves bulk
marine terminal from British Columbia Railway Company, a crown corporation owned
by the Province of British Columbia, for an aggregate consideration of $59.5
million, consisting of $38.8 million in cash and $20.7 million in assumed
liabilities. The acquisition both expanded and complemented Kinder
Morgan Energy Partners’ existing West region terminal operations, and all of the
acquired assets are included in the Terminals–KMP business
segment. In the first half of 2008, Kinder Morgan Energy Partners
made its final purchase price adjustments to reflect final fair value of
acquired assets and final expected value of assumed liabilities. The
adjustments increased “Property, Plant and Equipment, net” by $2.7 million,
reduced working capital balances by $1.6 million, and increased long-term
liabilities by $1.1 million.
(3)
Marine Terminals, Inc. Assets
Effective
September 1, 2007, Kinder Morgan Energy Partners acquired certain bulk terminals
assets from Marine Terminals, Inc. for an aggregate consideration of $102.1
million, consisting of $100.8 million in cash and assumed liabilities of $1.3
million. The acquired assets and operations are primarily involved in
the handling and storage of steel and alloys. The acquisition both
expanded and complemented Kinder Morgan Energy Partners’ existing ferro alloy
terminal operations and provides customers further access to its growing
national network of marine and rail terminals. All of the acquired
assets are included in the Terminals–KMP business segment. In the
first nine months of 2008, Kinder Morgan Energy Partners paid an additional $0.5
million for purchase price settlements, and made purchase price adjustments to
reflect final fair value of acquired assets and final expected value of assumed
liabilities. The 2008 adjustments primarily reflected changes in the
allocation of the purchase cost to intangible assets acquired.
128
Kinder
Morgan, Inc. Form 10-K
The
$22.5 million allocation to “Deferred charges and other assets” included a $20.1
million amount representing the fair value of a service contract entered into
with Nucor Corporation, a large domestic steel company with significant
operations in the Southeast region of the United States. For
valuation purposes, the service contract was determined to have a useful life of
20 years, and pursuant to the contract’s provisions, the acquired terminal
facilities will continue to provide Nucor with handling, processing, harboring
and warehousing services.
The
$18.6 million allocation to “Goodwill,” which is expected to be deductible for
tax purposes, was based on the fact that this acquisition both expanded and
complemented Kinder Morgan Energy Partners’ existing ferro alloy terminal
operations and will provide Nucor and other customers further access to its
growing national network of marine and rail terminals. Kinder Morgan
Energy Partners believes the acquired value of the assets, including all
contributing intangible assets, exceeded the fair value of acquired identifiable
net assets and liabilities—in the aggregate, these factors represented
goodwill.
(4)
Wilmington, North Carolina Liquids Terminal
On
August 15, 2008, Kinder Morgan Energy Partners purchased certain terminal assets
from Chemserve, Inc. for an aggregate consideration of $12.7 million, consisting
of $11.8 million in cash and $0.9 million in assumed liabilities. The
liquids terminal facility is located in Wilmington, North Carolina and stores
petroleum products and chemicals. The acquisition both expanded
and complemented Kinder Morgan Energy Partners’ existing Southeast region
terminal operations, and all of the acquired assets are included in the
Terminals–KMP business segment.
In
the fourth quarter of 2008, Kinder Morgan Energy Partners allocated its purchase
price to reflect final fair value of acquired assets and final expected value of
assumed liabilities. A total of $6.8 million of goodwill was assigned
to the Terminals–KMP business segment and the entire amount is expected to be
deductible for tax purposes. Kinder Morgan Energy Partners believes
this acquisition resulted in the recognition of goodwill primarily because of
certain advantageous factors (including the synergies provided by increasing its
liquids storage capacity in the Southeast region of the U.S.) that contributed
to its acquisition price exceeding the fair value of acquired identifiable net
assets and liabilities—in the aggregate, these factors represented
goodwill.
(5)
Phoenix, Arizona Products Terminal
Effective
December 10, 2008, Kinder Morgan Energy Partners’ West Coast Products Pipelines
operations acquired a refined petroleum products terminal located in Phoenix,
Arizona from ConocoPhillips for approximately $27.5 million in
cash. The terminal has storage capacity of approximately 200,000
barrels for gasoline, diesel fuel and ethanol. The acquisition
complemented Kinder Morgan Energy Partners’ existing Phoenix liquids assets, and
the acquired incremental storage increased Kinder Morgan Energy Partners’
combined storage capacity in the Phoenix market by approximately
13%. The acquired terminal is included as part the Products
Pipelines–KMP business segment.
(6)
Megafleet Towing Co., Inc. Assets
Effective
April 23, 2009, Kinder Morgan Energy Partners acquired certain terminals assets
from Megafleet Towing Co., Inc. for an aggregate consideration of approximately
$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 Kinder Morgan Energy Partners an agreed-upon amount
of earnings, as defined by the purchase and sale agreement, during the five year
period. The contingent consideration had a fair value of $3.7 million
as of the acquisition date, and there has been no change in the fair value
during the post-acquisition period ended December 31, 2009.
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. The acquisition complements and expands Kinder
Morgan Energy Partners’ existing Gulf Coast and Texas petroleum coke terminal
operations, and all of the acquired assets are included in the Terminals–KMP
business segment. We allocated $10.6 million of the purchase price to
“Goodwill,” and we expect that approximately $5.0 million of goodwill will be
deductible for tax purposes. Kinder Morgan Energy Partners believes
the primary item that generated the goodwill is the value of the synergies
created between the acquired assets and its pre-existing terminal assets
(resulting from the increase in services now offered by its Texas petroleum coke
operations).
(7)
Crosstex Energy, L.P. Natural Gas Treating Business
On
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, consisting of $265.3 million in cash and
assumed liabilities of $5.4 million. The acquired assets primarily
consist of approximately 290 natural gas amine-treating and dew-point control
plants and related equipment, and 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
129
Kinder
Morgan, Inc. Form 10-K
facilities
located in Mississippi, Oklahoma, Arkansas and Kansas. The
acquisition made Kinder Morgan Energy Partners the largest provider of
contract-provided treating plants in the U.S. and complemented and expanded the
existing natural gas treating operations offered by its Texas intrastate natural
gas pipeline group. All of the acquired assets are included in the
Natural Gas Pipelines–KMP business segment.
Kinder
Morgan Energy Partners measured the identifiable intangible assets acquired at
fair value on the acquisition date and accordingly, recognized $25.4 million in
“Deferred charges and other assets,” representing the purchased fair value of
separate and identifiable relationships with existing natural gas producing
customers. Kinder Morgan Energy Partners estimates the remaining
useful life of these existing customer relationships to be between approximately
eight and nine years. After measuring all of the identifiable
tangible and intangible assets acquired and liabilities assumed at fair value on
the acquisition date, Kinder Morgan Energy Partners recognized $48.6 million of
“Goodwill,” an intangible asset representing the future economic benefits
expected to be derived from this acquisition that are not assigned to other
identifiable, separately recognizable assets acquired. Kinder Morgan
Energy Partners believes the primary item that generated the goodwill is its
ability to grow the business by leveraging its pre-existing natural gas
operations (resulting from the increase in services now offered by its natural
gas processing and treating operations in the state of Texas), and Kinder Morgan
Energy Partners believes that this value contributed to its acquisition price
exceeding the fair value of acquired identifiable net assets and liabilities—in
the aggregate, these factors represented goodwill. Furthermore, this
entire amount of goodwill is expected to be deductible for tax
purposes.
(8)
Endeavor Gathering LLC
On
November 1, 2009, Kinder Morgan Energy Partners acquired a 40% membership
interest in Endeavor Gathering LLC for $36.0 million in
cash. Endeavor Gathering LLC owns the natural gas gathering and
compression business previously owned by GMX Resources Inc. and its wholly-owned
subsidiary, Endeavor Pipeline, Inc. 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. The remaining 60% interest
in Endeavor Gathering LLC is owned by GMX Resources, Inc. and Endeavor Pipeline
Inc. remained operator of the business. The acquired investment
complemented Kinder Morgan Energy Partners’ existing natural gas gathering and
transportation business located in the state of Texas. Kinder Morgan
Energy Partners accounts for this investment under the equity method of
accounting, and the investment is included in the Natural Gas Pipelines–KMP
business segment. For more information on our investments, see Note
6.
Pro
Forma Information
Pro
forma consolidated income statement information that gives effect to all of the
acquisitions we have made and all of the joint ventures we have entered into
since January 1, 2008 as if they had occurred as of January 1, 2008 is not
presented because it would not be materially different from the information
presented in the accompanying Consolidated Statements of
Operations.
Divestitures
North
System Natural Gas Liquids Pipeline System—Discontinued Operations
In
October 2007, Kinder Morgan Energy Partners completed the sale of its North
System and its 50% ownership interest in the Heartland Pipeline Company to ONEOK
Partners, L.P. for approximately $298.6 million in cash. For the year ended
December 31, 2008, Kinder Morgan Energy Partners paid $2.4 million to ONEOK
Partners, L.P. to fully settle both the sale of working capital items and the
allocation of pre-acquisition investee distributions, and to partially settle
the sale of liquids inventory balances. Due to the fair market valuation
resulting from the Going Private transaction (see Note 2), the consideration
Kinder Morgan Energy Partners received from the sale of its North System was
equal to its carrying value; therefore no gain or loss was recorded on this
disposal transaction. The North System consists of an approximately 1,600-mile
interstate common carrier pipeline system that delivers natural gas liquids and
refined petroleum products from south central Kansas to the Chicago area. Also
included in the sale were eight propane truck-loading terminals located at
various points in three states along the pipeline system, and one multi-product
terminal complex located in Morris, Illinois. All of these assets were included
in the Products Pipelines–KMP business segment.
Thunder
Creek Gas Services, LLC
Effective
April 1, 2008, Kinder Morgan Energy Partners sold its 25% ownership interest in
Thunder Creek Gas Services, LLC, referred to in this report as Thunder Creek, to
PVR Midstream LLC, a subsidiary of Penn Virginia Corporation. Prior
to the sale, Kinder Morgan Energy Partners accounted for its investment in
Thunder Creek under the equity method of accounting and included its financial
results within the Natural Gas Pipelines–KMP business segment. In the
second quarter of 2008, Kinder Morgan Energy Partners received cash proceeds,
net of closing costs and settlements, of approximately $50.7 million for its
investment, and recognized a gain of $13.0 million with respect to this
transaction. Kinder Morgan
130
Kinder
Morgan, Inc. Form 10-K
Energy
Partners used the proceeds from this sale to reduce the outstanding balance on
its commercial paper borrowings, and we included the amount of the gain within
the caption “Other, net” in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2008.
Cypress
Pipeline
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 an option it held to purchase a 50% ownership interest in
Kinder Morgan Energy Partners’ Cypress Pipeline. Kinder Morgan Energy
Partners expects the transaction to close no earlier than the end of the first
quarter of 2010. As of December 31, 2009, the net assets of the Cypress
Pipeline totaled approximately $21.3 million. The sale of 50% of
Kinder Morgan Energy Partners’ Cypress Pipeline will not have a material impact
on our business, financial position, results of operations or our cash
flows.
NGPL
PipeCo LLC
On
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC
(formerly MidCon Corp.), which owns Natural Gas Pipeline Company of America LLC
and certain affiliates, collectively referred to as “NGPL,” to Myria Acquisition
Inc. (“Myria”) for approximately $2.9 billion. We also received approximately
$3.0 billion of cash previously held in escrow related to a notes offering by
NGPL PipeCo LLC in December 2007, the net proceeds of which were distributed to
us principally as repayment of intercompany indebtedness and partially as a
dividend, immediately prior to the closing of the sale to Myria. Pursuant to the
purchase agreement, Myria acquired all 800 Class B shares and we retained all
200 Class A shares of NGPL PipeCo LLC. We continue to operate NGPL’s assets
pursuant to a 15-year operating agreement. The total proceeds from
this sale of $5.9 billion were used to pay off the entire outstanding balances
of our senior secured credit facility’s Tranche A and Tranche B term loans, to
repurchase $1.67 billion of our outstanding debt securities and to reduce
balances outstanding under our $1.0 billion revolving credit
facility.
Terasen
Pipelines (Corridor) Inc. – Discontinued Operations
In
June 2007, we completed the sale of Terasen Pipelines (Corridor) Inc.
(“Corridor”) to Inter Pipeline Fund, a Canada-based company. Corridor transports
diluted bitumen from the Athabasca Oil Sands Project near Fort McMurray,
Alberta, to the Scotford Upgrader near Fort Saskatchewan, Alberta. The sale did
not include any other assets of Kinder Morgan Canada (formerly Terasen
Pipelines). The sale price was approximately $711 million (C$760 million) plus
the buyer’s assumption of all of the debt related to Corridor, including the
debt associated with the expansion taking place on Corridor at the time of the
sale. The consideration was equal to Corridor’s carrying value, therefore no
gain or loss was recorded on this disposal transaction.
Terasen
Inc. – Discontinued Operations
We
closed the sale of Terasen Inc. to Fortis Inc. on May 17, 2007, for sales
proceeds of approximately $3.4 billion (C$3.7 billion) including cash plus the
buyers’ assumption of debt. The sale did not include the assets of Kinder Morgan
Canada (formerly Terasen Pipelines) discussed in the preceding paragraph. We
recorded a book gain on this disposition of $55.7 million in the second quarter
of 2007. The sale resulted in a capital loss of $998.6 million for tax purposes.
Approximately $223.3 million of this loss was utilized to reduce capital gains
principally associated with the sale of our U.S.-based retail gas operations
(see below) resulting in a tax benefit of approximately $82.2 million. The
remaining capital loss carryforward of $775.3 million was utilized to reduce the
capital gain associated with our sale of an 80% ownership interest in NGPL
PipeCo LLC.
Natural
Gas Distribution and Retail Operations – Discontinued Operations
In
March 2007, we completed the sale of our U.S.-based retail natural gas
distribution and related operations to GE Energy Financial Services, a
subsidiary of General Electric Company and Alinda Investments LLC for $710
million and an adjustment for working capital. In conjunction with this sale, we
recorded a pre-tax gain of $251.8 million (net of $3.9 million of transaction
costs) in the first quarter of 2007. The Natural Gas Pipelines–KMP business
segment (i) provides natural gas transportation and storage services and sells
natural gas to and (ii) receives natural gas transportation and storage
services, natural gas and natural gas liquids and other gas supply services from
the discontinued U.S.-based retail natural gas distribution business. These
transactions are continuing after the sale of this business and will likely
continue to a similar extent into the future. For the five months ended May 31,
2007, revenues and expenses of our continuing operations totaling $3.1 million
and $1.2 million, respectively for products and services sold to and purchased
from our discontinued U.S.-based retail natural gas distribution operations
prior to its sale in March 2007, have been eliminated in the accompanying
Consolidated Statements of Operations. We are currently receiving fees from
SourceGas, a subsidiary of General Electric Company, to provide certain
administrative functions for a limited period of time and for the lease of
office space. We do not have any significant continuing involvement in or retain
any ownership interest in these operations and, therefore, the continuing cash
flows discussed above are not considered direct cash flows of the disposed
assets.
131
Kinder
Morgan, Inc. Form 10-K
Other
Divestitures
In
January 2008, we completed the sale of our interests in three natural gas-fired
power plants in Colorado to Bear Stearns. We received proceeds of $63.1
million.
Earnings
of Discontinued Operations
The
financial results of discontinued operations have been reclassified for all
periods presented and reported in the caption, “Income (loss) from Discontinued
Operations, net of tax” in the accompanying Consolidated Statements of
Operations. Summarized financial results of these operations are as follows (in
millions):
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
||||||||||||||
|
Revenues
|
$ | - | $ | - | $ | 24.1 | $ | 921.8 | |||||||||
|
Income
(loss) from discontinued operations before income taxes
|
$ | 0.5 | $ | (0.9 | ) | $ | (10.2 | ) | $ | 393.2 | |||||||
|
Income
taxes
|
(0.2 | ) | - | 8.7 | (94.6 | ) | |||||||||||
|
Income
(loss) from discontinued operations
|
$ | 0.3 | $ | (0.9 | ) | $ | (1.5 | ) | $ | 298.6 | |||||||
The
cash flows attributable to discontinued operations are included in the
accompanying Consolidated Statements of Cash Flows for the years ended December
31, 2009 and 2008, seven months ended December 31, 2007, and five months ended
May 31, 2007 in the captions “Net Cash Flows (Used in) Provided by Discontinued
Operations,” “Net Cash Flows Provided by Discontinued Investing Activities” and
“Net Cash Flows Provided by Discontinued Financing Activities.”
Acquisitions
Subsequent to December 31, 2009
USD
Terminal Acquisition
On
January 15, 2010, Kinder Morgan Energy Partners acquired three ethanol handling
train terminals from U.S Development Group 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. As part of the transaction,
Kinder Morgan Energy Partners announced the formation of a venture with U.S.
Development Group to optimize and coordinate customer access to the three
acquired terminals, other ethanol terminal assets Kinder Morgan Energy Partners
already owns and operates, and other terminal projects currently under
development by both parties. The acquisition complemented and
expanded the ethanol and rail terminal operations Kinder Morgan Energy Partners
previously owned, and all of the acquired assets are included in the
Terminals–KMP business segment. In the first quarter of 2010, Kinder
Morgan Energy Partners expects to make final purchase price adjustments for
acquired working capital items and measure the identifiable tangible and
intangible assets acquired and liabilities assumed at fair value on the
acquisition date.
Slay
Industries Terminal Acquisition
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, Illinois, which has approximately 175 acres to develop. All
of the assets in Sauget have access to the Mississippi River and five rail
carriers. The acquisition complemented and expanded Kinder Morgan
Energy Partners’ pre-existing Midwest terminal operations by adding a diverse
mix of liquid and bulk capabilities, and all of the acquired assets are included
in the Terminals-KMP business segment. In the first quarter of 2010, Kinder
Morgan Energy Partners expects to make final purchase price adjustments for
acquired working capital items and measure the identifiable tangible and
intangible assets acquired and liabilities assumed at fair value on March 5,
2010.
132
Kinder
Morgan, Inc. Form 10-K
4. Income
Taxes
The
components of income (loss) before income taxes from continuing operations are
as follows (in millions):
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
||||||||||||||
|
United
States
|
$ | 1,023.3 | $ | (2,978.7 | ) | $ | 511.8 | $ | 369.9 | ||||||||
|
Foreign
|
76.1 | 80.7 | 1.7 | (376.4 | ) | ||||||||||||
|
Total
|
$ | 1,099.4 | $ | (2,898.0 | ) | $ | 513.5 | $ | (6.5 | ) | |||||||
Components
of the income tax provision applicable to continuing operations for federal and
state income taxes are as follows (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Current
tax provision
|
||||||||||||||||
|
Federal
|
$ | 249.6 | $ | 786.6 | $ | 268.6 | $ | (7.0 | ) | |||||||
|
State
|
16.9 | 18.6 | 25.1 | 3.2 | ||||||||||||
|
Foreign
|
- | (4.5 | ) | 23.5 | 0.6 | |||||||||||
| 266.5 | 800.7 | 317.2 | (3.2 | ) | ||||||||||||
|
|
||||||||||||||||
|
Deferred
tax provision
|
||||||||||||||||
|
Federal
|
28.4 | (439.5 | ) | (95.2 | ) | 134.0 | ||||||||||
|
State
|
0.2 | 11.5 | 0.5 | 6.4 | ||||||||||||
|
Foreign
|
30.5 | (68.4 | ) | 4.9 | (1.7 | ) | ||||||||||
| 59.1 | (496.4 | ) | (89.8 | ) | 138.7 | |||||||||||
|
Total
tax provision
|
$ | 325.6 | $ | 304.3 | $ | 227.4 | $ | 135.5 | ||||||||
The
difference between the statutory federal income tax expense (and rate) and our
actual income tax expense (and effective income tax rate) is summarized as
follows (in millions, except percentages):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||||||||||
|
Year
Ended December 31,
|
Seven Months Ended
|
Five Months Ended
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
December
31, 2007
|
May
31, 2007
|
|||||||||||||||||||||||||||||
|
Federal
income tax
|
$ | 384.8 | 35.0 | % | $ | (1,014.3 | ) | (35.0 | ) % | $ | 179.7 | 35.0 | % | $ | (2.3 | ) | (35.0 | ) % | ||||||||||||||
|
Increase (decrease) as a result of:
|
||||||||||||||||||||||||||||||||
|
Nondeductible
goodwill impairment
|
- | - | % | 1,411.7 | 48.7 | % | (3.5 | ) | (0.7 | ) % | 132.0 | 2,039.8 | % | |||||||||||||||||||
|
Terasen
acquisition financing structure
|
- | - | - | - | - | - | (16.6 | ) | (257.0 | ) % | ||||||||||||||||||||||
|
Nondeductible
going private costs
|
- | - | - | - | - | - | 30.8 | 475.6 | % | |||||||||||||||||||||||
|
Deferred
tax rate change
|
(10.4 | ) | (0.9 | ) % | 17.8 | 0.6 | % | - | - | 0.5 | (0.2 | ) % | ||||||||||||||||||||
|
Taxes
on foreign earnings
|
30.2 | 2.7 | % | (68.2 | ) | (2.4 | ) % | 27.7 | 5.4 | % | 8.4 | 129.5 | % | |||||||||||||||||||
|
Net
effects of consolidating Kinder Morgan Energy Partners’ United States
income tax provision
|
(93.5 | ) | (8.5 | ) % | (77.4 | ) | (2.7 | ) % | 14.6 | 2.8 | % | (22.5 | ) | (348.3 | ) % | |||||||||||||||||
|
State
income tax, net of federal benefit
|
24.6 | 2.2 | % | 17.1 | 0.6 | % | 11.1 | 2.2 | % | 6.9 | 105.6 | % | ||||||||||||||||||||
|
Other
|
(10.1 | ) | (0.9 | ) % | 17.6 | 0.7 | % | (2.2 | ) | (0.4 | ) % | (1.7 | ) | (25.4 | ) % | |||||||||||||||||
|
Total
|
$ | 325.6 | 29.6 | % | $ | 304.3 | 10.5 | % | $ | 227.4 | 44.3 | % | $ | 135.5 | 2,084.6 | % | ||||||||||||||||
133
Kinder
Morgan, Inc. Form 10-K
Deferred
tax assets and liabilities result from the following (in millions):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets
|
||||||||
|
Employee
benefits
|
$ | 57.6 | $ | 79.8 | ||||
|
Book
accruals
|
21.3 | 14.3 | ||||||
|
Net
operating loss carryforwards
|
11.4 | - | ||||||
|
Interest
rate and currency swaps
|
24.3 | 7.0 | ||||||
|
Other
|
25.9 | 7.9 | ||||||
|
Total
deferred tax assets
|
140.5 | 109.0 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Property,
plant and equipment
|
239.9 | 160.0 | ||||||
|
Investments
|
1,880.2 | 1,937.2 | ||||||
|
Book
accruals
|
4.7 | - | ||||||
|
Derivative
instruments
|
12.5 | 5.7 | ||||||
|
Prepaid
pension costs
|
- | 16.6 | ||||||
|
Debt
adjustment
|
19.4 | 23.0 | ||||||
|
Other
|
9.5 | 47.8 | ||||||
|
Total
deferred tax liabilities
|
2,166.2 | 2,190.3 | ||||||
|
Net
deferred tax liabilities
|
$ | 2,025.7 | $ | 2,081.3 | ||||
|
|
||||||||
|
Current
deferred tax asset
|
$ | 14.2 | $ | - | ||||
|
Non-current
deferred tax liability
|
2,039.9 | 2,081.3 | ||||||
|
Net
deferred tax liabilities
|
$ | 2,025.7 | $ | 2,081.3 | ||||
During
2007, our sale of Terasen Inc. resulted in a capital loss of $998.6 million of
which approximately $223.3 million was utilized to reduce capital gain
principally associated with the sale of our U.S.-based retail natural gas
operations. The remaining capital loss was carried forward and utilized to
reduce the capital gain on the sale of our 80% ownership interest in the NGPL
PipeCo LLC business segment.
We
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based not only on the technical merits of the tax position
based on tax law, but also the past administrative practices and precedents of
the taxing authority. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate
resolution.
A
reconciliation of our gross unrecognized tax benefit excluding interest and
penalties for the years ended December 31, 2009, 2008 and 2007 is as follows (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at beginning of period
|
$ | 26.2 | $ | 41.5 | $ | 63.1 | ||||||
|
Additions
based on current year tax positions
|
1.4 | 2.1 | 9.8 | |||||||||
|
Additions
based on prior year tax positions
|
19.3 | 15.9 | 0.5 | |||||||||
|
Settlements
with taxing authority
|
14.0 | (10.2 | ) | (21.4 | ) | |||||||
|
Reductions
due to lapse in statue of limitations
|
(8.9 | ) | (3.7 | ) | (2.7 | ) | ||||||
|
Reductions
for tax positions related to prior year
|
- | (19.4 | ) | (7.8 | ) | |||||||
|
Balance
at end of period
|
$ | 52.0 | $ | 26.2 | $ | 41.5 | ||||||
Our
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense, and as of December 31, 2009, we had $6.5
million of accrued interest and $0.8 million in accrued penalties. As of
December 31, 2008, we had $2.9 million of accrued interest and $0.8 million
of accrued
penalties. As of December 31, 2007, we had $8.1 million of accrued
interest and no penalties. In addition, we believe it is reasonably
possible that our liability for unrecognized tax benefits will decrease by $2.2
million during the next twelve months, and that approximately $40.6 million included
in the total $52.0
million of unrecognized tax benefits, if recognized, would affect our effective
tax rate in future periods. Such amounts exclude interest, while the latter
amount of $52.0 million includes both temporary and permanent
differences.
We
are subject to taxation, and have tax years open to examination for the periods
2006-2009 in the United States and Mexico, 2005-2009 in Canada, and 1999-2009 in
various states.
134
Kinder
Morgan, Inc. Form 10-K
5. Property,
Plant and Equipment
Classes
and Depreciation
Our
property, plant and equipment, net consisted of the following (in
millions):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Kinder
Morgan, Inc.
|
||||||||
|
General
and other
|
$ | 45.7 | $ | 44.4 | ||||
|
Kinder
Morgan Energy Partners(a)
|
||||||||
|
Natural
gas, liquids, crude oil and carbon dioxide pipelines
|
6,503.6 | 5,641.5 | ||||||
|
Natural
gas, liquids, carbon dioxide, and terminals station
equipment.
|
9,271.8 | 7,577.0 | ||||||
|
Natural
gas, liquids (including linefill), and transmix processing
|
220.3 | 210.3 | ||||||
|
Other
|
1,671.3 | 2,084.5 | ||||||
|
Accumulated
depreciation, depletion and amortization
|
(2,002.8 | ) | (979.0 | ) | ||||
| 15,709.9 | 14,578.7 | |||||||
|
Land
and land right-of-way
|
519.5 | 201.7 | ||||||
|
Construction
work in process
|
574.1 | 1,329.4 | ||||||
|
Property,
plant and equipment, net
|
$ | 16,803.5 | $ | 16,109.8 | ||||
____________
|
(a)
|
Includes
the allocation of purchase accounting adjustments associated with the
Going Private transaction (see Note
2).
|
Depreciation
and depletion expense charged against property, plant and equipment consisted of
$1,047.5 million in 2009, $897.2 million in 2008, $464.3 million in the seven
months ended December 31, 2007 and $256.5 million in the five months ended May
31, 2007.
Asset
Retirement Obligations
As of
December 31, 2009 and 2008, we have recognized asset retirement obligations in
the aggregate amount of $100.9 million and $76.5 million,
respectively. The majority of our recorded asset retirement
obligations are associated with the CO2–KMP
business segment, where Kinder Morgan Energy Partners is required to plug and
abandon oil and gas wells that have been removed from service and to remove its
surface wellhead equipment and compressors. We have included $2.5
million of asset retirement obligations as of both December 31, 2009 and 2008
within “Accrued other current liabilities” in the accompanying Consolidated
Balance Sheets. The remaining amounts are included within “Other
long-term liabilities and deferred credits” at each reporting date.
A
reconciliation of the beginning and ending aggregate carrying amount of recorded
asset retirement obligations is as follows (in millions):
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
at beginning of period
|
$ | 76.5 | $ | 55.0 | ||||
|
Liabilities
incurred/revised
|
26.0 | 26.2 | ||||||
|
Liabilities
settled
|
(6.2 | ) | (8.2 | ) | ||||
|
Accretion
expense
|
4.6 | 3.5 | ||||||
|
Balance
at end of period
|
$ | 100.9 | $ | 76.5 | ||||
Kinder
Morgan Energy Partners has various other obligations throughout its businesses
to remove facilities and equipment on rights-of- way and other leased
facilities. We currently cannot reasonably estimate the fair value of
these obligations because the associated assets have indeterminate
lives. These assets include pipelines, certain processing plants and
distribution facilities, and certain bulk and liquids terminal
facilities. An asset retirement obligation, if any, will be
recognized once sufficient information is available to reasonably estimate the
fair value of the obligation.
6. Investments
We
reported a combined $3,695.6 million and $1,827.4 million as “Investments” in
the accompanying Consolidated Balance Sheet as of December 31, 2009 and 2008,
respectively. As of both dates, our investment amounts included bond
investments totaling $13.2 million. These bond investments consisted
of certain tax exempt, fixed-income development revenue bonds acquired in the
fourth quarter of 2008. Because we have both the ability and the
intent to hold these debt securities to maturity, we account for these
investments at historical cost. Our bond investments are further
discussed in Note 8.
135
Kinder
Morgan, Inc. Form 10-K
Our
total equity investments consisted of the following (in millions):
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Rockies
Express Pipeline LLC
|
$ | 1,693.4 | $ | 501.1 | ||||
|
NGPL
PipeCo LLC
|
698.5 | 717.3 | ||||||
|
Midcontinent
Express Pipeline LLC
|
662.3 | - | ||||||
|
Plantation
Pipe Line Company
|
340.4 | 343.6 | ||||||
|
Red
Cedar Gathering Company
|
145.8 | 138.9 | ||||||
|
Express
pipeline system
|
68.0 | 64.9 | ||||||
|
Cortez
Pipeline Company
|
11.2 | 13.6 | ||||||
|
Endeavor
Gathering LLC
|
36.2 | - | ||||||
|
Subsidiary
trusts holding solely debentures of Kinder Morgan
|
8.6 | 8.6 | ||||||
|
All
others
|
18.0 | 26.2 | ||||||
|
Total
equity investments
|
3,682.4 | 1,814.2 | ||||||
|
Gulf
Opportunity Zone Bonds
|
13.2 | 13.2 | ||||||
|
Total
long-term investments
|
$ | 3,695.6 | $ | 1,827.4 | ||||
The
increase in the carrying amounts of our equity investments since December 31,
2008 was primarily driven by Kinder Morgan Energy Partners’ 2009 equity capital
contributions of $2,051.8 million, paid primarily to Rockies Express Pipeline
LLC, Midcontinent Express Pipeline LLC, and Fayetteville Pipeline LLC to
partially fund their respective Rockies Express, Midcontinent Express, and
Fayetteville Express Pipeline construction and/or pre-construction costs, and
the repayment of senior notes by Rockies Express in August 2009. For
information pertaining to guarantees or indemnifications Kinder Morgan Energy
Partners has made with respect to its equity investees, see Note 12 “Commitments
and Contingent Liabilities—Contingent Debt.”
As
shown in the table above, our significant equity investments, including those of
Kinder Morgan Energy Partners, as of December 31, 2009 consisted of the
following:
|
|
·
|
Rockies
Express Pipeline LLC (“Rockies Express”)—Kinder Morgan Energy Partners
operates and owns a 50% ownership interest in Rockies Express, the
surviving legal entity from its December 30, 2009 merger with its parent
entity, West2East Pipeline LLC. Rockies Express is the sole
owner of the Rockies Express natural gas pipeline system, which began full
operations on November 12, 2009 following the completion of its final
pipeline segment, Rockies Express-East. The remaining ownership
interests in Rockies Express are owned by Sempra Energy and
ConocoPhillips.
Effective December 1, 2009, Kinder Morgan
Energy Partners’ ownership interest in West2East Pipeline LLC was reduced
to 50% (from 51%), ConocoPhillips’ interest was increased to 25% (from
24%), and minimum voting requirements for most matters was increased to
75% (from 51%) of the member interests. Kinder Morgan Energy
Partners received $31.9 million for the 1% reduction in ownership interest
and we included this amount within “Sale or casualty of property, plant
and equipment, investments and other net assets, net of removal costs” on
the accompanying Consolidated Statement of Cash Flows for the year ended
December 31, 2009. Sempra Energy continues to own the remaining
25% ownership interest in Rockies Express. Additionally, in
2009 and 2008, Kinder Morgan Energy Partners made capital contributions of
$1,273.1 million and $306.0 million, respectively, to Rockies Express
(West2East Pipeline LLC before the merger) to partially fund both the
construction costs for the Rockies Express pipeline system and the
repayment of senior notes (which matured in August 2009). In
2009 and 2008, Kinder Morgan Energy Partners also received, from Rockies
Express, cash distributions of $148.8 million and $82.9 million,
respectively;
|
|
|
·
|
NGPL
PipeCo LLC (“NGPL”)— On February 15, 2008, we sold an 80% ownership
interest in NGPL (formerly MidCon Corp.), which owns Natural Gas Pipeline
of America and certain affiliates, collectively referred to as “NGPL,” to
Myria Acquisition Inc. (“Myria”). Pursuant to the purchase agreement,
Myria acquired all 800 Class B shares and we retained all 200 Class A
shares of NGPL. We will continue to operate NGPL’s assets pursuant to a
15-year operating agreement. See Note 3 for further discussion
regarding this transaction;
|
|
|
·
|
Midcontinent
Express Pipeline LLC (“Midcontinent Express”)—Kinder Morgan Energy
Partners operates and owns a 50% ownership interest in Midcontinent
Express, which was formed in May 2006. It is the sole owner of
the Midcontinent Express natural gas pipeline system and Energy Transfer
Partners, L.P. owns the remaining 50% ownership interest. In
2007, Kinder Morgan Energy Partners began making cash contributions for
its share of the construction costs for the Midcontinent Express pipeline
system, and in 2009 and 2008, Kinder Morgan Energy Partners made capital
contributions of $664.5 million and $27.5 million, respectively, to
Midcontinent Express to partially fund its pipeline construction
costs. Kinder Morgan Energy Partners received cash
distributions of $16.2
|
136
Kinder
Morgan, Inc. Form 10-K
|
|
|
million
and $1.9 million in 2009 and 2008, respectively; however, as of December
31, 2008, Kinder Morgan Energy Partners had no net investment in
Midcontinent Express because in 2008, it established and made borrowings
under its own revolving bank credit facility in order to fund its pipeline
construction costs and to make distributions to its member owners to fully
reimburse them for prior contributions. Accordingly, Kinder
Morgan Energy Partners received an $89.1 million return of capital from
Midcontinent Express in the first quarter of
2008.
|
|
|
|
Additionally,
in January 2008, in conjunction with the signing of additional binding
transportation commitments, Midcontinent Express entered into an option
agreement with a subsidiary of MarkWest Energy Partners, L.P. providing it
a one-time right to purchase a 10% ownership interest in the Midcontinent
Express pipeline system. In September 2009, MarkWest declined
to exercise this option;
|
|
|
·
|
Red
Cedar Gathering Company—Kinder Morgan Energy Partners acquired its 49%
ownership interest in the Red Cedar Gathering Company from us on December
31, 1999. The remaining 51% interest in Red Cedar is owned by
the Southern Ute Indian Tribe. Red Cedar is the sole owner of
the Red Cedar natural gas gathering, compression and treating
system;
|
|
|
·
|
Plantation
Pipe Line Company—Kinder Morgan Energy Partners operates and owns a 51.17%
ownership interest in Plantation Pipe Line Company, the sole owner of the
Plantation refined petroleum products pipeline system. An
affiliate of ExxonMobil owns the remaining interest. Each
investor has an equal number of directors on Plantation’s board of
directors, and board approval is required for certain corporate actions
that are considered participating rights; therefore, Kinder Morgan Energy
Partners does not control Plantation Pipe Line Company, and it accounts
for its investment under the equity
method;
|
|
|
·
|
Express
pipeline system—Kinder Morgan Energy Partners acquired our 33
1/3%ownership interest in the Express pipeline system effective August 28,
2008 (discussed in Note 11 “Related Party
Transactions”);
|
|
|
·
|
Endeavor
Gathering LLC—Kinder Morgan Energy Partners acquired a 40% ownership
interest in Endeavor Gathering LLC from GMX Resources Inc. effective
November 1, 2009 (discussed in Note 3 “Acquisitions and Divestitures”);
and
|
|
|
·
|
Cortez
Pipeline Company—Kinder Morgan Energy Partners operates and owns a 50%
ownership interest in the Cortez Pipeline Company, the sole owner of the
Cortez carbon dioxide pipeline system. Kinder Morgan Energy
Partners acquired its ownership interest in Cortez Pipeline Company from
affiliates of Shell in April 2000. A subsidiary of Exxon Mobil
Corporation owns a 37% ownership interest and Cortez Vickers Pipeline
Company owns the remaining 13% ownership
interest.
|
In
addition to the investments listed above, Kinder Morgan Energy Partners
significant equity investments included a 25% ownership interest in Thunder
Creek Gas Services, LLC until it sold its ownership interest to PVR Midstream
LLC on April 1, 2008. The divestiture of the investment in Thunder
Creek Gas Services, LLC is discussed in Note 3 “Acquisitions and
Divestitures”.
Kinder
Morgan Energy Partners also owns a 50% ownership interest in Fayetteville
Express Pipeline LLC (“Fayetteville Express”), which was formed in August
2008. Fayetteville Express is the sole owner of the Fayetteville
Express natural gas pipeline joint venture project that is currently being
developed. Energy Transfer Partners, L.P. owns the remaining 50%
ownership interest in Fayetteville Express and will operate the Fayetteville
Express pipeline system. In 2009 and 2008, Kinder Morgan Energy
Partners made capital contributions of $103.2 million and $9.0 million,
respectively, to Fayetteville Express to partially fund certain pre-construction
pipeline costs. As of December 31, 2009, however, Kinder Morgan
Energy Partners had no material net investment in Fayetteville Express because
in November 2009, Fayetteville Express established and made borrowings under its
own revolving bank credit facility in order to fund its pipeline development
costs and to make distributions to its member owners to reimburse them for prior
contributions. Accordingly, Kinder Morgan Energy Partners received cash
distributions of $115.6 million from Fayetteville Express in 2009.
137
Kinder
Morgan, Inc. Form 10-K
Our
earnings (losses) from equity investments were as follows (in
millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Rockies
Express
|
$ | 98.5 | $ | 84.9 | $ | (8.2 | ) | $ | (4.2 | ) | ||||||
|
NGPL
|
42.5 | 40.1 | - | - | ||||||||||||
|
Red
Cedar Gathering Company
|
24.9 | 26.7 | 16.1 | 11.9 | ||||||||||||
|
Cortez
Pipeline Company
|
22.3 | 20.8 | 10.5 | 8.7 | ||||||||||||
|
Plantation
Pipe Line Company
|
16.5 | 13.6 | 10.8 | 11.9 | ||||||||||||
|
Thunder
Creek Gas Services, LLC
|
- | 1.3 | 1.2 | 1.0 | ||||||||||||
|
Midcontinent
Express
|
14.7 | 0.5 | 1.2 | 0.2 | ||||||||||||
|
Express
pipeline system
|
(4.1 | ) | 8.2 | 14.9 | 5.0 | |||||||||||
|
Thermo
Companies
|
- | - | 8.0 | 5.1 | ||||||||||||
|
Horizon
Pipeline Company
|
- | 0.2 | 1.0 | 0.6 | ||||||||||||
|
Endeavor
Gathering LLC
|
0.1 | - | - | - | ||||||||||||
|
All
others
|
6.5 | 4.8 | 1.3 | 0.5 | ||||||||||||
|
Total
|
$ | 221.9 | $ | 201.1 | $ | 56.8 | $ | 40.7 | ||||||||
|
Amortization
of excess costs
|
$ | (5.8 | ) | $ | (5.7 | ) | $ | (3.4 | ) | $ | (2.4 | ) | ||||
Summarized
combined unaudited financial information for our significant equity investments
(listed or described above) is reported below (in millions; amounts represent
100% of investee financial information):
|
Year
Ended December 31,
|
||||||||||||
|
Income Statement (a)
|
2009
|
2008
|
2007
|
|||||||||
|
Revenues
|
$ | 2,351.9 | $ | 2,170.4 | $ | 738.4 | ||||||
|
Costs
and expenses
|
1,754.8 | 1,649.6 | 534.4 | |||||||||
|
Earnings
before extraordinary items and cumulative effect of a change in
accounting principle
|
597.1 | 520.8 | 204.0 | |||||||||
|
Net
income
|
$ | 597.1 | $ | 520.8 | $ | 204.0 | ||||||
|
December
31,
|
||||||||
|
Balance
Sheet
|
2009
|
2008
|
||||||
|
Current
assets
|
$ | 501.8 | $ | 501.7 | ||||
|
Non-current
assets
|
16,687.5 | 13,582.1 | ||||||
|
Current
liabilities
|
2,299.7 | 3,876.4 | ||||||
|
Non-current
liabilities
|
6,275.6 | 5,306.0 | ||||||
|
Minority
interest in equity of subsidiaries
|
- | 0.6 | ||||||
|
Shareholders’
equity
|
$ | 8,614.0 | $ | 4,900.8 | ||||
________________
|
(a)
|
Amounts
exclude NGPL earnings prior to sale of our 80% interest on February 15,
2008.
|
On
January 1, 2009, we adopted certain provisions included within the
“Investments—Equity Method and Joint Ventures” Topic of the
Codification. These provisions clarify certain accounting and
impairment considerations involving equity method investments. The
adoption of these provisions did not have any impact on our consolidated
financial statements.
Also,
on June 30, 2009, we adopted certain provisions included within the
“Investments—Debt and Equity Securities” Topic of the
Codification. These adopted provisions provide additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. The provisions change (i)
the method for determining whether an other-than-temporary impairment exists for
debt securities and (ii) the amount of an impairment charge to be recorded in
earnings. The adoption of these provisions did not have a material
impact on our consolidated financial statements. For more information
on certain of our equity investments, see Note 17.
138
Kinder
Morgan, Inc. Form 10-K
7. Goodwill
and Other Intangibles
Goodwill
and Excess Investment Cost
Changes
in the gross amounts of our goodwill for each of the two years ended December
31, 2009 and 2008 are summarized as follows (in millions):
|
Products
Pipelines–KMP
|
Natural
Gas
Pipelines–KMP
|
CO2–KMP
|
Terminals–KMP
|
Kinder
Morgan
Canada–KMP
|
Total
|
|||||||||||||||||||
|
Balance
as of December 31, 2007
|
$ | 2,179.4 | $ | 3,201.0 | $ | 1,077.6 | $ | 1,465.9 | $ | 250.1 | $ | 8,174.0 | ||||||||||||
|
Acquisitions
and purchase price adjustments.
|
(54.8 | ) | 251.2 | 450.9 | (9.5 | ) | - | 637.8 | ||||||||||||||||
|
Disposals.
|
- | - | - | - | - | - | ||||||||||||||||||
|
Impairments
|
(1,266.5 | ) | (2,090.2 | ) | - | (676.6 | ) | - | (4,033.3 | ) | ||||||||||||||
|
Other
|
(8.1 | ) | (12.8 | ) | (6.8 | ) | (5.6 | ) | (46.5 | ) | (79.8 | ) | ||||||||||||
|
Balance as of December 31, 2008
|
850.0 | 1,349.2 | 1,521.7 | 774.2 | 203.6 | 4,698.7 | ||||||||||||||||||
|
Acquisitions and purchase price adjustments.
|
- | 48.6 | - | (35.4 | ) | - | 13.2 | |||||||||||||||||
|
Disposals.
|
- | - | - | - | - | - | ||||||||||||||||||
|
Impairments
|
- | - | - | - | - | - | ||||||||||||||||||
|
Currency translation adjustments
|
- | - | - | - | 32.4 | 32.4 | ||||||||||||||||||
|
Balance as of December 31, 2009
|
$ | 850.0 | $ | 1,397.8 | $ | 1,521.7 | $ | 738.8 | $ | 236.0 | $ | 4,744.3 | ||||||||||||
For
more information on our accounting policies for goodwill, see Note 2 “Summary of
Significant Accounting Policies—Goodwill.”
We
record the excess of the cost of an acquisition price over the fair value of
acquired net assets as an asset on our balance sheet. This amount is
referred to and reported separately as “Goodwill” in the accompanying
Consolidated Balance Sheets. Goodwill is not subject to amortization
but must be tested for impairment at least annually. This test
requires us to assign goodwill to an appropriate reporting unit and to determine
if the implied fair value of the reporting unit’s goodwill is less than its
carrying amount.
We
evaluate goodwill for impairment on May 31 of each year. For this
purpose, we have six reporting units as follows: (i) Products Pipelines–KMP
(excluding associated terminals), (ii) Products Pipelines Terminals–KMP
(evaluated separately from Products Pipelines–KMP for goodwill purposes), (iii)
Natural Gas Pipelines–KMP, (iv) CO2–KMP, (v)
Terminals–KMP and (vi) Kinder Morgan Canada–KMP. There were no impairment
charges resulting from our May 31, 2009 impairment testing, and no event
indicating an impairment has occurred subsequent to that date.
In
the second quarter of 2008, we finalized the purchase price allocation
associated with our May 2007 Going Private transaction, establishing the fair
values of our individual assets and liabilities including assigning the
associated goodwill to our six reporting units, in each case as of the May 31,
2007 acquisition date. A significant portion of the goodwill that arose in
conjunction with this acquisition was determined to be associated with the
general partner and significant limited partner interests in Kinder Morgan
Energy Partners (a publicly traded master limited partnership, or “MLP”),
attributable, in part, to the difference between the market multiples that might
be paid to acquire the general partner and limited interests in an MLP and the
market multiples that might be paid to acquire the individual assets that
comprise that MLP. This market premium is partially attributable to the
incentive distribution right that is embedded in the Kinder Morgan Energy
Partners general partner interest for which a separate intangible asset was not
recognized in purchase accounting because this right cannot be detached or
transferred apart from the entire general partner interest.
In
conjunction with our first annual impairment test of the carrying value of this
goodwill, performed as of May 31, 2008, we determined that the fair value of
certain reporting units that are part of our investment in Kinder Morgan Energy
Partners were less than the carrying values. The fair value of each reporting
unit was determined from the present value of the expected future cash flows
from the applicable reporting unit (inclusive of a terminal value calculated
using market multiples between six and ten times cash flows) discounted at a
rate of 9.0%. The value of each reporting unit was determined on a stand-alone
basis from the perspective of a market participant and represented the price
that would be received to sell the unit as a whole in an orderly transaction
between market participants at the measurement date. Thus, any value generated
from the inclusion of these assets in an MLP structure was not captured in the
valuation of these reporting units. This resulted in several of the reporting
units having fair values less than their carrying values as the incremental
value created by the inclusion of these assets in an MLP structure was taken
into account in the Going Private transaction and thus was used in allocating
the purchase price. To capture this value at the reporting unit level, we
believe it would be necessary to recreate the MLP structure at the reporting
unit level. We believe this is not feasible for Kinder Morgan, Inc. or for any
market participant, as further discussed below.
139
Kinder
Morgan, Inc. Form 10-K
Recreating
such structure would involve separating each of our reporting units into
separate entities so that each reporting unit could be valued on a stand alone
basis assuming each such unit was sold as an MLP. Creating separate MLPs would
involve significant structural difficulties including potentially numerous
adverse state and federal tax consequences to Kinder Morgan Energy Partners and
its unitholders. In addition, it would involve a significant amount of tax,
legal and commercial analysis, and based on that analysis may also require
customer and/or joint venture consents, lender consents, and regulatory
approvals and/or unitholder approval. As a result of these factors, we believe
that it is not feasible to apply the MLP structure related value to the
individual reporting unit level.
For
the reporting units where the fair value was determined to be less than the
carrying value, we determined the implied fair value of goodwill. The implied
fair value of goodwill within each reporting unit was then compared to the
carrying value of goodwill of each such unit, resulting in the following
goodwill impairment charges by reporting units: 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 charges were non-cash charges and did not have any impact on
our cash flows.
On
April 30, 2007, Kinder Morgan Energy Partners acquired the Trans Mountain
pipeline system from us. This transaction caused us to evaluate the fair value
of the Trans Mountain pipeline system in determining whether goodwill related to
these assets was impaired. Accordingly, based on our consideration of supporting
information obtained regarding the fair values of the Trans Mountain pipeline
system assets, a goodwill impairment non-cash charge of $377.1 million was
recorded in five months ended May 31, 2007.
With
regard to our equity investments in unconsolidated affiliates, in almost all
cases, the price we paid to acquire our share of the net assets of such equity
investees differed from the underlying book value of such net
assets. This differential consists of two pieces. First,
an amount related to the difference between the investee’s recognized net assets
at book value and at current fair values (representing the appreciated value in
plant and other net assets), and secondly, to any premium in excess of fair
value (referred to as equity method goodwill) we paid to acquire the
investment. We include both amounts within “Investments” on the
accompanying Consolidated Balance Sheets.
The
first differential, representing the excess of the fair market value of our
investees’ plant and other net assets over its underlying book value at the date
of acquisition totaled $163.2 million and $169.0 million as of December 31, 2009
and 2008, respectively. In almost all instances, this differential,
relating to the discrepancy between our share of the investee’s recognized net
assets at book values and at current fair values, represents our share of
undervalued depreciable assets, and since those assets (other than land) are
subject to depreciation, we amortize this portion of our investment cost against
our share of investee earnings. As of December 31, 2009, this excess
investment cost is being amortized over a weighted average life of approximately
28.9 years.
The
second differential, representing total unamortized excess cost over underlying
fair value of net assets acquired (equity method goodwill) was $138.2 million as
of both December 31, 2009 and December 31, 2008. This differential is
not subject to amortization but rather to impairment
testing. Accordingly, in addition to our annual impairment test of
goodwill, we periodically reevaluate the amount at which we carry the excess of
cost over fair value of net assets accounted for under the equity method, as
well as the amortization period for such assets, to determine whether current
events or circumstances warrant adjustments to our carrying value and/or revised
estimates of useful lives. Our impairment test considers whether the
fair value of the equity investment as a whole, not the underlying net assets,
has declined and whether that decline is other than temporary. As of
December 31, 2009, we believed no such impairment had occurred and no reduction
in estimated useful lives was warranted.
140
Kinder
Morgan, Inc. Form 10-K
Other
Intangibles
Excluding
goodwill, our other intangible assets include customer relationships, contracts
and agreements, technology-based assets, and lease value. These
intangible assets have definite lives and are reported separately as “Other
intangibles, net” in the accompanying Consolidated Balance
Sheets. Following is information related to our intangible assets
subject to amortization (in millions):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Customer
relationships, contracts and agreements
|
||||||||
|
Gross
carrying amount
|
$ | 297.9 | $ | 270.9 | ||||
|
Accumulated
amortization
|
(50.9 | ) | (30.3 | ) | ||||
|
Net
carrying amount
|
247.0 | 240.6 | ||||||
|
Technology-based
assets, lease value and other
|
||||||||
|
Gross
carrying amount
|
14.1 | 11.7 | ||||||
|
Accumulated
amortization
|
(1.3 | ) | (0.8 | ) | ||||
|
Net
carrying amount
|
12.8 | 10.9 | ||||||
|
Total
other intangibles, net
|
$ | 259.8 | $ | 251.5 | ||||
Our
customer relationships, contracts and agreements relate primarily to the
Terminals–KMP business segment, and include relationships and contracts for
handling and storage of petroleum, chemical, and dry-bulk materials, including
oil, gasoline and other refined petroleum products, coal, petroleum coke,
fertilizer, steel and ores. The values of these intangible assets
were determined by us (often in conjunction with third party valuation
specialists) by first, estimating the revenues derived from a customer
relationship or contract (offset by the cost and expenses of supporting assets
to fulfill the contract), and second, discounting the revenues at a risk
adjusted discount rate.
We
amortize the costs of our intangible assets to expense in a systematic and
rational manner over their estimated useful lives. Among the factors
we weigh, depending on the nature of the asset, are the effect of obsolescence,
new technology, and competition. For the years ended December 31,
2009 and 2008, seven months ended December 31, 2007 and five months ended May
31, 2007, the amortization expense on our intangibles totaled $21.1 million,
$19.2 million, $11.9 million and $6.3 million, respectively. These
expense amounts primarily consisted of amortization of our customer
relationships, contracts and agreements. Our estimated amortization
expense for our intangible assets for each of the next five fiscal years (2010 –
2014) is approximately $24.2 million, $22.1 million, $20.5 million, $19.6
million and $18.8 million, respectively.
The
life of each intangible asset is based either on the life of the corresponding
customer contract or agreement or, in the case of a customer relationship
intangible (the life of which was determined by an analysis of all available
data on that business relationship), the length of time used in the discounted
cash flow analysis to determine the value of the customer
relationship. As of December 31, 2009, the weighted average
amortization period for our intangible assets was approximately 15.1
years.
8. Debt
We
classify our debt based on the contractual maturity dates of the underlying debt
instruments or as of the earliest put date available to the holders of the
applicable debt. We defer costs associated with debt issuance over
the applicable term or to the first put date, in the case of debt with a put
feature. These costs are amortized as interest expense in the
accompanying Consolidated Statements of Operations.
Short-Term
Debt
Our
outstanding short-term debt balance as of December 31, 2009 was $768.7 million.
The balance consisted of (i) $171.0 million in
outstanding borrowings under our senior secured credit facility, (ii) $1.1
million remaining portion of our 6.50% series debentures, due September 1, 2013,
(iii) $300 million in outstanding borrowings under Kinder Morgan Energy
Partners’ bank credit facility, (iv) $251.9 million (including $1.9 million of
unamortized discounts and purchase accounting attributable to the Going Private
transaction) for Kinder Morgan Energy Partners’ 7.50% senior notes due November
1, 2010, (v) $23.7 million in principal amount of tax-exempt bonds that mature
on April 1, 2024, but are due on demand pursuant to certain standby purchase
agreement provisions contained in the bond indenture (Kinder Morgan Energy
Partners’ subsidiary Kinder Morgan Operating L.P. “B” is the obligor on the
bonds), (vi) an $8.9 million portion of a 5.40% long-term note payable (Kinder
Morgan Energy Partners’ subsidiaries Kinder Morgan Operating L.P. “A” and Kinder
Morgan Canada Company are the obligors on the note), (vii) a $6.8 million
portion of 5.23% senior notes (Kinder Morgan Energy Partners’ subsidiary Kinder
Morgan Texas Pipeline, L.P. is the obligor on the notes) and (viii) $5.3 million
in principal amount of
141
Kinder
Morgan, Inc. Form 10-K
adjustable
rate industrial development revenue bonds that matured on January 1, 2010 (the
bonds were issued by the Illinois Development Finance Authority and Kinder
Morgan Energy Partners’ subsidiary Arrow Terminals L.P. was the obligor on the
bonds).
Our
outstanding short-term debt as of December 31, 2008 was $302.5 million,
consisting of (i) $8.8 million in outstanding borrowings under our senior
secured credit facility, (ii) a $5.0 million current portion of our 6.50% series
debentures, due September 1, 2013, (iii) $250 million in principal amount of
Kinder Morgan Energy Partners’ 6.30% senior notes due February 1, 2009, (iv) the
$23.7 million in principal amount of tax-exempt bonds due from Kinder Morgan
Energy Partners’ subsidiary Kinder Morgan Operating L.P. “B”, (v) an $8.5
million portion of the 5.40% long-term note payable due from Kinder Morgan
Energy Partners’ subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan
Canada Company and (vi) a $6.5 million portion of the 5.23% senior notes due
from Kinder Morgan Energy Partners’ subsidiary Kinder Morgan Texas Pipeline,
L.P.
Credit
Facilities
|
As
of December 31, 2009
|
||||||||
|
Short-term
Notes
Payable
|
Weighted-
Average
Interest
Rate
|
|||||||
|
(In
millions)
|
||||||||
|
Kinder
Morgan, Inc. – Secured debt(a)
|
$ | 171.0 | 1.61 | % | ||||
|
Kinder
Morgan Energy Partners – Unsecured debt(b)
|
$ | 300.0 | 0.59 | % | ||||
____________
|
(a)
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $77.7 million (2.09%) during the twelve months ended December
31, 2009.
|
|
(b)
|
The
average short-term debt outstanding (and related weighted-average interest
rate) was $442.1 million (1.43%) during the twelve months ended December
31, 2009.
|
Our
$1.0 billion six-year senior secured revolving credit facility matures on May
30, 2013 and includes a sublimit of $300 million for the issuance of letters of
credit and a sublimit of $50 million for swingline loans. We do not have a
commercial paper program. We had $8.8 million outstanding under our
credit facility at December 31, 2008.
The
applicable margin for the revolving credit facility is subject to change
pursuant to a leverage-based pricing grid. In addition, the credit agreement
provides for customary commitment fees and letter of credit fees under the
revolving credit facility. The credit agreement contains customary terms and
conditions and is unconditionally guaranteed by each of our wholly owned
material domestic restricted subsidiaries, to the extent permitted by applicable
law and contract. Voluntary prepayments can be made at any time on revolving
credit loans and swingline loans, in each case without premium or penalty, and
on LIBOR Loans (as defined in the credit agreement) on the interest payment date
without premium or penalty.
Our
credit facility included the following restrictive covenants as of December 31,
2009:
|
|
·
|
total
debt divided by earnings before interest, income taxes, depreciation and
amortization may not exceed:
|
|
|
·
|
7.00:
1.00 during January 1, 2009 and December 31, 2009;
and
|
|
|
·
|
6.00:
1.00 thereafter;
|
|
|
·
|
certain
limitations on indebtedness, including payments and
amendments;
|
|
|
·
|
certain
limitations on entering into mergers, consolidations, sales of assets and
investments;
|
|
|
·
|
limitations
on granting liens; and
|
|
|
·
|
prohibitions
on making any dividend to shareholders if an event of default exists or
would exist upon making such
dividend.
|
Kinder
Morgan Energy Partners’ $1.85 billion unsecured revolving bank credit facility
is with a syndicate of financial institutions, and Wachovia Bank, National
Association is the administrative agent. The credit facility permits Kinder
Morgan Energy Partners to obtain bids for fixed rate loans from members of the
lending syndicate, and the facility can be amended to allow for borrowings of up
to $2.0 billion. Interest on Kinder Morgan Energy Partners’ credit facility
accrues at its option at a floating rate equal to either (i) the administrative
agent’s base rate (but not less than the Federal Funds Rate, plus 0.5%); or (ii)
LIBOR, plus a margin, which varies depending upon the credit rating of Kinder
Morgan Energy Partners’ long-term senior unsecured debt. Borrowings
under Kinder Morgan Energy Partners’ credit facility can be used for general
partnership purposes and as a backup for its commercial paper
program.
As
of December 31, 2008, there were no borrowings under the Kinder Morgan Energy
Partners credit facility. The credit facility matures August 18, 2010, and
currently, Kinder Morgan Energy Partners plans to negotiate a renewal of the
credit facility before its maturity date.
142
Kinder
Morgan, Inc. Form 10-K
During
the first quarter of 2009, following Lehman Brothers Holdings Inc.’s filing for
bankruptcy protection in September 2008; Kinder Morgan Energy Partners amended
the credit facility to remove Lehman Brothers Commercial Bank as a lender, thus
reducing the borrowing capacity under its credit facility by $63.3 million. The
commitments of the other banks remain unchanged, and the credit facility is not
defaulted.
Additionally,
as of December 31, 2009, the amount available for borrowing under Kinder Morgan
Energy Partners’ credit facility was reduced by an aggregate amount of
$282.8 million, consisting of the following letters of
credit: (i) a $100 million letter of credit that supports certain proceedings
with the California Public Utilities Commission involving refined products
tariff charges on the intrastate common carrier operations of Kinder Morgan
Energy Partners’ Pacific operations’ pipelines in the state of California, (ii)
a combined $89.4 million in three letters of credit that support tax-exempt
bonds, (iii) a combined $55.0 million in two letters of credit that support
Kinder Morgan Energy Partners’ hedging of commodity price risks associated with
the sale of natural gas, natural gas liquids and crude oil, (iv) a $21.4 million
letter of credit that supports Kinder Morgan Energy Partners’ indemnification
obligations on the Series D note borrowings of Cortez Capital Corporation and
(v) a combined $17.0 million in other letters of credit supporting other
obligations of Kinder Morgan Energy Partners and its subsidiaries.
Kinder
Morgan Energy Partners’ credit facility included the following restrictive
covenants as of December 31, 2009:
|
|
·
|
total
debt divided by earnings before interest, income taxes, depreciation and
amortization for the preceding four quarters may not
exceed:
|
|
|
·
|
5.5,
in the case of any such period ended on the last day of (i) a fiscal
quarter in which we make any Specified Acquisition, or (ii) the first or
second fiscal quarter next succeeding such a fiscal quarter;
or
|
|
|
·
|
5.0,
in the case of any such period ended on the last day of any other fiscal
quarter;
|
|
|
·
|
certain
limitations on entering into mergers, consolidations and sales of
assets;
|
|
|
·
|
limitations
on granting liens; and
|
|
|
·
|
prohibitions
on making any distribution to holders of units if an event of default
exists or would exist upon making such
distribution.
|
In
addition to normal repayment covenants, under the terms of Kinder Morgan Energy
Partners’ credit facility, the occurrence at any time of any of the following
would constitute an event of default: (i) Kinder Morgan Energy Partners’ failure
to make required payments of any item of indebtedness or any payment in respect
of any hedging agreement, provided that the aggregate outstanding principal
amount for all such indebtedness or payment obligations in respect of all
hedging agreements is equal to or exceeds $75 million, (ii) Kinder Morgan Energy
Partners’ general partner’s failure to make required payments of any item of
indebtedness, provided that the aggregate outstanding principal amount for all
such indebtedness is equal to or exceeds $75 million, (iii) adverse judgments
rendered against Kinder Morgan Energy Partners for the payment of money in an
aggregate amount in excess of $75 million, if this same amount remains
undischarged for a period of thirty consecutive days during which execution
shall not be effectively stayed and (iv) voluntary or involuntary commencements
of any proceedings or petitions seeking Kinder Morgan Energy Partners’
liquidation, reorganization or any other similar relief under any federal, state
or foreign bankruptcy, insolvency, receivership or similar law.
Other
than the relatively non-restrictive negative covenants and events of default in
Kinder Morgan Energy Partners’ credit facility, there are no provisions
protecting against a situation where Kinder Morgan Energy Partners is unable to
terminate an agreement with a counterparty who is facing an impending financial
collapse, and such collapse may be hastened due to cross-defaults. Also, Kinder
Morgan Energy Partners’ credit facility does not contain a material adverse
change clause coupled with a lockbox provision; however, the facility does
provide that the margin Kinder Morgan Energy Partners will pay with respect to
borrowings, and the facility fee that it will pay on the total commitment, will
vary based on its senior debt investment rating. None of Kinder Morgan Energy
Partners’ debt is subject to payment acceleration as a result of any change to
its credit ratings.
Commercial
Paper Program
On
October 13, 2008, Standard & Poor’s Rating Services lowered Kinder Morgan
Energy Partners’ short-term credit rating to A-3 from A-2. Additionally,
on May 6, 2009, Moody’s Investor Services, Inc. downgraded Kinder Morgan Energy
Partners’ commercial paper rating to Prime-3 from Prime-2. As a result of
these revisions and the commercial paper market conditions, Kinder Morgan Energy
Partners has been unable to access commercial paper borrowings, and as of
December 31, 2009 and 2008, it had no commercial paper
borrowings.
On
February 25, 2010, Standard & Poor’s Rating Services raised Kinder Morgan
Energy Partners’ short-term credit rating to A-2 from A-3 which may allow Kinder
Morgan Energy Partners access to the commercial paper market. However,
Kinder Morgan Energy Partners expects that it will continue to meet its
financing and liquidity needs primarily through borrowings made under its bank
credit facility described above.
143
Kinder
Morgan, Inc. Form 10-K
Long-Term
Debt
Our
long-term debt balance at December 31, 2009 and 2008 was $13,240.7 million and
$12,126.8 million, respectively. Total long-term debt consisted of the balances
shown in the table below (in millions).
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Kinder
Morgan, Inc.
|
||||||||
|
Debentures
|
||||||||
|
6.50%
Series, due September 1, 2013
|
$ | 1.1 | $ | 6.1 | ||||
|
6.67%
Series, due November 1, 2027
|
7.0 | 7.0 | ||||||
|
7.25%
Series, due March 1, 2028
|
32.0 | 32.0 | ||||||
|
7.45%
Series, due March 1, 2098
|
25.9 | 25.9 | ||||||
|
Senior
Notes
|
||||||||
|
6.50%
Series, due September 1, 2012
|
844.1 | 846.2 | ||||||
|
5.15%
Series, due March 1, 2015
|
235.6 | 233.3 | ||||||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
||||||||
|
8.56%
Junior Subordinated Deferrable Interest Debentures due April 15,
2027
|
15.8 | 15.8 | ||||||
|
7.63%
Junior Subordinated Deferrable Interest Debentures due April 15,
2028
|
19.9 | 19.9 | ||||||
|
Bank
credit facility borrowings
|
171.0 | 8.8 | ||||||
|
Unamortized
gain on termination of interest rate swap
|
4.6 | 6.4 | ||||||
|
|
||||||||
|
Kinder
Morgan Finance Company, LLC
|
||||||||
|
5.35%
Series, due January 5, 2011
|
745.9 | 742.0 | ||||||
|
5.70%
Series, due January 5, 2016
|
811.6 | 806.6 | ||||||
|
6.40%
Series, due January 5, 2036
|
34.4 | 33.8 | ||||||
|
Carrying
value adjustment for interest rate swap(a)
|
13.5 | - | ||||||
|
Unamortized
gain on termination of interest rate swap
|
10.5 | 12.8 | ||||||
|
|
||||||||
|
Kinder
Morgan G.P., Inc.
|
||||||||
|
$1,000
Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative
Preferred Stock
|
100.0 | 100.0 | ||||||
|
|
||||||||
|
Kinder
Morgan Energy Partners, L.P. borrowings:
|
||||||||
|
6.30%
senior notes due February 1, 2009
|
- | 250.1 | ||||||
|
7.50%
senior notes due November 1, 2010
|
251.8 | 253.8 | ||||||
|
6.75%
senior notes due March 15, 2011
|
704.3 | 707.6 | ||||||
|
7.125%
senior notes due March 15, 2012
|
456.2 | 458.7 | ||||||
|
5.85%
senior notes due September 15, 2012
|
500.0 | 500.0 | ||||||
|
5.00%
senior notes due December 15, 2013
|
492.8 | 491.3 | ||||||
|
5.125%
senior notes due November 15, 2014
|
491.7 | 490.2 | ||||||
|
5.625%
senior notes due February 15, 2015
|
300.0 | - | ||||||
|
6.00%
senior notes due February 1, 2017
|
598.0 | 597.8 | ||||||
|
5.95%
senior notes due February 15, 2018
|
975.0 | 975.0 | ||||||
|
9.00%
senior notes due February 1, 2019(b)
|
500.0 | 500.0 | ||||||
|
6.85%
senior notes due February 15, 2020
|
700.0 | - | ||||||
|
5.80%
senior notes due March 1, 2021
|
400.0 | - | ||||||
|
7.40%
senior notes due March 15, 2031
|
310.1 | 310.3 | ||||||
|
7.75%
senior notes due March 15, 2032
|
316.1 | 316.4 | ||||||
|
7.30%
senior notes due August 15, 2033
|
513.7 | 513.9 | ||||||
|
5.80%
senior notes due March 15, 2035
|
477.7 | 477.4 | ||||||
|
6.50%
senior notes due February 1, 2037
|
395.8 | 395.8 | ||||||
|
6.95%
senior notes due January 15, 2038
|
1,175.0 | 1,175.0 | ||||||
|
6.50%
senior notes due September 1, 2039
|
600.0 | - | ||||||
|
Bank
credit facility borrowings
|
300.0 | - | ||||||
|
Carrying
value adjustment for interest rate swaps
|
10.0 | 754.2 | ||||||
|
Unamortized
gain on termination of interest rate swaps
|
322.4 | 197.6 | ||||||
|
Subsidiary
borrowings:
|
||||||||
|
Arrow
Terminals L.P.-IL Development Revenue Bonds due January 1,
2010
|
5.3 | 5.3 | ||||||
|
Kinder
Morgan Louisiana Pipeline LLC-6.0% LA Development Revenue note due
January 1, 2011
|
5.0 | 5.0 | ||||||
|
Kinder
Morgan Operating L.P. “A”-5.40% BP note, due March 31,
2012
|
14.9 | 19.4 | ||||||
|
Kinder
Morgan Canada Company-5.40% BP note, due March 31, 2012
|
13.2 | 17.2 | ||||||
|
Kinder
Morgan Texas Pipeline, L.P.-5.23% Senior Notes, due January 2,
2014
|
30.5 | 37.0 | ||||||
144
Kinder
Morgan, Inc. Form 10-K
|
Kinder
Morgan Liquids Terminals LLC-N.J. Development Revenue Bonds due
January 15, 2018
|
25.0 | 25.0 | ||||||
|
Kinder
Morgan Columbus LLC-5.50% MS Development Revenue note due
September 1, 2022
|
8.2 | 8.2 | ||||||
|
Kinder
Morgan Operating L.P. “B”-Jackson-Union Cos. IL Revenue Bonds due April 1,
2024
|
23.7 | 23.7 | ||||||
|
International
Marine Terminals-Plaquemines, LA Revenue Bonds due March 15,
2025
|
40.0 | 40.0 | ||||||
|
Other
miscellaneous subsidiary debt
|
1.3 | 1.3 | ||||||
|
Unamortized
Debt Discount on Long-term Debt
|
(21.2 | ) | (14.5 | ) | ||||
|
Current
Maturities of Long-term Debt
|
(768.7 | ) | (302.5 | ) | ||||
|
Total
Long-term Debt
|
$ | 13,240.7 | $ | 12,126.8 |
____________
|
(a)
|
Adjustment
of carrying value of long-term securities subject to outstanding interest
rate swaps; see Note 13.
|
|
(b)
|
Kinder
Morgan Energy Partners issued its $500 million in principal amount of
9.00% senior notes due February 1, 2019 in December 2008, and these notes
may be repurchased at the noteholders’ option. Each holder of
the notes has the right to require Kinder Morgan Energy Partners to
repurchase all or a portion of the notes owned by such holder on February
1, 2012 at a purchase price equal to 100% of the principal amount of the
notes tendered by the holder plus accrued and unpaid interest to, but
excluding, the repurchase date. On and after February 1, 2012,
interest will cease to accrue on the notes tendered for
repayment. A holder’s exercise of the repurchase option is
irrevocable.
|
In
February 2008, approximately $4.6 billion of the proceeds from the completed
sale of an 80% ownership interest in NGPL PipeCo LLC were used to pay off and
retire our senior secured credit facility’s Tranche A and Tranche B term loans
and to pay down amounts outstanding at that time under our $1.0 billion
revolving credit facility as follows (in millions):
|
Debt Paid Down
and/or
Retired
|
||||
|
Kinder
Morgan, Inc.
|
||||
|
Senior
Secured Credit Term Loan Facilities
|
||||
|
Tranche
A Term Loan, Due 2013
|
$
|
995.0
|
||
|
Tranche
B Term Loan, Due 2014
|
3,183.5
|
|||
|
Credit
Facility
|
||||
|
$1.0
billion Secured Revolver, Due May 2013
|
375.0
|
|||
|
Total
Paid Down and/or Retired
|
$
|
4,553.5
|
||
In
March 2008, using primarily proceeds from the completed sale of an 80% ownership
interest in NGPL PipeCo LLC, along with cash on hand and borrowings under our
$1.0 billion revolving credit facility, we repurchased approximately $1.67
billion par value of our outstanding debt securities for $1.6 billion in cash as
follows (in millions):
|
Par Value of Debt
Repurchased
|
||||
|
Kinder
Morgan, Inc.
|
||||
|
Debentures
|
||||
|
6.50%
Series, Due 2013
|
$
|
18.9
|
||
|
6.67%
Series, Due 2027
|
143.0
|
|||
|
7.25%
Series, Due 2028
|
461.0
|
|||
|
7.45%
Series, Due 2098
|
124.1
|
|||
|
Senior
Notes
|
||||
|
6.50%
Series, Due 2012
|
160.7
|
|||
|
Kinder
Morgan Finance Company, LLC
|
||||
|
6.40%
Series, Due 2036
|
513.6
|
|||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
||||
|
8.56%
Junior Subordinated Deferrable Interest Debentures
Due 2027
|
87.3
|
|||
|
7.63%
Junior Subordinated Deferrable Interest Debentures
Due 2028
|
160.6
|
|||
|
Repurchase
of Outstanding Debt Securities
|
$
|
1,669.2
|
||
Kinder
Morgan, Inc.
The
2013 debentures are not redeemable prior to maturity. The 2028 and 2098
debentures and the 2012 and 2015 senior notes are redeemable in whole or in
part, at our option at any time, at redemption prices defined in the associated
prospectus supplements. The 2027 debentures are redeemable in whole
or in part, at our option after November 1, 2004 at redemption prices defined in
the associated prospectus supplements.
145
Kinder
Morgan, Inc. Form 10-K
On
each of the dates of September 4, 2009 and September 5, 2008, we made $5.0
million payments on our 6.50% series debentures, due 2013.
Kinder
Morgan Finance Company, LLC
The
2011, 2016 and 2036 senior notes issued by Kinder Morgan Finance Company, LLC
are redeemable in whole or in part, at our option at any time, at redemption
prices defined in the associated prospectus supplements. Each series of these
notes is fully and unconditionally guaranteed by Kinder Morgan, Inc. on a senior
unsecured basis as to principal, interest and any additional amounts required to
be paid as a result of any withholding or deduction for Canadian
taxes.
Kinder
Morgan Energy Partners
All
of Kinder Morgan Energy Partners’ fixed rate senior notes provide that it may
redeem the notes at any time at a price equal to 100% of the principal amount of
the notes plus accrued interest to the redemption date plus a make-whole
premium.
During
2009, Kinder Morgan Energy Partners completed two separate public offerings of
senior notes. With regard to these offerings, Kinder Morgan Energy
Partners received proceeds, net of underwriting discounts and commissions, as
follows: (i) $993.3 million from a May 14, 2009 public offering of 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 6.85% notes due February
15, 2020 and (ii) $987.4 million from a September 16, 2009 public offering of 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.
During
2008, Kinder Morgan Energy Partners completed three separate public offerings of
senior notes. With regard to the three offerings, Kinder
Morgan Energy Partners received proceeds, net of underwriting discounts and
commissions, as follows: (i) $894.1 million from a February 12, 2008 public
offering of a total of $900 million in principal amount of senior notes,
consisting of $600 million of 5.95% notes due February 15, 2018, and $300
million of 6.95% notes due January 15, 2038 (these notes constitute a further
issuance of the $550 million aggregate principal amount of 6.95% notes Kinder
Morgan Energy Partners issued on June 21, 2007 and form a single series with
those notes), (ii) $687.7 million from a June 6, 2008 public offering of a total
of $700 million in principal amount of senior notes, consisting of $375 million
of 5.95% notes due February 15, 2018 (these notes constitute a further issuance
of the $600 million aggregate principal amount of 5.95% notes Kinder Morgan
Energy Partners issued on February 12, 2008 and form a single series with those
notes), and $325 million of 6.95% notes due January 15, 2038 (these notes
constitute a further issuance of the combined $850 million aggregate principal
amount of 6.95% notes Kinder Morgan Energy Partners issued on June 21, 2007 and
February 12, 2008, and form a single series with those notes) and (iii) $498.4
million from a December 19, 2008 public offering of $500 million in principal
amount of 9.00% senior notes due February 1, 2019.
Kinder
Morgan Energy Partners used the proceeds from its first two 2008 debt offerings
to reduce the borrowings under its commercial paper program. Kinder
Morgan Energy Partners used the proceeds from its December 2008 debt offering
and from all of its 2009 debt offerings to reduce the borrowings under its bank
credit facility.
In
addition, on February 1, 2009, Kinder Morgan Energy Partners paid $250 million
to retire the principal amount of its 6.30% senior notes that matured on that
date. Kinder Morgan Energy Partners borrowed the necessary funds
under its bank credit facility.
Interest
Rate Swaps
Information
on our interest rate swaps is contained in Note 13 “Risk Management—Interest
Rate Risk Management.”
Kinder Morgan Energy Partners’
Subsidiary Debt
Kinder
Morgan Energy Partners’ subsidiaries are obligors on the following
debt. The agreements governing these obligations contain various
affirmative and negative covenants and events of default. Kinder
Morgan Energy Partners does not believe that these provisions will materially
affect distributions to its partners.
Central
Florida Pipeline LLC Debt
On
July 23, 2008, Central Florida Pipeline LLC paid the final $5.0 million
outstanding principal amount of its 7.84% senior notes that matured on that
date, and following its repayment, Central Florida Pipeline LLC had no
outstanding debt.
Arrow
Terminals L.P.
Kinder
Morgan Energy Partners’ subsidiary Arrow Terminals L.P. is an obligor on a $5.3
million principal amount of Adjustable Rate Industrial Development Revenue Bonds
issued by the Illinois Development Finance Authority. The bonds have
a maturity date of January 1, 2010, and interest on these bonds is paid and
computed quarterly at the Bond Market
146
Kinder
Morgan, Inc. Form 10-K
Association
Municipal Swap Index. The bonds are collateralized by a first
mortgage on assets of Arrow’s Chicago operations and a third mortgage on assets
of Arrow’s Pennsylvania operations. As of December 31, 2009, the
interest rate was 0.365%. The bonds are also backed by a $5.4 million
letter of credit issued by JP Morgan Chase that backs-up the $5.3 million
principal amount of the bonds and $0.1 million of interest on the bonds for up
to 45 days computed at 12% per annum on the principal amount thereof. On January
4, 2010, Arrow Terminals L.P. paid the $5.3 million outstanding principal amount
of the bonds that matured on that date and following its repayment, Arrow
Terminals L.P. had no outstanding debt.
Kinder
Morgan Operating L.P. “A” Debt
Effective
January 1, 2007, Kinder Morgan Energy Partners acquired the remaining
approximately 50.2% interest in the Cochin pipeline system that it did not
already own. As part of the purchase price consideration, two of
Kinder Morgan Energy Partners’ subsidiaries issued a long-term note payable to
the seller having a fair value of $42.3 million. Kinder Morgan Energy
Partners valued the debt equal to the present value of amounts to be paid,
determined using an annual interest rate of 5.40%. Kinder Morgan
Energy Partners’ subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan
Canada Company are the obligors on the note, and the principal amount of the
note, along with interest, is due in five annual installments of $10.0 million
beginning March 31, 2008. The final payment is due March 31,
2012. As of December 31, 2008, the net present value (representing
the outstanding balance on our balance sheet) of the note was $36.6
million. The second installment was paid on March 31, 2009, and as of
December 31, 2009, the net present value of the note was $28.1
million.
Kinder
Morgan Texas Pipeline, L.P. Debt
Kinder
Morgan Energy Partners’ subsidiary, Kinder Morgan Texas Pipeline, L.P. is the
obligor on a series of unsecured senior notes with a fixed annual stated
interest rate as of August 1, 2005, of 8.85%. Kinder Morgan Energy
Partners assumed this debt on August 1, 2005 when it acquired a natural gas
storage facility located in Liberty County, Texas from a third party, and it
valued the debt equal to the present value of amounts to be paid determined
using an approximate interest rate of 5.23%. The assumed principal
amount, along with interest, is due in monthly installments of approximately
$0.7 million, and the final payment is due January 2, 2014. As of
December 31, 2009, Kinder Morgan Texas Pipeline L.P.’s outstanding balance under
the senior notes was $30.5 million. Additionally, the unsecured
senior notes may be prepaid at any time in amounts of at least $1.0 million and
at a price equal to the higher of par value or the present value of the
remaining scheduled payments of principal and interest on the portion being
prepaid.
Kinder
Morgan Liquids Terminals LLC Debt
Kinder
Morgan Liquids Terminals LLC is the obligor on $25.0 million of Economic
Development Revenue Refunding Bonds issued by the New Jersey Economic
Development Authority. These bonds have a maturity date of January
15, 2018. Interest on these bonds is computed on the basis of a year
of 365 or 366 days, as applicable, for the actual number of days elapsed during
Commercial Paper, Daily or Weekly Rate Periods and on the basis of a 360-day
year consisting of twelve 30-day months during a Term Rate Period. As
of December 31, 2009, the interest rate was 0.19%. Kinder Morgan
Energy Partners has an outstanding letter of credit issued by Citibank in the
amount of $25.4 million that backs-up the $25.0 million principal amount of the
bonds and $0.4 million of interest on the bonds for up to 46 days computed at
12% on a per annum basis on the principal thereof.
Kinder
Morgan Operating L.P. “B” Debt
As
of December 31, 2008, Kinder Morgan Energy Partners’ subsidiary Kinder Morgan
Operating L.P. “B” was the obligor of a principal amount of $23.7 million of
tax-exempt bonds due April 1, 2024. The bonds were issued by the
Jackson-Union Counties Regional Port District, a political subdivision embracing
the territories of Jackson County and Union County in the state of
Illinois. These
variable rate demand bonds bear interest at a weekly floating market rate and
are backed-up by a letter of credit issued by Wachovia.
The
bond indenture also contains certain standby purchase agreement provisions which
allow investors to put (sell) back their bonds at par plus accrued
interest. In the fourth quarter of 2008, certain investors elected to
sell back their bonds and Kinder Morgan Energy Partners paid a total principal
and interest amount of $5.2 million according to the letter of credit
reimbursement provisions; however, the bonds were subsequently resold and as of
December 31, 2008, Kinder Morgan Energy Partners was fully reimbursed for its
prior payments. As of December 31, 2009, the interest rate on these
bonds was 0.21%. Kinder Morgan Energy Partners’ outstanding letter of
credit issued by Wachovia totaled $24.1 million, which backs-up a principal
amount of $23.7 million and $0.4 million of interest on the bonds for up to 55
days computed at 12% per annum on the principal amount thereof.
147
Kinder
Morgan, Inc. Form 10-K
International
Marine Terminals Debt
Kinder
Morgan Energy Partners owns a 66 2/3% interest in the International Marine
Terminals partnership (“IMT”). The principal assets owned by IMT are
dock and wharf facilities financed by the Plaquemines Port, Harbor and Terminal
District (Louisiana) $40.0 million Adjustable Rate Annual Tender Port Facilities
Revenue Refunding Bonds (International Marine Terminals Project) Series 1984A
and 1984B. As of December 31, 2009, the interest rate on these bonds
was 3.25%.
On
March 15, 2005, these bonds were refunded and the maturity date was extended
from March 15, 2006 to March 15, 2025. No other changes were made
under the bond provisions. The bonds are backed by two letters of
credit issued by Wachovia Bank, National Association. On March 19,
2002, an Amended and Restated Letter of Credit Reimbursement Agreement relating
to the letters of credit in the amount of $45.5 million was entered into by IMT
and KBC Bank. In connection with that agreement, Kinder Morgan Energy
Partners agreed to guarantee the obligations of IMT in proportion to its
ownership interest. Kinder Morgan Energy Partners’ obligation is
approximately $30.3 million for principal, plus interest and other
fees.
Gulf
Opportunity Zone Bonds
To
help fund Kinder Morgan Energy Partners’ business growth in the states of
Mississippi and Louisiana, it completed the purchase of a combined $13.2 million
in principal amount of tax exempt revenue bonds in two separate transactions in
December 2008. The bond offerings were issued under the Gulf
Opportunity Zone Act of 2005 and consisted of the following: (i) $8.2 million in
principal amount of 5.5% Development Revenue Bonds issued by the Mississippi
Business Finance Corporation (“MBFC”), a public, non-profit corporation that
coordinates a variety of resources used to assist business and industry in the
state of Mississippi and (ii) $5.0 million in principal amount of 6.0%
Development Revenue Bonds issued by the Louisiana Community Development
Authority, a political subdivision of the state of Louisiana.
The
Mississippi revenue bonds mature on September 1, 2022, and both principal and
interest is due in full at maturity. Kinder Morgan Energy Partners
holds an option to redeem in full (and settle the note payable to MBFC) the
principal amount of bonds it holds without penalty after one
year. The Louisiana revenue bonds have a maturity date of January 1,
2011 and provide for semi-annual interest payments each July 1 and January
1.
Maturities
of Debt
The
scheduled maturities of our and Kinder Morgan Energy Partners’ outstanding debt
balances, excluding the value of interest rate swaps, as of December 31, 2009,
are summarized as follows (in millions):
|
Year
|
Commitment
|
|||
|
2010
|
$ | 768.7 | ||
|
2011
|
1,471.7 | |||
|
2012
|
2,317.2 | |||
|
2013
|
500.2 | |||
|
2014
|
492.3 | |||
|
Thereafter
|
8,098.3 | |||
|
Total
|
$ | 13,648.4 | ||
Kinder
Morgan G.P., Inc. Preferred Shares
As
of December 31, 2009, Kinder Morgan G.P., Inc. had outstanding 100,000 shares of
its $1,000 Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative
Preferred Stock due 2057. Until August 18, 2012, dividends will
accumulate, commencing on the issue date, at a fixed rate of 8.33% per annum and
will be payable quarterly in arrears, when and if declared by Kinder Morgan
G.P., Inc.’s Board of Directors, on February 18, May 18, August 18 and November
18 of each year, beginning November 18, 2007. After August 18, 2012, dividends
on the preferred stock will accumulate at a floating rate of the 3-month LIBOR
plus 3.8975% and will be payable quarterly in arrears, when and if declared by
Kinder Morgan G.P., Inc.’s Board of Directors, on February 18, May 18, August 18
and November 18 of each year, beginning November 18, 2012. The preferred stock
has approval rights over a commencement of or filing of voluntary bankruptcy by
Kinder Morgan Energy Partners or its SFPP, L.P. or Calnev Pipe Line LLC
subsidiaries.
During
2009, $8.3 million in cash dividends, or $83.30 per share, was paid on Kinder
Morgan G.P. Inc.’s Series A Fixed-to-Floating Rate Term Cumulative Preferred
Stock. On January 20, 2010, Kinder Morgan G.P., Inc.’s Board of Directors
declared a quarterly cash dividend on its Series A Fixed-to-Floating Rate Term
Cumulative Preferred Stock of $20.825 per share that was paid on February 18,
2010 to shareholders of record as of January 29, 2010.
148
Kinder
Morgan, Inc. Form 10-K
9. Employee
Benefits
Pension
and Postretirement Benefit Plans
Kinder
Morgan, Inc.
Retirement
Plans
We
have defined benefit pension plans covering eligible full-time employees. These
plans provide pension benefits that are based on the employees’ compensation
during the period of employment, age and years of service. These plans are
tax-qualified subject to the minimum funding requirements of the Employee Retirement Income Security
Act of 1974, as amended. Our funding policy is to contribute annually the
recommended contribution using the actuarial cost method and assumptions used
for determining annual funding requirements. Plan assets consist primarily of
pooled fixed income, equity, bond and money market funds. The Plan did not have
any material investments in our company or affiliates as of December 31, 2009
and 2008.
Total
amounts recognized in net periodic pension cost include the following components
(in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Net
periodic pension benefit cost
|
||||||||||||||||
|
Service
cost
|
$ | 4.8 | $ | 10.8 | $ | 5.6 | $ | 4.5 | ||||||||
|
Interest
cost
|
15.8 | 14.5 | 8.1 | 5.6 | ||||||||||||
|
Expected
return on assets
|
(16.2 | ) | (23.2 | ) | (14.0 | ) | (9.6 | ) | ||||||||
|
Amortization
of prior service cost
|
0.1 | 0.1 | - | 0.1 | ||||||||||||
|
Amortization
of loss
|
7.9 | 0.3 | - | 0.2 | ||||||||||||
|
Net
periodic pension benefit cost
|
$ | 12.4 | $ | 2.5 | $ | (0.3 | ) | $ | 0.8 | |||||||
The
following table sets forth the reconciliation of the beginning and ending
balances of the pension benefit obligation (in millions):
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Benefit
obligation at beginning of period
|
$ | 255.0 | $ | 258.0 | ||||
|
Service
cost
|
4.8 | 10.8 | ||||||
|
Interest
cost
|
15.8 | 14.5 | ||||||
|
Actuarial
loss (gain)
|
12.4 | (14.2 | ) | |||||
|
Plan
amendments
|
- | 0.8 | ||||||
|
Benefits
paid
|
(13.6 | ) | (14.9 | ) | ||||
|
Benefit
obligation at end of period
|
$ | 274.4 | $ | 255.0 | ||||
The
accumulated benefit obligation at December 31, 2009 and 2008 was $265.2 million
and $248.6 million, respectively.
The
following table sets forth the reconciliation of the beginning and ending
balances of the fair value of the plans’ assets and the plans’ funded status (in
millions):
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
millions)
|
||||||||
|
Fair
value of plan assets at beginning of period
|
$ | 179.7 | $ | 264.7 | ||||
|
Actual
return on plan assets during the period
|
34.0 | (70.1 | ) | |||||
|
Contributions
by employer
|
20.0 | - | ||||||
|
Benefits
paid during the period
|
(13.6 | ) | (14.9 | ) | ||||
|
Fair
value of plan assets at end of period
|
220.1 | 179.7 | ||||||
|
Benefit
obligation at end of period
|
(274.4 | ) | (255.0 | ) | ||||
|
Funded
status at end of period
|
$ | (54.3 | ) | $ | (75.3 | ) | ||
149
Kinder
Morgan, Inc. Form 10-K
The
accompanying Consolidated Balance Sheets at December 31, 2009 and 2008 include a
balance of $54.3 million and $75.3 million, respectively, under the caption
“Other Long-term Liabilities and Deferred Credits” related to our pension
plans.
The
following table sets forth by level, within the fair value hierarchy, the Plan’s
assets at fair value (in millions):
|
Assets
at fair value at December 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Money market funds
|
$ | - | $ | 20.1 | $ | - | $ | 20.1 | ||||||||
|
Insurance contracts
|
- | 12.2 | - | 12.2 | ||||||||||||
|
Mutual funds
|
- | 61.1 | - | 61.1 | ||||||||||||
|
Common and preferred stocks
|
75.6 | - | - | 75.6 | ||||||||||||
|
Corporate bonds
|
- | 23.8 | - | 23.8 | ||||||||||||
|
U.S. government securities
|
- | 15.2 | - | 15.2 | ||||||||||||
|
Asset backed securities
|
- | 3.2 | - | 3.2 | ||||||||||||
|
Limited partnerships
|
- | - | 5.2 | 5.2 | ||||||||||||
|
Private equity
|
- | - | 3.2 | 3.2 | ||||||||||||
|
Total asset fair value
|
$ | 75.6 | $ | 135.6 | $ | 8.4 | $ | 219.6 | (a) | |||||||
____________
|
(a)
|
Excludes
$0.5 million in interest, dividend and security
receivables.
|
An
asset’s fair value measurement level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and
minimize the use of unobservable inputs.
Following
is a description of the valuation methodologies used for assets measured at fair
value:
Common stocks and fixed
income: Valued at the closing price reported on the active market on
which the individual securities are traded.
Money market funds: Valued at
amortized cost, which approximates fair value.
Mutual funds: Valued at the
net asset value (“NAV”) of shares held by the plan at year end.
Limited partnership and private
equity investments: Valued at net fair value utilizing discounted present
value.
Insurance contracts: Valued
at contract value, which approximates fair value.
The
table below sets forth a summary of changes in the fair value of the Plan’s
level 3 assets (in millions):
|
Level
3 assets at fair value at
December
31, 2009
|
||||||||||||
|
Limited
Partnerships
|
Private
Equity
|
Total
|
||||||||||
|
Balance,
beginning of year
|
$ | 4.6 | $ | 2.6 | $ | 7.2 | ||||||
|
Realized
and unrealized gains/(losses)
|
0.4 | (0.5 | ) | (0.1 | ) | |||||||
|
Purchases
and sales
|
0.2 | 1.1 | 1.3 | |||||||||
|
Level
3 end of year balance
|
$ | 5.2 | $ | 3.2 | $ | 8.4 | ||||||
150
Kinder
Morgan, Inc. Form 10-K
Changes
in the underlying value of level 3 assets due to the effect of measurement were
immaterial for the year ended December 31, 2009.
Amounts
recognized in “Accumulated Other Comprehensive Loss” consist of:
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
balance
|
$ | 109.9 | $ | 30.6 | ||||
|
Net
(gain)/loss arising during period
|
(5.3 | ) | 79.1 | |||||
|
Prior
service cost arising during period
|
- | 0.7 | ||||||
|
Amortization
of (gain)/loss
|
(7.9 | ) | (0.4 | ) | ||||
|
Amortization
of prior service cost
|
(0.1 | ) | (0.1 | ) | ||||
|
Ending
balance
|
$ | 96.6 | $ | 109.9 | ||||
Our
actuarial estimates allocate costs based on projected employee costs. As
experience develops under our plan, actuarial gains (losses) result from
experience more favorable (unfavorable) than assumed.
The
estimated net loss for the defined benefit pension plans that will be amortized
from accumulated other comprehensive income into net periodic pension benefit
cost over the next fiscal year is $6.1 million.
We
expect to contribute approximately $20 million to the Plan during
2010.
The
following net benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in millions):
|
Fiscal year
|
Expected net
benefit
payments
|
|||
|
2010
|
$
|
14.9
|
||
|
2011
|
$
|
15.9
|
||
|
2012
|
$
|
16.6
|
||
|
2013
|
$
|
17.2
|
||
|
2014
|
$
|
18.1
|
||
|
2015-2019
|
$
|
115.0
|
||
Effective
January 1, 2001, we created the Kinder Morgan, Inc. Retirement Plan (“Retirement
Plan”), a cash balance plan. Certain collectively bargained employees
and “grandfathered” employees continue to accrue benefits through the defined
pension benefit plan described above. The remainder of the employees accrue
benefits through a Personal Retirement Account (“PRA”) in the Retirement Plan.
Employees converting to the Retirement Plan were credited with the current fair
value of any benefits they had previously accrued through the defined benefit
plan. We allocate contributions equivalent to 3% of eligible compensation every
pay period to participants’ PRA. Interest is credited to the PRA at the 30-year
U.S. Treasury bond rate determined on November 30 of the prior year. Employees
become 100 percent vested in the plan after three years (five years prior to
January 1, 2008) and may take a lump sum distribution upon termination of
employment or retirement.
Commencing
April 12, 2009, we suspended the 3% contributions to employees’ PRAs for the
2009 year. We began allocating contributions equivalent to 3% of eligible
compensation into the PRA effective January 1, 2010. Those employees who were
grandfathered or accruing under the prior defined benefit pension plan continued
to accrue pension benefits with no interruption in 2009.
In
addition to the Retirement Plan described above, we have the Kinder Morgan, Inc.
Savings Plan (the “Plan”), a defined contribution 401(k) plan. The Plan permits
all eligible Plan participants to contribute between 1% and 50% of eligible
compensation, on a pre-tax or after-tax (Roth 401k) basis, into their accounts.
In addition to a Company contribution equal to 4% of eligible compensation per
year for most of the Plan participants, Kinder Morgan may make discretionary
contributions. Certain Plan participant’s contributions and Company
contributions are based on collective bargaining agreements. The contributions
are made each pay period on behalf of each eligible participant. Participants
may direct the investment of their contributions and all Company contributions,
including discretionary contributions, into a variety of investments. Plan
assets are held and distributed pursuant to a trust agreement. The total amount
contributed for the year ended December 31, 2009, the year ended December 31,
2008, seven months ended December 31, 2007 and five months ended May 31, 2007
was $19.8 million, $20.8 million, $11.0 million and $8.1 million,
respectively.
151
Kinder
Morgan, Inc. Form 10-K
Company
contributions for participants vest on the second anniversary of the date of
hire. Effective October 1, 2005, a tiered Company contribution schedule was
implemented for new employees of the Terminals–KMP segment. This tiered schedule
provides for Company contributions of 1% for service less than one year, 2% for
service between one and two years, 3% for services between two and five years,
and 4% for service of five years or more. All Company contributions for
Terminals–KMP employees hired after October 1, 2005 vest on the fifth
anniversary of the date of hire. Effective January 1, 2008, this five-year
anniversary date for Terminals–KMP employees was changed to three-year
anniversary vest schedule to comply with changes in federal regulations.
Effective July 16, 2008, we changed the vesting schedule for Terminals-KMP back
to two years of service. Vesting on Company contributions for bargaining
employees will follow the collective bargaining agreements.
At
its July 2008 meeting, the Compensation Committee of our Board of Directors
approved a special contribution of an additional 1% of base pay into the Plan
for each eligible participant. Each eligible participant received an additional
1% Company contribution based on eligible base pay each pay period beginning
with the first pay period of August 2008 and continuing through the last pay
period of July 2009. The additional 1% contribution did not change or otherwise
impact the annual 4% contribution that eligible participants received and the
vesting schedule mirrored the Company’s 4% contribution. Since this additional
1% Company contribution is discretionary, Compensation Committee approval will
be required annually for each additional contribution.
Commencing
February 1, 2009 through February 1, 2010, the Company suspended both the annual
4% contribution as well as the discretionary 1% contribution for participants
with a title of Vice President or greater.
Additionally,
participants have an option to make after-tax “Roth” contributions (Roth 401(k)
option) to a separate participant account. Unlike traditional 401(k) plans,
where participant contributions are made with pre-tax dollars, earnings grow
tax-deferred, and the withdrawals are treated as taxable income, Roth 401(k)
contributions are made with after-tax dollars, earnings are tax-free, and the
withdrawals are tax-free if they occur after both (i) the fifth year of
participation in the Roth 401(k) option and (ii) attainment of age 59 ½, death
or disability. The Company contribution will still be considered taxable income
at the time of withdrawal.
Beginning
in 2006, we elected not to make any restricted stock awards as a result of the
Going Private transaction. To ensure that certain key employees who had
previously received restricted stock and restricted stock unit awards continued
under a long-term retention and incentive program, the Company implemented the
Long-term Incentive Retention Award plan. The plan provides cash awards approved
by the compensation committees of the Company which are granted in July of each
year to recommended key employees. Senior management is not eligible for these
awards. These grants require the employee to sign a grant agreement. The grants
vest 100% after the third year anniversary of the grant provided the employee
remains with the Company. Grants were made in July of 2007, 2008 and 2009.
During the year ended December 31, 2009, December 31, 2008, seven months ended
December 31, 2007 and five months ended May 31, 2007 we amortized $2.3 million,
$6.9 million, $5.3 million and $1.3 million, respectively, related to these
grants.
Other
Postretirement Employee Benefits
We
have a postretirement plan providing medical and life insurance benefits upon
retirement. For certain eligible employees and their eligible dependents that
are “grandfathered,” we also provide a subsidized premium. All others who are
eligible pay the full cost. NGPL PipeCo funds a portion of the future expected
postretirement benefit cost under the plan by making payments to Voluntary
Employee Benefit Association trusts. Plan assets are invested in a mix of equity
funds and fixed income instruments similar to the investments in our pension
plans.
Total amounts
recognized in net periodic postretirement benefit cost include the following
components (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Net
periodic postretirement benefit cost
|
||||||||||||||||
|
Service
cost
|
$ | 0.3 | $ | 0.3 | $ | 0.2 | $ | 0.2 | ||||||||
|
Interest
cost
|
4.5 | 4.6 | 2.7 | 1.9 | ||||||||||||
|
Expected
return on assets
|
(4.6 | ) | (6.5 | ) | (3.9 | ) | (2.7 | ) | ||||||||
|
Amortization
of prior service credit
|
- | - | - | (0.7 | ) | |||||||||||
|
Amortization
of loss
|
2.5 | 0.5 | - | 2.0 | ||||||||||||
|
Net
periodic postretirement benefit cost
|
$ | 2.7 | $ | (1.1 | ) | $ | (1.0 | ) | $ | 0.7 | ||||||
152
Kinder
Morgan, Inc. Form 10-K
The
following table sets forth the reconciliation of the beginning and ending
balances of the accumulated postretirement benefit obligation (in
millions):
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Benefit
obligation at beginning of period
|
$ | 78.0 | $ | 82.0 | ||||
|
Service
cost
|
0.3 | 0.3 | ||||||
|
Interest
cost
|
4.5 | 4.6 | ||||||
|
Actuarial
loss (gain)
|
1.1 | 2.0 | ||||||
|
Benefits
paid
|
(11.7 | ) | (13.8 | ) | ||||
|
Retiree
contributions
|
3.4 | 2.9 | ||||||
|
Benefit
obligation at end of period
|
$ | 75.6 | $ | 78.0 | ||||
The
following table sets forth the reconciliation of the beginning and ending
balances of the fair value of plan assets and the plan’s funded status (in
millions):
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Fair
value of plan assets at beginning of period
|
$ | 49.1 | $ | 69.2 | ||||
|
Actual
return on plan assets
|
6.8 | (17.5 | ) | |||||
|
Contributions
|
7.0 | 8.7 | ||||||
|
Retiree
contributions
|
3.4 | 2.9 | ||||||
|
Benefits
paid
|
(12.2 | ) | (14.2 | ) | ||||
|
Fair
value of plan assets at end of period
|
54.1 | 49.1 | ||||||
|
Benefit
obligation at end of period
|
(75.6 | ) | (78.0 | ) | ||||
|
Funded
status at end of period
|
$ | (21.5 | ) | $ | (28.9 | ) | ||
The
accompanying Consolidated Balance Sheets at December 31, 2009 and 2008 include
balances of $21.5 million and $28.9 million, respectively, under the caption
“Other Long-term Liabilities and Deferred Credits,” related to our other
postretirement benefit plans.
The
following table sets forth by level, within the fair value hierarchy, the fair
value of postretirement benefit assets:
|
Assets
at fair value at December 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Money
market funds
|
$ | - | $ | 5.5 | $ | - | $ | 5.5 | ||||||||
|
Insurance
contracts
|
- | 41.6 | - | 41.6 | ||||||||||||
|
Mutual
funds
|
7.0 | - | - | 7.0 | ||||||||||||
|
Total
asset fair value
|
$ | 7.0 | $ | 47.1 | $ | - | $ | 54.1 | ||||||||
Amounts
recognized in “Accumulated Other Comprehensive Loss” consist of (in
millions):
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
balance
|
$ | 37.9 | $ | 12.0 | ||||
|
Net
(gain)/loss arising during period
|
(0.5 | ) | 26.4 | |||||
|
Amortization
of (gain)/loss
|
(2.5 | ) | (0.5 | ) | ||||
|
Amortization
of prior service cost
|
- | - | ||||||
|
Ending
balance
|
$ | 34.9 | $ | 37.9 | ||||
The
estimated net loss for the postretirement benefit plans that will be amortized
from accumulated other comprehensive income into net periodic postretirement
benefit cost over the next fiscal year is $2.8 million. NGPL PipeCo LLC
contributed approximately $8.7 million to the plan in February
2010.
A
one-percentage-point increase (decrease) in the assumed health care cost trend
rate for each future year would have increased (decreased) the aggregate of the
service and interest cost components of the 2009 net periodic postretirement
benefit cost by approximately $5 $(5) thousand and would have increased
(decreased) the accumulated postretirement benefit obligation as of December 31,
2009 by approximately $78 $(73) thousand.
153
Kinder
Morgan, Inc. Form 10-K
The
following net benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in millions):
|
Fiscal year
|
Expected net
benefit
payments
|
|||
|
2010
|
$
|
7.2
|
||
|
2011
|
$
|
6.9
|
||
|
2012
|
$
|
6.6
|
||
|
2013
|
$
|
6.4
|
||
|
2014
|
$
|
6.2
|
||
|
2015-2018
|
$
|
28.6
|
||
Actuarial
Assumptions
The
assumptions used to determine benefit obligations for the pension and
postretirement benefit plans were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
Year
Ended December 31,
|
Seven Months
Ended
December 31,
|
Five Months
Ended
May
31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||||||
|
Discount
rate
|
(a)
|
6.25
|
%
|
5.75
|
%
|
6.00
|
%
|
|||||||||||||
|
Expected
long-term return on assets
|
8.90
|
%
|
8.75
|
%
|
9.00
|
%
|
9.00
|
%
|
||||||||||||
|
Rate
of compensation increase (pension plan only)
|
3.50
|
%
|
3.50
|
%
|
3.50
|
%
|
3.50
|
%
|
||||||||||||
____________
|
(a)
|
Discount
rates of 5.75% and 6.00% are used to determine obligations for other
postretirement benefits and pension benefits,
respectively.
|
The
assumptions used to determine net periodic benefit cost for the pension and
postretirement benefits were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
Year
Ended December 31,
|
Seven Months
Ended
December 31,
|
Five Months
Ended
May
31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||||||
|
Discount
rate
|
6.25
|
%
|
5.75
|
%
|
6.00
|
%
|
6.00
|
%
|
||||||||||||
|
Expected
long-term return on assets
|
8.75
|
%
|
9.00
|
%
|
9.00
|
%
|
9.00
|
%
|
||||||||||||
|
Rate
of compensation increase (pension plan only)
|
3.50
|
%
|
3.50
|
%
|
3.50
|
%
|
3.50
|
%
|
||||||||||||
The
assumed healthcare cost trend rates for the postretirement plan
were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
Year
Ended December 31,
|
Seven Months
Ended
December 31,
|
Five Months
Ended
May
31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||||||
|
Healthcare
cost trend rate assumed for next year
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
||||||||||||
|
Rate
to which the cost trend rate is assumed to decline (ultimate trend
rate)
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
||||||||||||
|
Year
the rate reaches the ultimate trend rate
|
2009
|
2008
|
2007
|
2007
|
||||||||||||||||
Plan
Investment Policies
The
investment policies and strategies for the assets of our pension and retiree
medical and retiree life insurance plans are established by the Fiduciary
Committee (the “Committee”), which is responsible for investment decisions and
management oversight of each plan. The stated philosophy of the Committee is to
manage these assets in a manner consistent with the purpose for which the plans
were established and the time frame over which the plans’ obligations need to be
met. The objectives of the investment management program are to (1) meet or
exceed plan actuarial earnings assumptions over the long term and (2) provide a
reasonable return on assets within established risk tolerance guidelines and
liquidity needs of the plans with the goal of paying benefit and expense
obligations when due. In seeking to meet these objectives, the
Committee
154
Kinder
Morgan, Inc. Form 10-K
recognizes
that prudent investing requires taking reasonable risks in order to raise the
likelihood of achieving the targeted investment returns. In order to reduce
portfolio risk and volatility, the Committee has adopted a strategy of using
multiple asset classes.
As
of December 31, 2009, the following target asset allocation ranges were in
effect for our pension plans (Minimum/Target/Maximum): Cash – 0%/0%/5%; Fixed
Income –20%/30%/40%; Equity – 55%/65%/75% and Alternative Investments –
0%/5%/10%. As of December 31, 2009, the following target asset allocation ranges
were in effect for our retiree medical and retiree life insurance plans
(Minimum/Target/Maximum): Cash – 0%/0%/5%; Fixed Income –20%/30%/40% and Equity
– 60%/70%/80%. In order to achieve enhanced diversification, the equity category
is further subdivided into sub-categories with respect to small cap vs. large
cap, value vs. growth and international vs. domestic, each with its own target
asset allocation.
In
implementing its investment policies and strategies, the Committee has engaged a
professional investment advisor to assist with its decision making process and
has engaged professional money managers to manage plan assets. The Committee
believes that such active investment management will achieve superior returns
with comparable risk in comparison to passive management. Consistent with its
goal of reasonable diversification, no manager of an equity portfolio for the
plan is allowed to have more than 10% of the market value of the portfolio in a
single security or weight a single economic sector more than twice the weighting
of that sector in the appropriate market index. Finally, investment managers are
not permitted to invest or engage in the following equity transactions unless
specific permission is given in writing (which permission has not been requested
or granted by the Committee to-date): derivative instruments, except for the
purpose of asset value protection (such as the purchase of protective puts),
direct ownership of letter stock, restricted stock, limited partnership units
(unless the security is registered and listed on a domestic exchange), venture
capital, short sales, margin purchases or borrowing money, stock loans and
commodities. In addition, fixed income holdings in the following investments are
prohibited without written permission: private placements, except medium-term
notes and securities issued under SEC Rule 144a; foreign bonds (non-dollar
denominated); municipal or other tax exempt securities, except taxable
municipals; margin purchases or borrowing money to effect leverage in the
portfolio; inverse floaters, interest only and principle only mortgage
structures; and derivative investments (futures or option contracts) used for
speculative purposes. Certain other types of investments such as hedge funds and
land purchases are not prohibited as a matter of policy but have not, as yet,
been adopted as an asset class or received any allocation of fund
assets.
Return
on Plan Assets
For
the year ending December 31, 2009, our defined benefit pension plan yielded a
weighted-average rate of return of 20.18%, above the expected rate of return on
assets of 8.90%. Investment performance for a balanced fund comprised of a
similar mix of assets yielded a weighted-average return of 18.82%, so our plans
outperformed the benchmark balanced fund index. For the year ending December 31,
2009, our retiree medical and retiree life insurance plans yielded a
weighted-average rate of return of 19.62%, above the expected rate of return on
assets of 8.90%. Investment performance for a balanced fund comprised of a
similar mix of assets yielded a weighted-average return of 17.27%, so our plans
outperformed the benchmark balanced fund index.
At
December 31, 2009, our pension plan assets consisted of 64.6% equity, 26.0%
fixed income and 9.4% cash and cash equivalents, and our retiree medical and
retiree life insurance plan assets consisted of 63.4% equity, 26.2% fixed income
and 10.4% cash and cash equivalents. Historically over long periods of time,
widely traded large cap equity securities have provided a return of 10%, while
fixed income securities have provided a return of 6%, indicating that a long
term expected return predicated on the asset allocation as of December 31, 2009
would be approximately 8.73% to 9.30% if investments were made in the broad
indexes for our defined benefit pension plan, and 8.36% to 8.88% for our retiree
medical and retiree life insurance plan. We arrived at an overall expected
return of 8.75% for our periodic benefit cost calculations and an overall
expected return of 8.90% for our benefit obligation calculations as of December
31, 2009.
Kinder
Morgan Energy Partners
Pension
and Postretirement Benefit Plans
Two
of Kinder Morgan Energy Partners’ subsidiaries, Kinder Morgan Canada Inc. and
Trans Mountain Pipeline Inc. (as general partner of Trans Mountain Pipeline
L.P.) are sponsors of pension plans for eligible Trans Mountain
employees. The plans include registered defined benefit pension
plans, supplemental unfunded arrangements, which provide pension benefits in
excess of statutory limits, and defined contributory plans. Kinder
Morgan Energy Partners also provides postretirement benefits other than pensions
for retired employees. Kinder Morgan Energy Partners’ combined net
periodic benefit costs for these Trans Mountain pension and postretirement
benefit plans for 2009, 2008, the seven months ended December 31, 2007 and the
five months ended May 31, 2007 were approximately $2.9 million, $3.5 million,
$1.9 million and $1.3 million, respectively, recognized ratably over each
year.
155
Kinder
Morgan, Inc. Form 10-K
As
of December 31, 2009, Kinder Morgan Energy Partners estimates its overall net
periodic pension and postretirement benefit costs for these plans for the year
2010 will be approximately $3.6 million, although this estimate could change if
there is a significant event, such as a plan amendment or a plan curtailment,
which would require a remeasurement of liabilities. Kinder Morgan
Energy Partners expects to contribute approximately $4.8 million to these
benefit plans in 2010.
Additionally,
in connection with Kinder Morgan Energy Partners’ acquisition of SFPP, L.P. and
Kinder Morgan Bulk Terminals, Inc. in 1998, Kinder Morgan Energy Partners
acquired certain liabilities for pension and postretirement
benefits. Kinder Morgan Energy Partners provides medical and life
insurance benefits to current employees, their covered dependents and
beneficiaries of SFPP and Kinder Morgan Bulk Terminals. Kinder Morgan
Energy Partners also provides the same benefits to former salaried employees of
SFPP. Additionally, Kinder Morgan Energy Partners will continue to
fund these costs for those employees currently in the plan during their
retirement years. SFPP’s postretirement benefit plan is frozen and no
additional participants may join the plan. The noncontributory
defined benefit pension plan covering the former employees of Kinder Morgan Bulk
Terminals is the Kinder Morgan, Inc. Retirement Plan. The benefits
under this plan are based primarily upon years of service and final average
pensionable earnings; however, benefit accruals were frozen as of December 31,
1998.
Kinder
Morgan Energy Partners’ net periodic benefit cost for the SFPP postretirement
benefit plan was a credit of less than $0.1 million in 2009,
a credit of less than $0.1 million in 2008, a
credit of $0.1 million for the seven months ended December 31, 2007 and a credit
of $0.1 million for the five months ended May 31, 2007. The credits
in all periods resulted in increases to income, largely due to amortizations of
an actuarial gain and a negative prior service cost. As of December
31, 2009, Kinder Morgan Energy Partners estimates its overall net periodic
postretirement benefit cost for the SFPP postretirement benefit plan for the
year 2010 will be a credit of less than $0.1 million; however, this estimate
could change if a future significant event would require a remeasurement of
liabilities. In addition, Kinder Morgan Energy Partners expects to
contribute approximately $0.3 million to this postretirement benefit plan in
2010.
As
of December 31, 2009 and 2008, the recorded value of Kinder Morgan Energy
Partners’ pension and postretirement benefit obligations for these plans was a
combined $37.4 million and $33.4 million, respectively. Kinder Morgan
Energy Partners considers its pension and postretirement benefit liability
exposure and the fair value of its pension and postretirement plan assets to be
minimal in relation to the value of its total consolidated assets and net
income.
Multiemployer
Plans
As
a result of acquiring several terminal operations, primarily Kinder Morgan
Energy Partners’ acquisition of Kinder Morgan Bulk Terminals, Inc. effective
July 1, 1998, Kinder Morgan Energy Partners participates in several
multi-employer pension plans for the benefit of employees who are union
members. Kinder Morgan Energy Partners does not administer these
plans and contribute to them in accordance with the provisions of negotiated
labor contracts. Other benefits include a self-insured health and
welfare insurance plan and an employee health plan where employees may
contribute for their dependents’ health care costs. Amounts charged
to expense for these plans were approximately $8.4 million, $7.8 million, $2.5
million and $4.2 million for the years ended December 31, 2009 and 2008, the
seven months ended December 31, 2007 and the five months ended May 31, 2007,
respectively.
10. Stockholders’
Equity
During
the years ended December 31, 2009 and 2008, seven months ended December 31,
2007, and five months ended May 31, 2007, there were no material changes in our
ownership interests in subsidiaries, in which we retained a controlling
financial interest.
During
the year ended December 31, 2009, we paid cash dividends on our common stock
totaling $650.0 million to our sole stockholder, which then made dividends to
Kinder Morgan Holdco LLC. On January 20, 2010, our Board of Directors
declared a dividend of $150.0 million for the fourth quarter of 2009 that was
paid on February 16, 2010.
156
Kinder
Morgan, Inc. Form 10-K
Comprehensive
Income – Income Tax Expense
The following table sets forth the tax
amounts included in the respective components of other comprehensive income
(loss) (in millions):
Tax
Benefit (Expense) Included in Other Comprehensive Income (Loss)
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Kinder
Morgan, Inc.
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for hedging purposes
|
$ | 85.5 | $ | (121.3 | ) | $ | 140.8 | $ | 19.1 | |||||||
|
Reclassification
of change in fair value of derivatives to net income
|
24.5 | (69.4 | ) | 0.6 | (12.8 | ) | ||||||||||
|
Foreign
currency translation adjustments
|
(34.7 | ) | 31.0 | (8.3 | ) | (3.9 | ) | |||||||||
|
Benefit
plan adjustments
|
(1.6 | ) | 37.7 | 15.3 | (5.7 | ) | ||||||||||
|
Benefit
plan amortization
|
(3.7 | ) | (0.2 | ) | - | (0.6 | ) | |||||||||
|
Tax
benefit (expense) included in total other comprehensive income (loss)
attributable to Kinder Morgan, Inc.
|
70.0 | (122.2 | ) | 148.4 | (3.9 | ) | ||||||||||
|
Noncontrolling
interests
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for hedging purposes
|
20.7 | (34.1 | ) | 0.9 | 2.4 | |||||||||||
|
Reclassification
of change in fair value of derivatives to net income
|
(4.5 | ) | (34.6 | ) | (0.3 | ) | (2.7 | ) | ||||||||
|
Foreign
currency translation adjustments
|
(11.4 | ) | 17.2 | (0.1 | ) | (0.9 | ) | |||||||||
|
Benefit
plan adjustments
|
0.1 | (0.2 | ) | - | - | |||||||||||
|
Benefit
plan amortization
|
- | - | - | - | ||||||||||||
|
Tax
benefit (expense) included in total other comprehensive income (loss)
attributable to noncontrolling interests
|
4.9 | (51.7 | ) | 0.5 | (1.2 | ) | ||||||||||
|
Total
|
||||||||||||||||
|
Change
in fair value of derivatives utilized for hedging purposes
|
106.2 | (155.4 | ) | 141.7 | 21.5 | |||||||||||
|
Reclassification
of change in fair value of derivatives to net income
|
20.0 | (104.0 | ) | 0.3 | (15.5 | ) | ||||||||||
|
Foreign
currency translation adjustments
|
(46.1 | ) | 48.2 | (8.4 | ) | (4.8 | ) | |||||||||
|
Benefit
plan adjustments
|
(1.5 | ) | 37.5 | 15.3 | (5.7 | ) | ||||||||||
|
Benefit
plan amortization
|
(3.7 | ) | (0.2 | ) | - | (0.6 | ) | |||||||||
|
Tax
benefit (expense) included in total other comprehensive
income (loss)
|
$ | 74.9 | $ | (173.9 | ) | $ | 148.9 | $ | (5.1 | ) | ||||||
Noncontrolling
Interests
The
caption “Noncontrolling interests” in the accompanying Consolidated Balance
Sheets consists of interests in the following subsidiaries (in
millions):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Kinder
Morgan Energy Partners
|
$ | 2,746.4 | $ | 2,198.2 | ||||
|
Kinder
Morgan Management
|
1,870.7 | 1,826.5 | ||||||
|
Triton
Power Company LLC
|
45.9 | 39.0 | ||||||
|
Other
|
11.6 | 8.9 | ||||||
| $ | 4,674.6 | $ | 4,072.6 | |||||
Kinder
Morgan Energy Partners’ Common Units
2009
Issuances
On
January 16, 2009, Kinder Morgan Energy Partners entered into an equity
distribution agreement with UBS Securities LLC (“UBS”). According to
the provisions of this agreement, which was amended and restated on October 1,
2009, Kinder Morgan Energy Partners may offer and sell from time to time common
units having an aggregate offering value of up to $600 million through UBS, as
sales agent. Sales of the units will be made by means of ordinary
brokers’ transactions on the New York Stock Exchange at market prices, in block
transactions or as otherwise agreed between Kinder Morgan Energy Partners and
UBS. Under the terms of this agreement, Kinder Morgan Energy Partners
also may sell common units to UBS as principal for its own account at a price
agreed upon at the time of the sale. Any sale of common units to UBS
as principal would be pursuant to the terms of a separate agreement between
Kinder Morgan Energy Partners and UBS.
157
Kinder
Morgan, Inc. Form 10-K
This
equity distribution agreement provides Kinder Morgan Energy Partners the right,
but not the obligation, to sell common units in the future, at prices it deems
appropriate. Kinder Morgan Energy Partners retains at all times
complete control over the amount and the timing of each sale, and it will
designate the maximum number of common units to be sold through UBS, on a daily
basis or otherwise as it and UBS agree. UBS will then use its
reasonable efforts to sell, as Kinder Morgan Energy Partners’ sales agent and on
its behalf, all of the designated common units. Kinder Morgan Energy
Partners may instruct UBS not to sell common units if the sales cannot be
effected at or above the price designated by it in any such
instruction. Either Kinder Morgan Energy Partners or UBS may suspend
the offering of common units pursuant to the agreement by notifying the other
party.
In
2009, Kinder Morgan Energy Partners issued 5,488,947 of its common units
pursuant to this agreement. After commissions of $4.0 million, Kinder
Morgan Energy Partners received net proceeds from the issuance of these common
units of approximately $281.2 million. The proceeds were used to
reduce the borrowings under Kinder Morgan Energy Partners’ bank credit
facility.
Kinder
Morgan Energy Partners also completed three separate underwritten public
offerings of its common units in 2009, receiving net proceeds of $874.4 million
as discussed following, and in April 2009, it issued 105,752 common units,
valued at $5.0 million, as the purchase price for additional ownership interests
in certain oil and gas properties.
In
the first 2009 public offering, completed in March, Kinder Morgan Energy
Partners issued 5,666,000 of its common units at a price of $46.95 per unit,
less underwriting commissions and expenses. Net proceeds of $258.0
million were received for the issuance of these common units. In the
second offering, completed in July, 6,612,500 common units were issued at a
price of $51.50 per unit, less underwriting commissions and expenses, and net
proceeds of $329.9 million. In its final 2009 public offering, completed in
December, Kinder Morgan Energy Partners issued 5,175,000 common units at a price
of $57.15 per unit, less underwriting commissions and expenses, and received net
proceeds of $286.5 million for the issuance of these common
units. Kinder Morgan Energy Partners used the proceeds from each of
these three public offerings to reduce the borrowings under its bank credit
facility.
These
Kinder Morgan Energy Partners’ issuances of common units during the year ended
December 31, 2009, collectively, had the associated effects of increasing our
(i) noncontrolling interests associated with Kinder Morgan Energy Partners by
$1,116.9 million, (ii) accumulated deferred income taxes by $15.6 million and
(iii) additional paid-in capital by $28.1 million.
2008
Issuances
On
February 12, 2008, Kinder Morgan Energy Partners completed an offering of
1,080,000 of its common units at a price of $55.65 per unit in a privately
negotiated transaction. Kinder Morgan Energy Partners received net proceeds of
$60.1 million for the issuance of these 1,080,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
In
March 2008, Kinder Morgan Energy Partners issued, in a public offering,
5,750,000 of its common units at a price of $57.70 per unit, less commissions
and underwriting expenses. After commissions and underwriting expenses, Kinder
Morgan Energy Partners received net proceeds of $324.2 million for the issuance
of these common units, and used the proceeds to reduce the borrowings under its
commercial paper program.
In
connection with the August 28, 2008 sale of our one-third ownership interest in
the Express pipeline system and the full interest in the net assets of the Jet
Fuel pipeline system, Kinder Morgan Energy Partners issued 2,014,693 of its
common units to us. These units, as agreed by Kinder Morgan Energy Partners and
us, were valued at $116.0 million. For more information on this transaction; see
Note 11.
On
December 22, 2008, Kinder Morgan Energy Partners issued, in a public offering,
3,900,000 of its common units at a price of $46.75 per unit, less commissions
and underwriting expenses. After commissions and underwriting expenses, Kinder
Morgan Energy Partners received net proceeds of $176.6 million for the issuance
of these common units, and used the proceeds to reduce the borrowings under its
bank credit facility.
These
Kinder Morgan Energy Partners’ issuances of common units during the year ended
December 31, 2008, collectively, had the associated effects of increasing our
(i) noncontrolling interests associated with Kinder Morgan Energy Partners by
$539.4 million and (ii) associated accumulated deferred income taxes by $7.8
million, and reducing our (i) goodwill by $33.4 million and (ii) additional
paid-in capital by $19.7 million.
158
Kinder
Morgan, Inc. Form 10-K
Kinder Morgan Management, LLC
Kinder
Morgan Management’s distributions are paid in the form of additional shares or
fractions thereof calculated by dividing the Kinder Morgan Energy Partners cash
distribution per common unit by the average of the market closing prices of a
Kinder Morgan Management share determined for a ten-trading day period ending on
the trading day immediately prior to the ex-dividend date for the shares. Kinder
Morgan Management has paid share distributions totaling 7,540,357, 5,565,424,
2,402,439 and 2,028,367 shares in the years ended December 31, 2009 and 2008,
seven months ended December 31, 2007 and five months ended May 31, 2007,
respectively. On February 12, 2010, Kinder Morgan Management made a share
distribution of 0.018430 shares per outstanding share (1,576,470 total shares)
to shareholders of record as of January 29, 2010, based on the $1.05 per common
unit distribution declared by Kinder Morgan Energy Partners.
At
December 31, 2009, we owned 12.2 million Kinder Morgan Management shares
representing approximately 14.3% of Kinder Morgan Management’s outstanding
shares.
Common
Stock – Financing of the Going Private Transaction
On
May 30, 2007, investors led by Richard D. Kinder, our Chairman and Chief
Executive Officer, completed the Going Private transaction. As of the closing
date of the Going Private transaction, Kinder Morgan, Inc. had 149,316,603
common shares outstanding, before deducting 15,030,135 shares held in treasury.
The Going Private transaction, including associated fees and expenses, was
financed through (i) $5.0 billion in new equity financing from private equity
funds and other entities providing equity financing, (ii) approximately $2.9
billion from rollover investors, who were certain current or former directors,
officers or other members of management of Kinder Morgan, Inc. (or entities
controlled by such persons) that directly or indirectly reinvested all or a
portion of their equity interests in Kinder Morgan, Inc. and/or cash in exchange
for equity interests in Kinder Morgan Holdco LLC, the parent of the surviving
entity of the Going Private transaction, (iii) approximately $4.8 billion of new
debt financing, (iv) approximately $4.5 billion of our existing indebtedness
(excluding debt of Terasen Pipelines (Corridor) Inc., which was divested on June
15, 2007) and (v) $1.7 billion of cash on hand resulting principally from the
sale of our U.S.-based and Canada-based retail natural gas distribution
operations; see Note 2.
11. Related
Party Transactions
Related-party
revenues included in the accompanying Consolidated Statements of Operations for
the years ended December 31, 2009 and 2008, seven months ended December 31,
2007, and five months ended May 31, 2007 were $10.9 million, $11.5 million, $6.7
million and $4.5 million, respectively, and were primarily attributable to
transactions with Plantation Pipeline Company.
The
caption “Gas purchases and other costs of sales” in the accompanying
Consolidated Statements of Operations includes related-party costs totaling $5.4
million, $5.4 million, $0.8 million and $0.3 million for the years ended
December 31, 2009 and 2008, seven months ended December 31, 2007, and five
months ended May 31, 2007, respectively. During 2009, related party “Gas
purchases and other costs of sales” is primarily related to purchases from NGPL
PipeCo LLC.
The
caption “Interest, net” in the accompanying Consolidated Statements of
Operations includes related-party net interest income totaling $16.1 million,
$5.5 million, $2.6 million and $1.8 million for the years ended December 31,
2009 and 2008, seven months ended December 31, 2007, and five months ended May
31, 2007, respectively. Related party “Interest, net” is primarily related to
interest income from Plantation Pipe Line Company and Express US Holdings
LP.
Significant
Investors
Two
of Kinder Morgan Holdco LLC’s investors are considered “related parties” to us
as that term is defined in the authoritative accounting literature. The two
related parties are (i) American International Group, Inc. and certain of its
affiliates (“AIG”) and (ii) Goldman Sachs Capital Partners and certain of its
affiliates (“Goldman Sachs”). We and/or our affiliates enter into
transactions with certain AIG affiliates in the ordinary course of their
conducting insurance and insurance-related activities, although no individual
transaction is, and all such transactions collectively are not, material to our
consolidated financial statements. In addition, Goldman Sachs has
acted in the past, and may act in the future, as an underwriter for equity
and/or debt issuances for us, Kinder Morgan Energy Partners and Kinder Morgan
Management. Also, on January 15, 2010, Kinder Morgan Energy Partners
acquired three ethanol handling train terminals from U.S. Development Group, of
which Goldman Sachs effectively owned 49%, for an aggregate consideration of
$197.4 million, consisting of $115.7 million in cash and $81.7 million in its
common units. The three train terminals are located in Linden, New
Jersey, Baltimore, Maryland, and Dallas, Texas. As part of the
transaction, Kinder Morgan Energy Partners announced the formation of a venture
with U.S. Development Group to optimize and coordinate customer access to the
three acquired terminals, other ethanol terminal assets Kinder Morgan Energy
Partners already owns and operates, and other terminal projects currently under
development by both parties. We also conduct commodity risk management
activities in the ordinary course of implementing our risk management strategies
in which the counterparty to certain of our derivative
159
Kinder
Morgan, Inc. Form 10-K
transactions is an
affiliate of Goldman Sachs. In conjunction with these activities, we
are a party (through one of our subsidiaries engaged in the production of crude
oil) to a hedging facility with J. Aron & Company/Goldman Sachs, which
requires us to provide certain periodic information but does not require the
posting of margin. As a result of changes in the market value of our
derivative positions, we have recorded both amounts receivable from and payable
to Goldman Sachs affiliates. The following table summarizes the fair
values of our energy commodity derivative contracts that are (i) associated with
commodity price risk management activities with related parties and (ii)
included within “Fair value of derivative contracts” in the accompanying
Consolidated Balance Sheets (in millions):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Derivative
Assets (Liabilities)
|
||||||||
|
Current
Assets: Fair value of derivative contracts
|
$ | 4.3 | $ | 60.4 | ||||
|
Assets:
Fair value of derivative contracts
|
$ | 18.4 | $ | 20.1 | ||||
|
Current
Liabilities: Fair value of derivative contracts
|
$ | (96.8 | ) | $ | (13.2 | ) | ||
|
Long-term
Liabilities and Deferred Credits: Fair value of derivative
contracts
|
$ | (190.8 | ) | $ | (24.1 | ) | ||
Kinder
Morgan Holdco LLC
Our
parent, Kinder Morgan Holdco LLC, recognizes compensation expense in connection
with its Class A-1 and Class B units over the expected life of such units. As a
subsidiary of Kinder Morgan Holdco LLC, we and certain of our subsidiaries are
allocated this compensation expense, which totaled $7.6 million, $7.6 million
and $4.4 million for the years ended December 31, 2009 and 2008, and seven
months ended December 31, 2007, respectively, although none of us or any of our
subsidiaries have any obligation, nor do we expect to pay any amounts in respect
of such units.
Plantation
Pipe Line Company
Kinder
Morgan Energy Partners has a seven-year note receivable bearing interest at the
rate of 4.72% per annum from Plantation Pipe Line Company, its 51.17%-owned
equity investee. The outstanding note receivable balance was $84.8
million and $88.5 million as of December 31, 2009 and 2008, respectively. Of
these amounts, $2.6 million and $3.7 million are included within “Accounts,
notes and interest receivable, net” of the accompanying Consolidated Balance
Sheets as of December 31, 2009 and 2008, respectively, and the remainder is
included within “Notes receivable” at each reporting date.
Express
US Holdings LP
On
June 30, 2008, we exchanged our C$113.6 million preferred equity interest in
Express US Holdings LP for two subordinated notes from Express US Holdings LP
(the obligor) with a combined face value of $111.4 million (C$113.6
million). The debentures, denominated in Canadian dollars, are due in
full on January 9, 2023, each bearing an interest rate of 12.0% per annum and
providing for quarterly payments of interest in Canadian dollars on March 31,
June 30, September 30 and December 31 each year.
On
August 28, 2008, we sold our one-third interest in the net assets of the Express
pipeline system (“Express”), as well as our full ownership of the net assets of
the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy
Partners. This transaction included the sale of our subordinated
notes described above. We accounted for this transaction as a
transfer of net assets between entities under common
control. Therefore, following our sale of Express and Jet Fuel to
Kinder Morgan Energy Partners, Kinder Morgan Energy Partners recognized the
assets and liabilities acquired at our carrying amounts (historical cost) at the
date of transfer.
As
of December 31, 2009 and 2008, the outstanding note receivable balance,
representing the translated amount included in the accompanying Consolidated
Financial Statements in U.S. dollars, was $108.1 million and $93.3 million,
respectively, and we included these amounts within “Notes receivable” in the
accompanying Consolidated Balance Sheets.
NGPL
PipeCo LLC
On
February 15, 2008, Kinder Morgan, Inc. entered into an Operations and
Reimbursement Agreement (“Agreement”) with Natural Gas Pipeline Company of
America LLC, a wholly owned subsidiary of NGPL PipeCo LLC. The Agreement
provides for Kinder Morgan, Inc. to be reimbursed, at cost, for pre-approved
operations and maintenance costs, plus a $43.2 million annual general and
administration fixed fee charge (“Fixed Fee”), for services provided under the
Agreement. This Fixed Fee escalates at 3% each year until 2011 and is billed
monthly. For the years ended December 31, 2009 and 2008, these Fixed Fees
totaled $45.8 million and $38.9 million, respectively. In addition, Kinder
Morgan Energy Partners purchases natural gas transportation and storage services
from NGPL PipeCo LLC. For each of the years ended December 31, 2009 and 2008,
these expenses totaled $8.8 million and $8.1 million, respectively, and we
include these amounts within “Gas purchases and other costs of sales” in the
accompanying Consolidated Statements of Operations.
160
Kinder
Morgan, Inc. Form 10-K
12. Commitments
and Contingent Liabilities
Operating
Leases
Including
probable elections to exercise renewal options, the remaining terms on our
operating leases range from one to 59 years. Future commitments
related to these leases as of December 31, 2009 are as follows (in
millions):
|
Year
|
Commitment
|
||
|
2010
|
$
|
43.8
|
|
|
2011
|
38.3
|
||
|
2012
|
29.6
|
||
|
2013
|
23.6
|
||
|
2014
|
20.6
|
||
|
Thereafter
|
82.9
|
||
|
Total
minimum payments
|
$
|
238.8
|
|
We
have not reduced our total minimum payments for future minimum sublease rentals
aggregating approximately $3.7 million. Total lease and rental
expenses were $73.1 million, $84.2 million, $43.8 million and $32.2 million for
the years ended December 31, 2009 and 2008, seven months ended December 31, 2007
and five months ended May 31, 2007, respectively.
Share-based
Compensation
Kinder
Morgan, Inc.
In
March 2007, all stock options and restricted stock held by employees of our
discontinued U.S. Retail operations became fully vested. In May 2007, all
restricted stock units held by employees of our discontinued Terasen gas
operations became fully vested and any contingent stock unit grants were fully
expensed. Finally, on May 30, 2007, all remaining stock options and restricted
stock became fully vested and were exercised upon the closing of the Going
Private transaction. We recorded expense of $25.7 million during the five months
ended May 31, 2007 related to the accelerated vesting of these
awards.
Kinder
Morgan Energy Partners
Kinder
Morgan Energy Partners has two common unit-based compensation plans: The
Directors’ Unit Appreciation Rights Plan and the Kinder Morgan Energy Partners,
L.P. Common Unit Compensation Plan for Non-Employee Directors.
The
Directors’ Unit Appreciation Rights Plan was established on April 1, 2003.
Pursuant to this plan, and on this date of adoption, each of Kinder Morgan
Management’s then three non-employee directors was granted 7,500 common unit
appreciation rights. In addition, 10,000 common unit appreciation
rights were granted to each of Kinder Morgan Management’s then three
non-employee directors on January 21, 2004, at the first meeting of the board in
2004. During the first board meeting of 2005, the plan was terminated
and replaced by the Kinder Morgan Energy Partners, L.P. Common Unit Compensation
Plan for Non-Employee Directors (discussed following); however, all unexercised
awards made under the plan remain outstanding.
Upon
the exercise of unit appreciation rights, Kinder Morgan Energy Partners will
pay, within thirty days of the exercise date, the participant an amount of cash
equal to the excess, if any, of the aggregate fair market value of the unit
appreciation rights exercised as of the exercise date over the aggregate award
price of the rights exercised. The fair market value of one unit
appreciation right as of the exercise date will be equal to the closing price of
one common unit on the New York Stock Exchange on that date. The
award price of one unit appreciation right will be equal to the closing price of
one common unit on the New York Stock Exchange on the date of
grant. Proceeds, if any, from the exercise of a unit appreciation
right granted under the plan will be payable only in cash (that is, no exercise
will result in the issuance of additional common units) and will be evidenced by
a unit appreciation rights agreement. All unit appreciation rights
granted vest on the six-month anniversary of the date of grant. If a
unit appreciation right is not exercised in the ten year period following the
date of grant, the unit appreciation right will expire and not be exercisable
after the end of such period. In addition, if a participant ceases to
serve on the board for any reason prior to the vesting date of a unit
appreciation right, such unit appreciation right will immediately expire on the
date of cessation of service and may not be exercised.
During
2007, 7,500 unit appreciation rights were exercised at an aggregate fair value
of $53.00 per unit. During 2008, 10,000 unit appreciation rights were
exercised at an aggregate fair value of $60.32 per unit. During 2009,
17,500 unit appreciation rights were exercised at an aggregate fair value of
$53.75 per unit. As of December 31, 2009, 17,500 unit appreciation
rights had been granted, vested and remained outstanding.
161
Kinder
Morgan, Inc. Form 10-K
The
Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan for
Non-Employee Directors recognizes that the compensation to be paid to each
non-employee director is fixed by the Kinder Morgan Management board, generally
annually, and that the compensation is payable in cash. Pursuant to the plan, in
lieu of receiving cash compensation, each non-employee director may elect to
receive common units. A non-employee director may make a new election each
calendar year. The total number of common units authorized under this
compensation plan is 100,000. All common units issued under this plan are
subject to forfeiture restrictions that expire six months from the date of
issuance. A total of 14,818 common units were issued to non-employee
directors in 2009, 2008 and 2007 as a result of their elections to receive
common units in lieu of cash compensation.
On
January 20, 2010, one of Kinder Morgan Management’s directors elected to receive
his 2010 compensation in the form of 3,200 Kinder Morgan Energy Partner’s common
units.
Contingent
Debt
Kinder
Morgan Energy Partners’ contingent debt disclosures pertain to certain types of
guarantees or indemnifications Kinder Morgan Energy Partners has made and cover
certain types of guarantees included within debt agreements, even if the
likelihood of requiring Kinder Morgan Energy Partners’ performance under such
guarantee is remote. The following is a description of Kinder Morgan
Energy Partners’ contingent debt agreements as of December 31,
2009.
Cortez
Pipeline Company Debt
Pursuant
to a certain Throughput and Deficiency Agreement, the partners of Cortez
Pipeline Company (Kinder Morgan CO2 Company,
L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37% partner; and
Cortez Vickers Pipeline Company – 13% partner) are required, on a several,
proportional percentage ownership basis, to contribute capital to Cortez
Pipeline Company in the event of a cash deficiency. Furthermore, due
to Kinder Morgan Energy Partners’ indirect ownership of Cortez Pipeline Company
through Kinder Morgan CO2 Company,
L.P., Kinder Morgan Energy Partners severally guarantees 50% of the debt of
Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline
Company.
As
of December 31, 2008, the debt facilities of Cortez Capital Corporation
consisted of (i) $53.6 million of Series D notes due May 15, 2013, (ii) a $125
million short-term commercial paper program and (iii) a $125 million committed
revolving bank credit facility due December 22, 2009 (to support the
above-mentioned $125 million commercial paper program).
On
December 11, 2009, Cortez Capital Corporation performed the
following:
|
|
·
|
issued
$100 million in principal amount of three-year, variable rate Series E
notes that mature in full on December 11, 2012. Interest on the
Series E notes is paid quarterly and based on an interest rate of LIBOR
plus a spread. The net proceeds from the sale of the notes were
used to repay borrowings under its bank credit
facility;
|
|
|
·
|
amended
its bank credit facility to allow for borrowings up to $40.0 million due
December 11, 2012; and
|
|
|
·
|
terminated
its commercial paper program.
|
As
of December 31, 2009, in addition to the $100 million of outstanding Series E
notes, Cortez Capital Corporation had $42.9 million of outstanding Series D
notes and $9.9 million of outstanding borrowings under its credit
facility. Accordingly, as of December 31, 2009, Kinder Morgan Energy
Partners’ contingent share of Cortez’s debt was $76.4 million (50% of total
guaranteed borrowings).
With
respect to Cortez’s Series D notes, the average interest rate on the notes is
7.14%, and the outstanding $42.9 million principal amount of the notes is due in
four equal annual installments of approximately $10.7 million beginning May
2010. Shell Oil Company shares Kinder Morgan Energy Partners’ several
guaranty obligations jointly and severally; however, Kinder Morgan Energy
Partners is obligated to indemnify Shell for liabilities it incurs in connection
with such guaranty. As of December 31, 2009, JP Morgan Chase has
issued a letter of credit on Kinder Morgan Energy Partners’ behalf in the amount
of $21.4 million to secure Kinder Morgan Energy Partners’ indemnification
obligations to Shell for 50% of the $42.9 million in principal amount of Series
D notes outstanding as of that date.
Nassau
County, Florida Ocean Highway and Port Authority Debt
Kinder
Morgan Energy Partners has posted a letter of credit as security for borrowings
under Adjustable Demand Revenue Bonds issued by the Nassau County, Florida Ocean
Highway and Port Authority. The bonds were issued for the purpose of
constructing certain port improvements located in Fernandino Beach, Nassau
County, Florida. Kinder Morgan Energy Partners’ subsidiary, Nassau
Terminals LLC is the operator of the marine port facilities. The bond
indenture is for 30 years and allows the bonds to remain outstanding until
December 1, 2020. Principal payments on the bonds are made on the
first of December each year and corresponding reductions are made to the letter
of credit. As of December 31, 2009, this letter of credit had a face
amount of $19.8 million.
162
Kinder
Morgan, Inc. Form 10-K
In
addition, in October 2008, pursuant to the standby purchase agreement provisions
contained in the bond indenture—which require the sellers of those guarantees to
buy the debt back—certain investors elected to put (sell) back their bonds at
par plus accrued interest. A total principal and interest amount of
$11.8 million was tendered and drawn against Kinder Morgan Energy Partners’
letter of credit and accordingly, Kinder Morgan Energy Partners paid this amount
pursuant to the letter of credit reimbursement provisions. This
payment reduced the face amount of Kinder Morgan Energy Partners’
letter of credit from $22.5 million to $10.7 million. In
December 2008, the bonds that were put back were re-sold, and Kinder Morgan
Energy Partners was fully reimbursed for its prior letter of credit
payments.
Rockies
Express Pipeline LLC Debt
Pursuant
to certain guaranty agreements, all three member owners of Rockies Express
Pipeline LLC have agreed to guarantee, severally in the same proportion as their
percentage ownership of the member interests in Rockies Express Pipeline LLC,
borrowings under Rockies Express’ $2.0 billion five-year,
unsecured revolving credit facility (due April 28, 2011) and Rockies Express’
$2.0 billion commercial paper program. Rockies Express Pipeline LLC
is an equity method investee of Kinder Morgan Energy Partners, and the three
member owners and their respective ownership interests consist of the following:
Kinder Morgan Energy Partners’ subsidiary Kinder Morgan West2East Pipeline LLC –
50%, a subsidiary of Sempra Energy – 25%, and a subsidiary of ConocoPhillips –
25%.
Prior
to completing construction of its Rockies Express interstate natural gas
pipeline system in November 2009, borrowings under the Rockies Express’
commercial paper program and/or its credit facility were primarily used to
finance pipeline construction costs and to pay related
expenses. Subsequent borrowings can be used for general corporate
purposes. The credit facility, which can be amended to allow for
borrowings of up to $2.5 billion, supports borrowings under the commercial paper
program, and borrowings under the commercial paper program reduce the borrowings
allowed under the credit facility. Lehman Brothers Commercial Bank
was a lending bank with a $41 million commitment under Rockies Express Pipeline
LLC’s $2.0 billion credit facility, and during the first quarter of 2009,
Rockies Express amended its facility to remove Lehman Brothers Commercial Bank
as a lender, thus reducing the borrowing capacity under the facility by $41.0
million. However, the commitments of the other banks remain
unchanged, and the facility is not defaulted.
In
October 2008, Standard & Poor’s Rating Services lowered Rockies Express’
short-term credit rating to A-3 from A-2, and effective November 20, 2009,
Rockies Express terminated its commercial paper program. Rockies
Express expects that its financing and liquidity needs will continue to be met
through both borrowings made under its long-term bank credit facility and
contributions by its equity investors. As of December 31, 2009,
Rockies Express had outstanding borrowings of $1,672.7 million under its credit
facility. Accordingly, as of December 31, 2009, Kinder Morgan Energy
Partners’ contingent share of Rockies Express’ debt was $836.4 million (50% of
total guaranteed borrowings).
On
August 20, 2009, Rockies Express paid $600 million to retire the principal
amount of its floating rate senior notes that matured on that
date. It obtained the necessary funds to repay these senior notes
from contributions received from its equity investors, including $306.0 million
received from Kinder Morgan Energy Partners (51% of total principal repayments,
corresponding to Kinder Morgan Energy Partners’ percentage ownership at that
time).
Additionally, on
June 24, 2008, Rockies Express completed a private offering of an aggregate of
$1.3 billion in principal amount of fixed rate senior
notes. Rockies Express received net proceeds of approximately
$1.29 billion from this offering, after deducting the initial purchasers’
discount and estimated offering expenses, and virtually all of the net proceeds
from the sale of the notes were used to repay short-term commercial paper
borrowings. All payments of principal and interest in respect of
these senior notes are the sole obligation of Rockies
Express. Noteholders will have no recourse against Kinder Morgan
Energy Partners, Sempra Energy or ConocoPhillips, or against any of Kinder
Morgan Energy Partners’ or their respective officers, directors, employees,
shareholders, members, managers, unitholders or affiliates for any failure by
Rockies Express to perform or comply with its obligations pursuant to the notes
or the indenture.
Midcontinent
Express Pipeline LLC Debt
Pursuant
to certain guaranty agreements, each of the two member owners of Midcontinent
Express Pipeline LLC have agreed to guarantee, severally in the same proportion
as their percentage ownership of the member interests in Midcontinent Express,
borrowings under its $255.4 million three-year, unsecured revolving credit
facility due February 28, 2011. The facility is with a syndicate of
financial institutions with The Royal Bank of Scotland plc as the administrative
agent. Midcontinent Express is an equity method investee of Kinder
Morgan Energy Partners, and the two member owners and their respective ownership
interests consist of the following: Kinder Morgan Energy Partners’ subsidiary
Kinder Morgan Operating L.P. “A” – 50%, and Energy Transfer Partners, L.P. –
50%.
Borrowings
under the credit facility can be used for general corporate purposes, and in the
fourth quarter of 2009, Midcontinent Express amended and reduced the borrowing
capacity of its credit facility from $1.4 billion to $255.4 million after
completing permanent long-term financing (discussed below) and removing Lehman
Brothers Commercial Bank as a lender under the facility. As of
December 31, 2009, Midcontinent Express had outstanding borrowings of $29.5
million
163
Kinder
Morgan, Inc. Form 10-K
under
its bank credit facility. Accordingly, as of December 31, 2009,
Kinder Morgan Energy Partners’ contingent share of Midcontinent Express’ debt
was $14.8 million (50% of total borrowings). Furthermore, the credit
facility can be used for the issuance of letters of credit to support the
operation of the Midcontinent Express pipeline system, and as of December 31,
2009, a letter of credit having a face amount of $33.3 million was issued under
the credit facility. Accordingly, as of December 31, 2009, Kinder
Morgan Energy Partners’ contingent responsibility with regard to this
outstanding letter of credit was $16.7 million (50% of total face
amount).
On September 16,
2009, Midcontinent Express completed a private offering of an aggregate of $800
million in principal amount of fixed rate senior
notes. Midcontinent Express received net proceeds of $793.9
million from this offering, after deducting the initial purchasers’ discount and
estimated offering expenses, and the net proceeds from the sale of the notes
were used to repay borrowings under its revolving credit
facility. All payments of principal and interest in respect of the
notes are the sole obligation of Midcontinent Express. Noteholders
will have no recourse against Kinder Morgan Energy Partners, Energy Transfer
Partners, or against any of Kinder Morgan Energy Partners’ or their respective
officers, directors, employees, members, managers, unitholders or affiliates for
any failure by Midcontinent Express to perform or comply with its obligations
pursuant to the notes or the indenture.
Fayetteville
Express Pipeline LLC Debt
Pursuant
to certain guaranty agreements, each of the two member owners of Fayetteville
Express Pipeline LLC have agreed to guarantee, severally in the same proportion
as their percentage ownership of the member interests in Fayetteville Express,
borrowings under its $1.1 billion two and one-half year, unsecured revolving
credit facility, entered into on November 13, 2009 and due May 11,
2012. The facility is with a syndicate of financial institutions with
The Royal Bank of Scotland plc as the administrative
agent. Borrowings under the credit facility will be used to finance
the construction of the Fayetteville Express natural gas pipeline system and to
pay related expenses. Fayetteville Express is an equity method
investee of Kinder Morgan Energy Partners, and the two member owners and their
respective ownership interests consist of the following: Kinder Morgan Energy
Partners’ subsidiary Kinder Morgan Operating L.P. “A” – 50%, and Energy Transfer
Partners, L.P. – 50%.
As
of December 31, 2009, Fayetteville Express had outstanding borrowings of $355.0
million under its bank credit facility. Accordingly, as of December
31, 2009, Kinder Morgan Energy Partners’ contingent share of Fayetteville
Express’ debt was $177.5 million (50% of total borrowings).
13. Risk
Management
Certain
of our business activities expose us to risks associated with unfavorable
changes in the market price of natural gas, natural gas liquids and crude
oil. We also have exposure to interest rate risk as a result of the
issuance of our debt obligations. Pursuant to our management’s
approved risk management policy, we use derivative contracts to hedge or reduce
our exposure to certain of these risks.
Energy
Commodity Price Risk Management
We
are exposed to risks associated with changes in the market price of natural gas,
natural gas liquids and crude oil as a result of the forecasted purchase or sale
of these products. Specifically, these risks are primarily associated
with unfavorable price volatility related to (i) pre-existing or anticipated
physical natural gas, natural gas liquids and crude oil sales, (ii) natural gas
purchases and (iii) natural gas system use and storage. The
unfavorable price changes are often caused by shifts in the supply and demand
for these commodities, as well as their locations.
Our
principal use of energy commodity derivative contracts is to mitigate the risk
associated with unfavorable market movements in the price of energy
commodities. Our energy commodity derivative contracts act as a
hedging (offset) mechanism against the volatility of energy commodity prices by
allowing us to transfer this price risk to counterparties who are able and
willing to bear it.
For
derivative contracts that are designated and qualify as cash flow hedges
pursuant to generally accepted accounting principles, the portion of the gain or
loss on the derivative contract that is effective in offsetting the variable
cash flows associated with the hedged forecasted transaction is reported as a
component of other comprehensive income and reclassified into earnings in the
same line item associated with the forecasted transaction and in the same period
or periods during which the hedged transaction affects earnings (e.g., in
“revenues” when the hedged transactions are commodity sales). The
remaining gain or loss on the derivative contract in excess of the cumulative
change in the present value of future cash flows of the hedged item, if any
(i.e., the ineffective portion), is recognized in earnings during the current
period. The effectiveness of hedges using an option contract may be
assessed based on changes in the option’s intrinsic value with the change in the
time value of the contract being excluded from the assessment of hedge
effectiveness. Changes in the excluded component of the change in an
option’s time value are included currently in earnings. During 2009,
we recognized a net loss of $13.5
164
Kinder
Morgan, Inc. Form 10-K
million
related to crude oil hedges, which resulted from hedge ineffectiveness and
amounts excluded from effectiveness testing. Reflecting the portion of changes
in the value of derivative contracts that were not effective in offsetting
underlying changes in expected cash flows (the ineffective portion of hedges),
we recognized losses of $1.5 million during 2008. We recognized a pre-tax gain
of approximately $0.5 million and a pre-tax loss of approximately $0.7 million
in the seven months ended December 31, 2007 and five months ended May 31, 2007,
respectively.
Furthermore,
during the years ended December 31, 2009 and 2008 and the five months ended May
31, 2007, we reclassified gains of $39.4 million, losses of $117.1 million and
losses of $10.3 million, respectively, of the “Accumulated other comprehensive
loss” balance included in our Stockholder’s Equity into
earnings. With the exception of a $1.1 million net gain reclassified
during the five months ended May 31, 2007 into earnings as a result of the
discontinuance of cash flow hedges due to a determination that the forecasted
transactions would no longer occur by the end of the originally specified time
period, none of the reclassification of “Accumulated other comprehensive loss”
into earnings during 2009, 2008 or 2007 resulted from the discontinuance of cash
flow hedges due to a determination that the forecasted transactions would no
longer occur by the end of the originally specified time period or within an
additional two-month period of time thereafter, but rather resulted from the
hedged forecasted transactions actually affecting earnings (for example, when
the forecasted sales and purchases actually occurred). The proceeds
or payments resulting from the settlement of cash flow hedges are reflected in
the operating section of our statement of cash flows as changes to net income
and working capital.
The
“Accumulated other comprehensive loss” balance included in our Stockholder’s
Equity was $167.9 million as of December 31, 2009, and $53.4 million as of
December 31, 2008. These totals included “Accumulated other
comprehensive loss” amounts associated with energy commodity price risk
management activities of $95.7 million of losses as of December 31, 2009 and
$82.4 million of gains as of December 31, 2008. Approximately $42.6
million of the total amount associated with energy commodity price risk
management activities and included in our Stockholder’s Equity as of December
31, 2009 is expected to be reclassified into earnings during the next twelve
months (when the associated forecasted sales and purchases are also expected to
occur), and as of December 31, 2009, the maximum length of time over which we
have hedged our exposure to the variability in future cash flows associated with
energy commodity price risk is through December 2014.
As
of December 31, 2009, we had entered into the following outstanding commodity
forward contracts to hedge our forecasted energy commodity purchases and
sales:
|
Notional quantity
|
|
|
Derivatives
designated as hedging contracts
|
|
|
Crude
oil
|
25.6
million barrels
|
|
Natural
gas(a)
|
44.3
billion cubic feet
|
|
Derivatives
not designated as hedging contracts
|
|
|
Natural
gas(a)
|
0.1
billion cubic feet
|
____________
|
(a)
|
Notional
quantities are shown net.
|
For
derivative contracts that are not designated as a hedge for accounting purposes,
all realized and unrealized gains and losses are recognized in the statement of
operations during the current period. These types of transactions
include basis spreads, basis-only positions and gas daily swap
positions. Kinder Morgan Energy Partners primarily enters into these
positions to economically hedge an exposure through a relationship that does not
qualify for hedge accounting. This will result in non-cash gains or
losses being reported in our operating results associated with Kinder Morgan
Energy Partners.
Effective
at the beginning of the second quarter of 2008, Kinder Morgan Energy Partners
determined that the derivative contracts of its Casper and Douglas natural gas
processing operations that previously had been designated as cash flow hedges
for accounting purposes no longer met the hedge effectiveness assessment as
required by generally accepted accounting principles. Consequently,
it discontinued hedge accounting treatment for these relationships (primarily
crude oil hedges of heavy natural gas liquids sales) effective March 31,
2008. Since the forecasted sales of natural gas liquids volumes (the
hedged item) were still expected to occur, all of the accumulated losses through
March 31, 2008 on the related derivative contracts remained in accumulated other
comprehensive income, and were not reclassified into earnings until the physical
transactions occurred. Any changes in the value of these derivative
contracts subsequent to March 31, 2008 were no longer deferred in other
comprehensive income, but rather impacted current period income. The
last of these derivative contracts expired in December 2009.
Interest
Rate Risk Management
In
order to maintain a cost effective capital structure, it is our policy to borrow
funds using a mix of fixed rate debt and variable rate debt. We use
interest rate swap agreements to manage the interest rate risk associated with
the fair value of our fixed rate borrowings and to effectively convert a portion
of the underlying cash flows related to our long-term fixed rate debt securities
into variable rate cash flows in order to achieve our desired mix of fixed and
variable rate debt.
165
Kinder
Morgan, Inc. Form 10-K
Since the
fair value of fixed rate debt varies inversely with changes in the market rate
of interest, we enter into swap agreements to receive a fixed and pay a variable
rate of interest in order to convert the interest expense associated with
certain of our senior notes from fixed rates to variable rates, resulting in
future cash flows that vary with the market rate of
interest. These swaps, therefore, hedge against changes in the
fair value of our fixed rate debt that result from market interest rate
changes. For derivative contracts that are designated and qualify as
a fair value hedge, the gain or loss on the derivative as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings.
As
of December 31, 2008, we were not party to any interest rate swap agreements,
and our subsidiary, Kinder Morgan Energy Partners, was a party to interest rate
swap agreements with a total notional principal amount of $2.8
billion. During 2009, we entered into two fixed-to-variable interest
swap agreements having a combined notional principal amount of $725.0 million
related to our 5.70% senior notes due January 5, 2016. During 2009,
Kinder Morgan Energy Partners both terminated an existing fixed-to-variable
interest rate swap agreement having a notional principal amount of $300 million
and a maturity date of March 15, 2031, and entered into sixteen separate
fixed-to-variable interest swap agreements having a combined notional principal
amount of $2.95 billion. Kinder Morgan Energy Partners received
proceeds of $144.4 million from the early termination of the $300 million swap
agreement. In addition, an existing fixed-to-variable rate swap
agreement having a notional principal amount of $250 million matured on February
1, 2009. This swap agreement corresponded with the maturity of Kinder
Morgan Energy Partners’ $250 million in principal amount of 6.30% senior notes
that also matured on that date (discussed in Note 8).
Therefore,
as of December 31, 2009, we and our subsidiary, Kinder Morgan Energy Partners,
had a notional principal amount of $725.0 million and $5.2
billion of fixed-to-variable interest rate swap agreements, respectively, that
effectively convert the interest expense associated with certain senior notes
from fixed rates to variable rates based on an interest rate of LIBOR plus a
spread. All of our and Kinder Morgan Energy Partners’ swap agreements
have termination dates that correspond to the maturity dates of the related
series of senior notes and, as of December 31, 2009, the maximum length of time
over which we have hedged a portion of our exposure to the variability in the
value of this debt due to interest rate risk is through January 15,
2038.
Fair
Value of Derivative Contracts
The
fair values of our current and non-current asset and liability derivative
contracts are each reported separately as “Fair value of derivative contracts”
on the accompanying Consolidated Balance Sheets. The following table
summarizes the fair values of our derivative contracts included on the
accompanying Consolidated Balance Sheets as of December 31, 2009 and 2008 (in
millions):
Fair
Value of Derivative Contracts
|
Asset
derivatives
|
Liability
derivatives
|
|||||||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||||
|
Balance
sheet
location
|
Fair
value
|
Balance
sheet
Location
|
Fair
value
|
Balance
sheet
Location
|
Fair
value
|
Balance
sheet
location
|
Fair
value
|
|||||||||||||
|
Derivatives designated
as hedging contracts
|
||||||||||||||||||||
|
Energy
commodity derivative contracts
|
Current
|
$
|
19.1
|
Current
|
$
|
113.5
|
Current
|
$
|
(270.8)
|
Current
|
$
|
(129.4)
|
||||||||
|
Non-current
|
57.3
|
Non-current
|
48.9
|
Non-current
|
(241.5)
|
Non-current
|
(92.2)
|
|||||||||||||
|
Subtotal
|
76.4
|
162.4
|
(512.3)
|
(221.6)
|
||||||||||||||||
|
Interest
rate swap agreements
|
Non-current
|
236.0
|
Non-current
|
747.1
|
Non-current
|
(218.5)
|
Non-current
|
-
|
||||||||||||
|
Cross
currency swap agreements
|
Non-current
|
-
|
Non-current
|
32.0
|
Non-current
|
(9.6)
|
Non-current
|
-
|
||||||||||||
|
Total
|
312.4
|
941.5
|
(740.4)
|
(221.6)
|
||||||||||||||||
|
Derivatives not
designated as hedging contracts
|
||||||||||||||||||||
|
Energy
commodity derivative contracts
|
Current
|
1.7
|
Current
|
1.8
|
Current
|
(1.2)
|
Current
|
(0.1)
|
||||||||||||
|
Total
derivatives
|
$
|
314.1
|
$
|
943.3
|
$
|
(741.6)
|
$
|
(221.7)
|
||||||||||||
The
offsetting entry to adjust the carrying value of the debt securities whose fair
value was being hedged is included within “Value of interest rate swaps” on the
accompanying Consolidated Balance Sheets, which also includes any unamortized
portion of proceeds received from the early termination of interest rate swap
agreements. As of December 31, 2009 and 2008, this unamortized
premium totaled $337.5 million and $216.8 million, respectively.
166
Kinder
Morgan, Inc. Form 10-K
Effect
of Derivative Contracts on the Income Statement
The
following three tables summarize the impact of our derivative contracts on the
accompanying Consolidated Statements of Operations (in millions):
|
Derivatives
in fair value hedging relationships
|
Location
of gain/(loss) recognized in income on derivative
|
Amount
of gain/(loss) recognized in income on derivative(a)
|
Hedged
items in fair value hedging relationships
|
Location
of gain/(loss) recognized in income on related hedged item
|
Amount
of gain/(loss) recognized in income on related hedged
items(a)
|
||||||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||
|
Interest
rate swap agreements
|
Interest,
net – income/(expense)
|
$
|
(585.1)
|
$
|
609.1
|
Fixed
rate debt
|
Interest,
net – income/
(expense) |
$
|
585.1
|
$
|
(609.1)
|
||||||||
|
Total
|
$
|
(585.1)
|
$
|
609.1
|
Total
|
$
|
585.1
|
$
|
(609.1)
|
||||||||||
____________
|
(a)
|
Amounts
reflect the change in the fair value of interest rate swap agreements and
the change in the fair value of the associated fixed rate debt which
exactly offset each other as a result of no hedge
ineffectiveness. Amounts do not reflect the impact on interest
expense from the interest rate swap agreements under which we pay variable
rate interest and receive fixed rate
interest.
|
|
Derivatives
in cash flow hedging relationships
|
Amount
of gain/(loss) recognized in OCI on derivative (effective
portion)
|
Location
of gain/(loss) reclassified from Accumulated OCI into income (effective
portion)
|
Amount
of gain/(loss) reclassified from Accumulated OCI into income (effective
portion)
|
Location
of gain/(loss) recognized in income on derivative (ineffective portion and
amount excluded from effectiveness testing)
|
Amount
of gain/(loss) recognized in income on derivative (ineffective portion and
amount excluded from effectiveness testing)
|
|||||||||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||
|
Energy
commodity derivative contracts
|
$
|
(138.7)
|
$
|
212.0
|
Revenues-natural
gas sales
|
$
|
13.1
|
$
|
6.0
|
Revenues
|
$
|
(13.5)
|
$
|
-
|
||||||||
|
Revenues-product
sales and other
|
25.7
|
(97.6)
|
||||||||||||||||||||
|
Gas
purchases and other costs of sales
|
0.6
|
(25.5)
|
Gas
purchases and other costs of sales
|
-
|
(1.5)
|
|||||||||||||||||
|
Total
|
$
|
(138.7)
|
$
|
212.0
|
Total
|
$
|
39.4
|
$
|
(117.1)
|
Total
|
$
|
(13.5)
|
$
|
(1.5)
|
||||||||
|
Derivatives
in cash flow hedging relationships
|
Amount
of gain/(loss) recognized in OCI on derivative (effective
portion)
|
Location
of gain/(loss) reclassified from Accumulated OCI into income (effective
portion)
|
Amount
of gain/(loss) reclassified from Accumulated OCI into income (effective
portion)
|
Location
of gain/(loss) recognized in income on derivative (ineffective portion and
amount excluded from effectiveness testing)
|
Amount
of gain/(loss) recognized in income on derivative (ineffective portion and
amount excluded from effectiveness testing)
|
|||||||||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||
|
Cross
currency swap agreements
|
$
|
(41.6)
|
$
|
83.2
|
Other,
net
|
$
|
-
|
$
|
-
|
Revenues
|
$
|
-
|
$
|
-
|
||||||||
|
Total
|
$
|
(41.6)
|
$
|
83.2
|
Total
|
$
|
-
|
$
|
-
|
Total
|
$
|
-
|
$
|
-
|
||||||||
|
Derivatives
not designated as hedging
contracts
|
Location
of gain/(loss) recognized
in
income on derivative
|
Amount
of gain/(loss) recognized
in
income on derivative
|
||||||
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Energy
commodity derivative contracts
|
Gas
purchases and other costs of sales
|
$
|
(4.2)
|
$
|
5.6
|
|||
|
Total
|
$
|
(4.2)
|
$
|
5.6
|
||||
The
above disclosures regarding our derivative contracts and hedging activities are
made pursuant to provisions included within the Codification’s “Derivatives and
Hedging” Topic. These provisions provide for enhanced disclosure
requirements that include, among other things, (i) a tabular summary of the fair
value of derivative contracts and their gains and losses, (ii) disclosure of
derivative features that are credit-risk–related to provide more information
regarding an entity’s liquidity and (iii) cross-referencing within footnotes to
make it easier for financial statement users to locate important information
about derivative contracts. We adopted these provisions on January 1,
2009, and the adoption of these disclosure provisions did not have a material
impact on our consolidated financial statements.
167
Kinder
Morgan, Inc. Form 10-K
Net
Investment Hedges
We are
exposed to foreign currency risk from our investments in businesses owned and
operated outside the United States. To hedge the value of our
investment in Canadian operations, we have entered into various cross-currency
interest rate swap transactions that have been designated as net
investment hedges. The effective portion of the changes in fair value
of these swap transactions is reported as a cumulative translation adjustment
included in the caption “Accumulated other comprehensive loss” in the
accompanying Consolidated Balance Sheets. The combined notional value
of our remaining cross currency interest rate swaps at December 31, 2009 was
approximately C$96.3 million.
In
June 2009, we terminated cross currency interest rate swaps with a notional
value of C$29.2 million. In connection with this termination, we
received $0.5 million in July 2009. Additionally in July 2009, we
received $1.0 million for the termination of another portion of our cross
currency interest rate swaps with a notional value of C$29.2
million.
Credit
Risks
We
and our subsidiary, Kinder Morgan Energy Partners, have counterparty credit risk
as a result of our use of financial derivative contracts. Our
counterparties consist primarily of financial institutions, major energy
companies and local distribution companies. This concentration of
counterparties may impact our overall exposure to credit risk, either positively
or negatively, in that the counterparties may be similarly affected by changes
in economic, regulatory or other conditions.
We
maintain credit policies with regard to our counterparties that we believe
minimize our overall credit risk. These policies include (i) an
evaluation of potential counterparties’ financial condition (including credit
ratings), (ii) collateral requirements under certain circumstances and (iii) the
use of standardized agreements which allow for netting of positive and negative
exposure associated with a single counterparty. Based on our
policies, exposure, credit and other reserves, our management does not
anticipate a material adverse effect on our financial position, results of
operations, or cash flows as a result of counterparty performance.
Our
over-the-counter swaps and options are entered into with counterparties outside
central trading organizations such as a futures, options or stock
exchanges. These contracts are with a number of parties, all of which
have investment grade credit ratings. While we enter into derivative
transactions principally with investment grade counterparties and actively
monitor their ratings, it is nevertheless possible that from time to time losses
will result from counterparty credit risk in the future.
The
maximum potential exposure to credit losses on our derivative contracts as of
December 31, 2009 was (in millions):
|
Asset position
|
||||
|
Interest
rate swap agreements
|
$ | 236.0 | ||
|
Energy
commodity derivative contracts
|
78.1 | |||
|
Gross
exposure
|
314.1 | |||
|
Netting
agreement impact
|
(74.7 | ) | ||
|
Net
exposure
|
$ | 239.4 | ||
In
conjunction with the purchase of exchange-traded derivative contracts or when
the market value of our derivative contracts with specific counterparties
exceeds established limits, we are required to provide collateral to our
counterparties, which may include posting letters of credit or placing cash in
margin accounts. As of December 31, 2009 and 2008, Kinder Morgan
Energy Partners had outstanding letters of credit totaling $55.0 million and
$40.0 million, respectively, in support of its hedging of energy commodity price
risks associated with the sale of natural gas, natural gas liquids and crude
oil.
Additionally,
as of December 31, 2009, Kinder Morgan Energy Partners had cash margin deposits
associated with its energy commodity contract positions and over-the-counter
swap partners totaling $15.2 million, and we reported this amount as “Restricted
deposits” in our accompanying Consolidated Balance Sheet. As of
December 31, 2008, Kinder Morgan Energy Partners’ counterparties associated with
its energy commodity contract positions and over-the-counter swap agreements had
margin deposits with us totaling $3.1 million, and we reported this amount
within “Accrued other liabilities” in our accompanying consolidated balance
sheet.
Kinder
Morgan Energy Partners also has agreements with certain counterparties to its
derivative contracts that contain provisions requiring it to post additional
collateral upon a decrease in its credit rating. Based on contractual
provisions as of December 31, 2009, Kinder Morgan Energy Partners estimates that
if its credit rating was downgraded, it would have the following additional
collateral obligations (in millions):
168
Kinder
Morgan, Inc. Form 10-K
|
Credit
Ratings Downgraded(a)
|
Incremental
obligations
|
Cumulative
Obligations(b)
|
||||||
|
One
notch to BBB-/Baa3
|
$
|
58.1
|
$
|
128.3
|
||||
|
Two
notches to below BBB-/Baa3 (below investment grade)
|
$
|
76.9
|
$
|
205.2
|
||||
__________
|
(a)
|
If
there are split ratings among the independent credit rating agencies, most
counterparties use the higher credit rating to determine
our incremental collateral obligations, while the remaining use the lower
credit rating. Therefore, a one notch downgrade to BBB-/Baa3 by
one agency would not trigger the entire $58.1 million incremental
obligation.
|
|
(b)
|
Includes
current posting at current rating.
|
14. Fair
Value Measurements
Our
fair value measurements and disclosures are made in accordance with the “Fair
Value Measurements and Disclosures” Topic of the Codification. This
Topic establishes a single definition of fair value in generally accepted
accounting principles and prescribes disclosures about fair value
measurements.
We
adopted the provisions of this Topic for our financial assets and financial
liabilities effective January 1, 2008, and the adoption did not have a material
impact on our balance sheet, statement of operation, or statement of cash flows
since we already applied its basic concepts in measuring fair
values. With regard to our non-financial assets and non-financial
liabilities, we adopted the provisions of this Topic effective January 1,
2009. This includes applying the provisions to (i) nonfinancial
assets and liabilities initially measured at fair value in business
combinations, (ii) reporting units or nonfinancial assets and liabilities
measured at fair value in conjunction with goodwill impairment testing, (iii)
other nonfinancial assets measured at fair value in conjunction with impairment
assessments and (iv) asset retirement obligations initially measured at fair
value. The adoption for non-financial assets and liabilities did not
have a material impact on our balance sheet, statement of operations, or
statement of cash flows since we already applied its basic concepts in measuring
fair values.
The
Codification emphasizes that fair value is a market-based measurement that
should be determined based on assumptions (inputs) that market participants
would use in pricing an asset or liability. Inputs may be observable
or unobservable, and valuation techniques used to measure fair value should
maximize the use of relevant observable inputs and minimize the use of
unobservable inputs. Accordingly, the Codification establishes a
hierarchal disclosure framework that ranks the quality and reliability of
information used to determine fair values. The hierarchy is
associated with the level of pricing observability utilized in measuring fair
value and defines three levels of inputs to the fair value measurement
process—quoted prices are the most reliable valuation inputs, whereas model
values that include inputs based on unobservable data are the least
reliable. Each fair value measurement must be assigned to a level
corresponding to the lowest level input that is significant to the fair value
measurement in its entirety.
The
three broad levels of inputs defined by the fair value hierarchy are as
follows:
|
|
▪
|
Level
1 Inputs—quoted prices (unadjusted) in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date;
|
|
|
▪
|
Level
2 Inputs—inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. If the asset or liability has a specified
(contractual) term, a Level 2 input must be observable for substantially
the full term of the asset or liability;
and
|
|
|
▪
|
Level
3 Inputs—unobservable inputs for the asset or liability. These
unobservable inputs reflect the entity’s own assumptions about the
assumptions that market participants would use in pricing the asset or
liability, and are developed based on the best information available in
the circumstances (which might include the reporting entity’s own
data).
|
169
Kinder
Morgan, Inc. Form 10-K
Fair
Value of Derivative Contracts
The
following two tables summarize the fair value measurements of our (i) energy
commodity derivative contracts, (ii) interest rate swap agreements and (iii)
cross currency interest rate swap agreements as of December 31, 2009 and 2008,
based on the three levels established by the Codification and does not include
cash margin deposits, which are reported as “Restricted deposits” in the
accompanying Consolidated Balance Sheets (in millions):
|
Asset
fair value measurements using
|
||||||||||||||||
|
Total
|
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||
|
Energy
commodity derivative contracts(a)
|
$ | 78.1 | $ | - | $ | 14.4 | $ | 63.7 | ||||||||
|
Interest
rate swap agreements
|
236.0 | - | 236.0 | - | ||||||||||||
|
Cross
currency interest rate swap agreements
|
- | - | - | - | ||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Energy
commodity derivative contracts(b)
|
$ | 164.2 | $ | 0.1 | $ | 108.9 | $ | 55.2 | ||||||||
|
Interest
rate swap agreements
|
747.1 | - | 747.1 | - | ||||||||||||
|
Cross
currency interest rate swap agreements
|
32.0 | - | 32.0 | - | ||||||||||||
|
Liability
fair value measurements using
|
||||||||||||||||
|
Total
|
Quoted
prices in
active
markets
for
identical
liabilities
(Level
1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||
|
Energy
commodity derivative contracts(c)
|
$ | (513.5 | ) | $ | - | $ | (462.8 | ) | $ | (50.7 | ) | |||||
|
Interest
rate swap agreements
|
(218.5 | ) | - | (218.5 | ) | - | ||||||||||
|
Cross
currency interest rate swap agreements
|
(9.6 | ) | - | (9.6 | ) | - | ||||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Energy
commodity derivative contracts(d)
|
$ | (221.7 | ) | $ | - | $ | (210.6 | ) | $ | (11.1 | ) | |||||
|
Interest
rate swap agreements
|
- | - | - | - | ||||||||||||
__________
|
(a)
|
Level
2 consists primarily of OTC West Texas Intermediate hedges and OTC natural
gas hedges that are settled on NYMEX. Level 3 consists
primarily of natural gas basis swaps, natural gas options, and West Texas
Intermediate options.
|
|
(b)
|
Level
1 consists primarily of NYMEX natural gas futures. Level 2
consists primarily of OTC West Texas Intermediate hedges and OTC natural
gas hedges that are settled on NYMEX. Level 3 consists
primarily of West Texas Intermediate options and West Texas Sour
hedges.
|
|
(c)
|
Level
2 consists primarily of OTC West Texas Intermediate hedges and OTC natural
gas hedges that are settled on NYMEX. Level 3 consists primarily of West
Texas Sour hedges, natural gas basis swaps, natural gas options, and West
Texas Intermediate options.
|
|
(d)
|
Level
2 consists primarily of OTC West Texas Intermediate
hedges. Level 3 consists primarily of natural gas basis swaps,
natural gas options and West Texas Intermediate
options.
|
The
table below provides a summary of changes in the fair value of our Level 3
energy commodity derivative contracts (in millions):
Significant
unobservable inputs (Level 3)
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Derivatives-net
asset (liability)
|
||||||||
|
Beginning
of period
|
$ | 44.1 | $ | (100.3 | ) | |||
|
Realized
and unrealized net gains (losses)
|
(48.4 | ) | 69.6 | |||||
|
Purchases
and settlements
|
17.3 | 74.8 | ||||||
|
Transfers
in (out) of Level 3
|
- | - | ||||||
|
End
of period
|
$ | 13.0 | $ | 44.1 | ||||
|
Change
in unrealized net gains (losses) relating to contracts
still held at end of period
|
$ | (42.1 | ) | $ | 88.8 | |||
170
Kinder
Morgan, Inc. Form 10-K
In
addition, on both October 10, 2008 and June 30, 2009, we adopted separate
provisions included within the “Fair Value Measurements and Disclosures” Topic
of the Codification. The provisions adopted in October 2008 provide
guidance clarifying how fair value measurements should be applied when valuing
securities in markets that are not active, and reaffirm the notion of fair value
as an exit price as of the measurement date. Among other things, the
guidance also states that significant judgment is required in valuing financial
assets. The adoption of these provisions was effective immediately;
however, the adoption did not have any impact on our consolidated financial
statements.
The
provisions adopted on June 30, 2009 provide guidelines for making fair value
measurements more consistent with the overall principles presented in the “Fair
Value Measurements and Disclosures” Topic. They provide additional
guidance to highlight and expand on the factors that should be considered in
estimating fair value when there has been a significant decrease in market
activity for a financial asset. The adoption of these provisions did
not have a material impact on our consolidated financial
statements.
Fair
Value of Financial Instruments
Fair
value as used in the disclosure of financial instruments represents the amount
at which an instrument could be exchanged in a current transaction between
willing parties. As of each reporting date, the estimated fair value
of our outstanding publicly-traded debt is based upon quoted market prices, if
available, and for all other debt, fair value is based upon prevailing interest
rates currently available to us. In addition, we adjust (discount)
the fair value measurement of our long-term debt for the effect of credit
risk.
|
December
31, 2009
|
December
31, 2008
|
||||||||||||||
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
||||||||||||
|
Total
Debt
|
$
|
13,648.4
|
$
|
14,158.2
|
$
|
11,458.3
|
$
|
9,813.9
|
|||||||
15. Reportable
Segments
We
divide our operations into seven reportable business segments. These
segments and their principal source of revenues are as follows:
|
|
·
|
Products
Pipelines–KMP: the transportation and terminaling of refined petroleum
products, including gasoline, diesel fuel, jet fuel and natural gas
liquids;
|
|
|
·
|
Natural
Gas Pipelines–KMP: the sale, transport, processing, treating, storage and
gathering of natural gas;
|
|
|
·
|
CO2–KMP:
the production and sale of crude oil from fields in the Permian Basin of
West Texas and the transportation and marketing of carbon dioxide used as
a flooding medium for recovering crude oil from mature oil
fields;
|
|
|
·
|
Terminals–KMP:
the transloading and storing of refined petroleum products and dry and
liquid bulk products, including coal, petroleum coke, cement, alumina,
salt and other bulk chemicals;
|
|
|
·
|
Kinder
Morgan Canada–KMP: the transportation of crude oil and refined
products;
|
|
|
·
|
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:
consists of a natural gas-fired electric generation
facility.
|
On
August 28, 2008, we sold our one-third interest in the net assets of the Express
pipeline system (“Express”), as well as our full ownership of the net assets of
the Jet Fuel pipeline system (“Jet Fuel”), to Kinder Morgan Energy Partners. We
accounted for this transaction as a transfer of net assets between entities
under common control. Therefore, following our sale of Express and Jet Fuel to
Kinder Morgan Energy Partners, Kinder Morgan Energy Partners recognized the
assets and liabilities acquired at our carrying amounts (historical cost) at the
date of transfer. The results of Express and Jet Fuel are reported in the Kinder
Morgan Canada–KMP segment for all periods presented.
On
February 15, 2008, we sold an 80% ownership interest in our NGPL PipeCo LLC
business segment to Myria (see Note 3). We continue to operate NGPL PipeCo LLC’s
assets pursuant to a 15-year operating agreement. Effective February 15, 2008,
we began to account for the results of operations of the NGPL PipeCo LLC segment
as an equity investment. See Note 17 in regards to NGPL’s Section 5
proceeding.
171
Kinder
Morgan, Inc. Form 10-K
On
April 30, 2007, Kinder Morgan Energy Partners acquired the Trans Mountain
pipeline system from us. This transaction caused us to evaluate the fair value
of the Trans Mountain pipeline system in determining whether goodwill related to
these assets was impaired. Accordingly, based on our consideration of supporting
information obtained regarding the fair values of the Trans Mountain pipeline
system assets, a goodwill impairment non-cash charge of $377.1 million was
recorded in five months ended May 31, 2007. The results of Trans Mountain are
reported in the Kinder Morgan Canada–KMP segment for all periods
presented.
In
2007, we completed the sales of our (i) U.S. retail natural gas distribution and
related operations (March 2007), (ii) Terasen Pipeline (Corridor) Inc. (March
2007), (iii) Terasen Inc. (May 2007) and (iv) interests in three natural
gas-fired power plants in Colorado (effective January 1, 2008). Kinder Morgan
Energy Partners sold the North System and also its 50% ownership interest in the
Heartland Pipeline Company (October 2007). The financial results for these
entities and investments have been reclassified to discontinued operations for
all periods presented, also see Note 3.
The
accounting policies we apply in the generation of business segment earnings are
generally the same as those applied to our consolidated operations and described
in Note 2, except that (i) certain items below the “Operating Income” line (such
as interest expense) are either not allocated to business segments or are not
considered by management in its evaluation of business segment performance, (ii)
equity in earnings of equity method investees are included in segment earnings
(these equity method earnings are included in “Other Income and (Expenses)” in
the accompanying Consolidated Statements of Operations), (iii) certain items
included in operating income (such as general and administrative expenses and
depreciation, depletion and amortization (“DD&A”)) are not considered by
management in its evaluation of business segment performance and, thus, are not
included in reported performance measures, (iv) gains and losses from incidental
sales of assets are
included in segment
earnings and (v) our business segments that are also segments of Kinder Morgan
Energy Partners include certain other income and expenses and income taxes in
their segment earnings. With adjustment for these items, we currently evaluate
business segment performance primarily based on segment earnings before DD&A
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, while we account for asset transfers at either market
value or, in some instances, book value.
During
2009, 2008, the seven months ended December 31, 2007 and five months ended May
31, 2007, we did not have revenues from any single customer that exceeded 10% of
our consolidated revenues.
172
Kinder
Morgan, Inc. Form 10-K
Financial
information by segment follows (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
Products
Pipelines–KMP
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 826.6 | $ | 815.9 | $ | 471.5 | $ | 331.8 | ||||||||
|
Natural
Gas Pipelines–KMP
|
||||||||||||||||
|
Revenues
from external customers
|
3,806.9 | 8,422.0 | 3,825.9 | 2,637.6 | ||||||||||||
|
Intersegment
revenues
|
- | - | - | 3.0 | ||||||||||||
|
CO2–KMP
|
||||||||||||||||
|
Revenues
from external customers
|
1,131.3 | 1,269.2 | 605.9 | 324.2 | ||||||||||||
|
Terminals–KMP
|
||||||||||||||||
|
Revenues
from external customers
|
1,108.1 | 1,172.7 | 598.8 | 364.2 | ||||||||||||
|
Intersegment
revenues
|
0.9 | 0.9 | 0.4 | 0.3 | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
||||||||||||||||
|
Revenues
from external customers
|
226.1 | 198.9 | 100.0 | 62.9 | ||||||||||||
|
NGPL
PipeCo LLC(a)
|
||||||||||||||||
|
Revenues
from external customers
|
- | 132.1 | 752.4 | 424.5 | ||||||||||||
|
Intersegment
revenues
|
- | 0.9 | 4.8 | 2.0 | ||||||||||||
|
Power(b)
|
||||||||||||||||
|
Revenues
from external customers
|
40.4 | 44.0 | 40.2 | 19.9 | ||||||||||||
|
Other
|
||||||||||||||||
|
Revenues
from other customers(c)
|
45.8 | 40.0 | - | - | ||||||||||||
|
Intersegment
revenues
|
- | (0.9 | ) | - | - | |||||||||||
|
Total
segment revenues
|
7,186.1 | 12,095.7 | 6,399.9 | 4,170.4 | ||||||||||||
|
Less:
Total intersegment revenues
|
(0.9 | ) | (0.9 | ) | (5.2 | ) | (5.3 | ) | ||||||||
|
Total
consolidated revenues
|
$ | 7,185.2 | $ | 12,094.8 | $ | 6,394.7 | $ | 4,165.1 | ||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Operating
expenses(d)
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 269.5 | $ | 291.0 | $ | 320.6 | $ | 116.4 | ||||||||
|
Natural
Gas Pipelines–KMP
|
3,192.7 | 7,803.3 | 3,461.4 | 2,418.5 | ||||||||||||
|
CO2–KMP
|
271.1 | 391.8 | 182.7 | 121.5 | ||||||||||||
|
Terminals–KMP
|
536.8 | 631.8 | 344.2 | 192.2 | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
72.5 | 68.0 | 44.3 | 23.1 | ||||||||||||
|
NGPL
PipeCo LLC(a)
|
- | 43.5 | 335.4 | 159.7 | ||||||||||||
|
Power(b)
|
23.6 | 24.8 | 25.7 | 18.2 | ||||||||||||
|
Other
|
0.1 | 0.1 | 0.9 | (3.4 | ) | |||||||||||
|
Total
segment operating expenses
|
4,366.3 | 9,254.3 | 4,715.2 | 3,046.2 | ||||||||||||
|
Less:
Total intersegment operating expenses
|
(0.9 | ) | (0.9 | ) | (5.2 | ) | (5.3 | ) | ||||||||
|
Total
consolidated operating expenses
|
$ | 4,365.4 | $ | 9,253.4 | $ | 4,710.0 | $ | 3,040.9 | ||||||||
173
Kinder
Morgan, Inc. Form 10-K
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Other
expense (income)
|
||||||||||||||||
|
Products
Pipelines–KMP(e)
|
$ | 1.1 | $ | 1,269.5 | $ | (0.8 | ) | $ | 0.6 | |||||||
|
Natural
Gas Pipelines–KMP(e)
|
(6.6 | ) | 2,090.0 | (1.9 | ) | 0.1 | ||||||||||
|
CO2–KMP
|
- | - | - | - | ||||||||||||
|
Terminals–KMP(e)
|
(25.0 | ) | 683.0 | (3.3 | ) | (3.0 | ) | |||||||||
|
Kinder
Morgan Canada–KMP(f)
|
- | - | - | 377.1 | ||||||||||||
|
Other
|
(0.1 | ) | 0.1 | - | - | |||||||||||
|
Total
consolidated other expense (income)
|
$ | (30.6 | ) | $ | 4,042.6 | $ | (6.0 | ) | $ | 374.8 | ||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Depreciation,
depletion and amortization
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 121.3 | $ | 116.9 | $ | 58.1 | $ | 33.6 | ||||||||
|
Natural
Gas Pipelines–KMP
|
120.5 | 99.9 | 52.3 | 26.8 | ||||||||||||
|
CO2–KMP
|
620.6 | 498.1 | 243.5 | 116.3 | ||||||||||||
|
Terminals–KMP
|
169.1 | 157.4 | 62.1 | 34.4 | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
38.5 | 36.7 | 13.5 | 8.2 | ||||||||||||
|
NGPL
PipeCo LLC(a)
|
- | 9.3 | 42.3 | 45.3 | ||||||||||||
|
Power
|
- | - | 0.2 | (4.2 | ) | |||||||||||
|
Other
|
0.2 | 0.1 | 0.3 | 0.6 | ||||||||||||
|
Total
consolidated depreciation, depletion and amortization
|
$ | 1,070.2 | $ | 918.4 | $ | 472.3 | $ | 261.0 | ||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Earnings
from equity investments
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 18.7 | $ | 15.7 | $ | 11.5 | $ | 12.4 | ||||||||
|
Natural
Gas Pipelines–KMP
|
141.8 | 113.4 | 10.3 | 8.9 | ||||||||||||
|
CO2–KMP
|
22.3 | 20.7 | 10.5 | 8.7 | ||||||||||||
|
Terminals–KMP
|
0.7 | 2.7 | 0.6 | - | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
(4.1 | ) | 8.3 | 14.4 | 5.4 | |||||||||||
|
NGPL
PipeCo LLC(a)
|
42.5 | 40.3 | 1.0 | 0.6 | ||||||||||||
|
Power
|
- | - | 8.0 | 5.1 | ||||||||||||
|
Other
|
- | - | 0.5 | (0.4 | ) | |||||||||||
|
Total
consolidated equity earnings
|
$ | 221.9 | $ | 201.1 | $ | 56.8 | $ | 40.7 | ||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Amortization
of excess cost of equity investments
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 3.4 | $ | 3.3 | $ | 2.0 | $ | 1.4 | ||||||||
|
Natural
Gas Pipelines–KMP
|
0.4 | 0.4 | 0.2 | 0.2 | ||||||||||||
|
CO2–KMP
|
2.0 | 2.0 | 1.2 | 0.8 | ||||||||||||
|
Terminals–KMP
|
- | - | - | - | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
- | - | - | - | ||||||||||||
|
Total
consol. amortization of excess cost of invests.
|
$ | 5.8 | $ | 5.7 | $ | 3.4 | $ | 2.4 | ||||||||
174
Kinder
Morgan, Inc. Form 10-K
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Interest
income
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 4.1 | $ | 4.3 | $ | 2.6 | $ | 1.8 | ||||||||
|
Natural
Gas Pipelines–KMP
|
6.2 | 1.2 | - | - | ||||||||||||
|
CO2–KMP
|
- | - | - | - | ||||||||||||
|
Terminals–KMP
|
- | - | - | - | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
12.0 | 3.9 | - | - | ||||||||||||
|
Total
segment interest income
|
22.3 | 9.4 | 2.6 | 1.8 | ||||||||||||
|
Unallocated
interest income
|
3.4 | 38.1 | 4.6 | 9.5 | ||||||||||||
|
Total
consolidated interest income
|
$ | 25.7 | $ | 47.5 | $ | 7.2 | $ | 11.3 | ||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Other,
net-income (expense)
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 8.3 | $ | (2.3 | ) | $ | 2.1 | $ | 2.9 | |||||||
|
Natural
Gas Pipelines–KMP
|
25.6 | 15.1 | - | 0.2 | ||||||||||||
|
CO2–KMP
|
- | 1.9 | 0.1 | (0.1 | ) | |||||||||||
|
Terminals–KMP
|
3.7 | 1.7 | 0.7 | 0.3 | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
11.9 | (10.1 | ) | 6.3 | 1.7 | |||||||||||
|
Other
|
- | 0.7 | 2.4 | (4.4 | ) | |||||||||||
|
Total
consolidated other, net-income (expense)
|
$ | 49.5 | $ | 7.0 | $ | 11.6 | $ | 0.6 | ||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Income
tax benefit (expense)
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | (3.1 | ) | $ | 4.9 | $ | (5.4 | ) | $ | (7.5 | ) | |||||
|
Natural
Gas Pipelines–KMP
|
(5.7 | ) | (2.7 | ) | (3.4 | ) | (2.6 | ) | ||||||||
|
CO2–KMP
|
(4.0 | ) | (3.9 | ) | (0.8 | ) | (1.3 | ) | ||||||||
|
Terminals–KMP
|
(5.2 | ) | (19.7 | ) | (15.9 | ) | (3.3 | ) | ||||||||
|
Kinder
Morgan Canada–KMP
|
(18.9 | ) | 19.0 | (18.5 | ) | (0.9 | ) | |||||||||
|
Total
segment income tax benefit (expense)
|
(36.9 | ) | (2.4 | ) | (44.0 | ) | (15.6 | ) | ||||||||
|
Unallocated
income tax benefit (expense)
|
(288.7 | ) | (301.9 | ) | (183.4 | ) | (119.9 | ) | ||||||||
|
Total
consolidated income tax benefit (expense)
|
$ | (325.6 | ) | $ | (304.3 | ) | $ | (227.4 | ) | $ | (135.5 | ) | ||||
175
Kinder
Morgan, Inc. Form 10-K
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Segment
earnings before depreciation, depletion, amortization and amortization of
excess cost of equity investments(g)
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 584.0 | $ | (722.0 | ) | $ | 162.5 | $ | 224.4 | |||||||
|
Natural
Gas Pipelines–KMP
|
788.7 | (1,344.3 | ) | 373.3 | 228.5 | |||||||||||
|
CO2–KMP
|
878.5 | 896.1 | 433.0 | 210.0 | ||||||||||||
|
Terminals–KMP
|
596.4 | (156.5 | ) | 243.7 | 172.3 | |||||||||||
|
Kinder
Morgan Canada–KMP
|
154.5 | 152.0 | 58.8 | (332.0 | ) | |||||||||||
|
NGPL
PipeCo LLC(a)
|
42.5 | 129.8 | 422.8 | 267.4 | ||||||||||||
|
Power
|
4.8 | 5.7 | 13.4 | 8.9 | ||||||||||||
|
Segment
earnings before depreciation, depletion, amortization and
amortization of excess cost of equity investments
|
3,049.4 | (1,039.2 | ) | 1,707.5 | 779.5 | |||||||||||
|
Total
segment depreciation, depletion and amortization
|
(1,070.2 | ) | (918.4 | ) | (472.3 | ) | (261.0 | ) | ||||||||
|
Total
segment amortization of excess cost of equity investments
|
(5.8 | ) | (5.7 | ) | (3.4 | ) | (2.4 | ) | ||||||||
|
NGPL
PipeCo LLC fixed fee revenue
|
45.8 | 39.0 | - | - | ||||||||||||
|
General
and administrative expenses
|
(373.0 | ) | (352.5 | ) | (175.6 | ) | (283.6 | ) | ||||||||
|
Unallocable
interest and other, net(h)
|
(583.7 | ) | (623.6 | ) | (586.7 | ) | (254.6 | ) | ||||||||
|
Unallocable
income tax expense
|
(288.7 | ) | (301.9 | ) | (183.4 | ) | (119.9 | ) | ||||||||
|
Income
(loss) from continuing operations
|
$ | 773.8 | $ | (3,202.3 | ) | $ | 286.1 | $ | (142.0 | ) | ||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Capital
expenditures(i)
|
||||||||||||||||
|
Products
Pipelines–KMP
|
$ | 199.8 | $ | 221.7 | $ | 179.9 | $ | 79.5 | ||||||||
|
Natural
Gas Pipelines–KMP
|
372.0 | 946.5 | 197.4 | 66.6 | ||||||||||||
|
CO2–KMP
|
341.8 | 542.6 | 249.2 | 133.3 | ||||||||||||
|
Terminals–KMP
|
378.2 | 454.1 | 310.1 | 169.9 | ||||||||||||
|
Kinder
Morgan Canada–KMP
|
32.0 | 368.1 | 196.7 | 109.0 | ||||||||||||
|
NGPL
PipeCo LLC(a)
|
- | 10.3 | 152.0 | 77.3 | ||||||||||||
|
Power
|
- | - | - | - | ||||||||||||
|
Other
|
0.5 | 2.0 | 1.7 | 17.2 | ||||||||||||
|
Total
consolidated capital expenditures
|
$ | 1,324.3 | $ | 2,545.3 | $ | 1,287.0 | $ | 652.8 | ||||||||
|
2009
|
2008
|
|||||||
|
Investments
at December 31
|
||||||||
|
Products
Pipelines–KMP
|
$ | 346.9 | $ | 349.6 | ||||
|
Natural
Gas Pipelines–KMP
|
2,542.8 | 654.0 | ||||||
|
CO2–KMP
|
11.2 | 13.6 | ||||||
|
Terminals–KMP
|
18.7 | 18.6 | ||||||
|
Kinder
Morgan Canada–KMP
|
68.7 | 65.5 | ||||||
|
NGPL
PipeCo LLC(a)
|
698.5 | 717.3 | ||||||
|
Total
segment investments
|
3,686.8 | 1,818.6 | ||||||
|
Other
|
8.8 | 8.8 | ||||||
|
Total
consolidated investments
|
$ | 3,695.6 | $ | 1,827.4 | ||||
176
Kinder
Morgan, Inc. Form 10-K
|
2009
|
2008
|
|||||||
|
Assets
at December 31
|
||||||||
|
Products
Pipelines–KMP
|
$ | 5,614.7 | $ | 5,526.4 | ||||
|
Natural
Gas Pipelines–KMP
|
9,956.7 | 7,748.1 | ||||||
|
CO2–KMP
|
4,230.5 | 4,478.7 | ||||||
|
Terminals–KMP
|
4,537.3 | 4,327.8 | ||||||
|
Kinder
Morgan Canada–KMP
|
1,797.7 | 1,583.9 | ||||||
|
NGPL
PipeCo LLC(a)
|
698.5 | 717.3 | ||||||
|
Power
|
67.6 | 58.9 | ||||||
|
Total
segment
assets
|
26,903.0 | 24,441.1 | ||||||
|
Other(j)
|
683.3 | 1,003.8 | ||||||
|
Total
consolidated
assets
|
$ | 27,586.3 | $ | 25,444.9 | ||||
____________
|
(a)
|
Effective
February 15, 2008, we sold an 80% ownership interest in NGPL PipeCo LLC to
Myria. As a result of the sale, beginning February 15, 2008, we account
for our 20% ownership interest in NGPL PipeCo LLC as an equity method
investment and 100% of NGPL revenues, earnings and assets prior to the
sale, are included in the above tables.
|
|
(b)
|
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 segment earnings before DD&A (see Note 18).
|
|
(c)
|
2009
and 2008 includes NGPL fixed fee revenues of $45.8 million and $39.0
million, respectively (see Note 11).
|
|
(d)
|
Includes
natural gas purchases and other costs of sales, operations and maintenance
expenses, fuel and power expenses and taxes, other than income
taxes.
|
|
(e)
|
2008
includes non-cash goodwill impairment charges (see Note
7).
|
|
(f)
|
Five
months ended May 31, 2007 includes non-cash goodwill impairment charge
(see Note 7).
|
|
(g)
|
Includes
revenues, earnings from equity investments, allocable interest income, and
other, net, less operating expenses, allocable income taxes, and other
expense (income).
|
|
(h)
|
Includes
(i) interest expense and (ii) miscellaneous other income and expenses not
allocated to business segments.
|
|
(i)
|
Sustaining
capital expenditures, including Kinder Morgan Energy Partners’ share of
Rockies Express’ sustaining capital expenditures, for each of the years
ended December 31, 2009 and 2008, seven months ended December 31, 2007 and
five months ended May 31, 2007, were $172.7 million, $183.9 million,
$164.6 million and $78.6 million, respectively.
|
|
(j)
|
Includes
cash and cash equivalents, margin and restricted deposits, unallocable
interest receivable, prepaid assets and deferred charges, and risk
management assets related to the fair value of interest rate
swaps.
|
We
do not attribute interest and debt expense to any of our reportable business
segments. For each of the years ended December 31, 2009 and 2008,
seven months ended December 31, 2007 and five months ended May 31, 2007, we
reported total consolidated interest expense of $599.1 million, $675.8 million,
$ 601.5 million and $261.5 million, respectively.
Following
is geographic information regarding the revenues and long-lived assets of our
business segments (in millions):
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
||||||||||||||
|
Revenues
from external customers
|
|||||||||||||||||
|
United
States
|
$ | 6,862.3 | $ | 11,804.2 | $ | 6,239.7 | $ | 4,086.6 | |||||||||
|
Canada
|
301.9 | 269.3 | 143.5 | 70.5 | |||||||||||||
|
Mexico
and other(a)
|
21.0 | 21.3 | 11.5 | 8.0 | |||||||||||||
|
Total
consolidated revenues from external customers
|
$ | 7,185.2 | $ | 12,094.8 | $ | 6,394.7 | $ | 4,165.1 | |||||||||
|
2009
|
2008
|
|||||||
|
Long-lived
assets at December 31(b)
|
||||||||
|
United
States
|
$ | 19,258.2 | $ | 17,511.1 | ||||
|
Canada
|
1,834.3 | 1,568.7 | ||||||
|
Mexico
and other(a)
|
98.8 | 97.7 | ||||||
|
Total
consolidated long-lived assets
|
$ | 21,191.3 | $ | 19,177.5 | ||||
__________
|
(a)
|
Includes
operations in Mexico and the Netherlands.
|
|
(b)
|
Long-lived
assets exclude (i) goodwill and (ii) other intangibles,
net.
|
177
Kinder
Morgan, Inc. Form 10-K
16. Litigation, Environmental and Other
Contingencies
Below
is a brief description of our ongoing material legal proceedings, including any
material developments that occurred in such proceedings during
2009. This note also contains a description of any material legal
proceeding initiated during 2009 in which we are involved.
In
this note, we refer to SFPP, L.P. (a Kinder Morgan Energy Partners subsidiary)
as SFPP; Calnev Pipe Line LLC as Calnev; Chevron Products Company as Chevron;
Navajo Refining Company, L.P. as Navajo; ARCO Products Company as ARCO; BP West
Coast Products, LLC as BP; Texaco Refining and Marketing Inc. as Texaco; Western
Refining Company, L.P. as Western Refining; ExxonMobil Oil Corporation as
ExxonMobil; Tosco Corporation as Tosco; Ultramar Diamond Shamrock
Corporation/Ultramar Inc. as Ultramar; Valero Energy Corporation as Valero;
Valero Marketing and Supply Company as Valero Marketing; America West Airlines,
Inc., Continental Airlines, Inc., Northwest Airlines, Inc., Southwest Airlines
Co. and US Airways, Inc., collectively, as the Airlines; Kinder Morgan Energy
Partners’ subsidiary Kinder Morgan CO2 Company,
L.P. (the successor to Shell CO2 Company,
Ltd.) as Kinder Morgan CO2; the
United States Court of Appeals for the District of Columbia Circuit as the D.C.
Circuit; the Federal Energy Regulatory Commission, as the FERC; the California
Public Utilities Commission as the CPUC; the United States Department of the
Interior, Minerals Management Service as the MMS; the Union Pacific Railroad
Company (the successor to Southern Pacific Transportation Company) as UPRR;
the United States Department of Transportation Pipeline and Hazardous
Materials Safety Administration as the PHMSA; the North Carolina Department of
Environment and Natural Resources as the NCDENR; the Florida Department of
Environmental Protection as the Florida DEP; our subsidiary Kinder Morgan Bulk
Terminals, Inc. as KMBT; Rockies Express Pipeline LLC as Rockies Express; and
Plantation Pipe Line Company as Plantation. “OR” dockets designate complaint
proceedings, and “IS” dockets designate protest proceedings.
Federal
Energy Regulatory Commission Proceedings
|
|
·
|
FERC
Docket Nos. OR92-8, et
al (West and East Line Rates)—Complainants: Chevron, Navajo, ARCO,
BP, Western Refining, ExxonMobil, Tosco, and Texaco—Defendant:
SFPP—Status: Appeals pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket No. OR92-8-025 (Watson Drain-Dry
Charge)—Complainants: BP; ExxonMobil; Chevron; ConocoPhillips;
and Ultramar—Defendant: SFPP—Status: Appeal denied by the D.C.
Circuit;
|
|
|
·
|
FERC
Docket Nos. OR96-2, et
al (All SFPP Rates)—Complainants: All Shippers except
Chevron—Defendant: SFPP—Status: Compliance filings pending with
FERC;
|
|
|
·
|
FERC
Docket No. OR02-4 (All SFPP Rates)—Complainant: Chevron—Defendant: SFPP;
Status: Appeal of complaint dismissal pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket Nos. OR03-5, OR04-3, OR05-4 & OR05-5 (West, East, North, and
Oregon Line Rates)—Complainants: BP, ExxonMobil, ConocoPhillips, the
Airlines—Defendant: SFPP—Status: Exceptions to initial decision
pending at FERC;
|
|
|
·
|
FERC
Docket Nos. OR07-1 & OR07-2 (North and West Line Rates)—Complainant:
Tesoro—Defendant: SFPP—Status: Held in
abeyance;
|
|
|
·
|
FERC
Docket Nos. OR07-3 & OR07-6 (not consolidated) (2005-2006 Index Rate
Increases)—Complainants: BP, Chevron, ConocoPhillips, ExxonMobil, Tesoro,
and Valero Marketing—Defendant: SFPP—Status: Appeal of
dismissal by FERC pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket No. OR07-4 (All SFPP Rates)—Complainants: BP, Chevron, and
ExxonMobil—Defendants: SFPP—Status: Held in
abeyance;
|
|
|
·
|
FERC
Docket Nos. OR07-7, OR07-18, OR07-19 & OR07-22 (not consolidated)
(Calnev Rates)—Complainants : Tesoro, Airlines, BP, Chevron,
ConocoPhillips and Valero Marketing—Defendants:
Calnev—Status: Complaint amendments pending before
FERC;
|
|
|
·
|
FERC
Docket No. OR07-20 (2007 Index Rate Increases)—Complainant: BP—Defendant:
SFPP—Status: Appeal of dismissal by FERC pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket No. OR08-13 (Most SFPP Rates)—Complainants: BP and
ExxonMobil—Defendant: SFPP—Status: Held in
abeyance;
|
|
|
·
|
FERC
Docket No. IS05-230 (North Line Rates)—Protestants: Shippers—Defendant:
SFPP—Status: Exceptions to initial decision pending at
FERC;
|
178
Kinder
Morgan, Inc. Form 10-K
|
|
·
|
FERC
Docket No. IS08-390 (West Line Rates)— Protestants: BP, ExxonMobil,
ConocoPhillips, Valero Marketing, Chevron, the Airlines—Defendant:
SFPP—Status: Exceptions to initial decision pending at
FERC;
|
|
|
·
|
FERC
Docket No. IS09-375 (2009 Index Rate Increases)—Protestants: BP,
ExxonMobil, Chevron, Tesoro, ConocoPhillips, Western, Navajo, Valero
Marketing, and Southwest—Defendant: SFPP—Status: Requests for
rehearing of FERC dismissal pending before
FERC;
|
|
|
·
|
FERC
Docket No. IS09-377 (2009 Index Rate Increases)— Protestants: BP, Chevron,
and Tesoro—Defendant: Calnev—Status: Requests for rehearing of
FERC dismissal pending before FERC;
|
|
|
·
|
FERC
Docket No. IS09-437 (East Line Rates)—Protestants: BP, ExxonMobil,
ConocoPhillips, Valero, Chevron, Western Refining, and Southwest
Airlines—Defendant: SFPP—Status: Pre-hearing
stage;
|
|
|
·
|
FERC
Docket Nos. OR08-15/OR09-8 (consolidated) (2008 Index
Increases)—Complainants: BP/Chevron—Defendant: SFPP—Status: Complaints
partially dismissed and remainder set for hearing; hearing held in
abeyance pending settlement
discussions;
|
|
|
·
|
FERC
Docket Nos. OR09-18/OR09-21 (not consolidated) (2008 and 2009 Index
Increases)—Complainants: BP (for 2009)/Tesoro (for 2008 and
2009)—Defendant: SFPP—Status: BP appeal of FERC dismissal
pending at the D.C. Circuit;
|
|
|
·
|
FERC
Docket Nos. OR09-11/OR09-14 (not consolidated) (2007 and 2008 Page 700
Audit Request)—Complainants: BP/Tesoro—Defendant:
Calnev—Status: BP appeal of FERC dismissal pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket Nos. OR09-12/OR09-16 (not consolidated) (2007 and 2008 Page 700
Audit Request)—Complainants: BP/Tesoro—Defendant:
SFPP—Status: BP appeal of FERC dismissal pending at the D.C.
Circuit;
|
|
|
·
|
FERC
Docket Nos. OR09-15/OR09-20 (not consolidated) (Calnev
Rates)—Complainants: Tesoro/BP—Defendant:
Calnev—Status: Complaints pending at
FERC;
|
|
|
·
|
FERC
Docket Nos. OR09-17/OR09-22 (Most SFPP Rates) (not
consolidated)—Complainants: Tesoro/BP—Defendant:
SFPP—Status: BP appeal of FERC dismissal pending at the D.C.
Circuit; and
|
|
|
·
|
FERC
Docket Nos. OR09-19/OR09-23 (not consolidated) (2009 Index
Increases)—Complainants: Tesoro/BP—Defendant: Calnev—Status: BP
appeal of FERC dismissal pending at the D.C.
Circuit.
|
The
tariffs and rates charged by SFPP and Calnev are subject to numerous ongoing
proceedings at the FERC, including the above listed shippers’ complaints and
protests regarding interstate rates on these pipeline
systems. These complaints have been filed over numerous years
beginning in 1992 through and including 2009. In general, these
complaints allege the rates and tariffs charged by SFPP and Calnev are not just
and reasonable. If the shippers are successful in proving their
claims, they are entitled to seek reparations (which may reach up to two years
prior to the filing of their complaint) or refunds of any excess rates paid, and
SFPP and Calnev may be required to reduce their rates going forward. These proceedings tend
to be protracted, with decisions of the FERC often appealed to the federal
courts.
As
to SFPP, the issues involved in these proceedings include, among others: (i)
whether certain of the Pacific operations’ rates are “grandfathered” under the
Energy Policy Act of 1992, and therefore deemed to be just and reasonable, (ii)
whether “substantially changed circumstances” have occurred with respect to any
grandfathered rates such that those rates could be challenged, (iii) whether
indexed rate increases are justified and (iv) the appropriate level of return
and income tax allowance may be included in its rates. The issues
involving Calnev are similar.
During
2009, SFPP made settlement payments to various shippers totaling approximately
$15.5 million in connection with OR07-8, OR07-11, and IS08-28 and related
dockets. The IS08-28 settlement (East Line rates) was approved by
FERC in March 2009, and SFPP implemented reduced settlement rates effective May
1, 2009, along with refunds and settlement payments. Due to reduced
East Line volumes, SFPP terminated the IS08-28 settlement pursuant to its terms
and filed for increased East Line rates (IS09-437), which were accepted and
became effective January 1, 2010, subject to refund and
investigation.
Based
on a review of these FERC proceedings and the information available, Kinder
Morgan Energy Partners estimates that as of December 31, 2009, shippers are
seeking approximately $350 million in reparation and refund payments and
approximately $35 to $40 million in additional annual rate
reductions. Kinder Morgan Energy Partners assumes that, with respect
to its SFPP litigation reserves, any reparations and accrued interest thereon
will be paid no earlier than the end of the first quarter of 2010.
179
Kinder
Morgan, Inc. Form 10-K
California
Public Utilities Commission Proceedings
SFPP
has previously reported ratemaking and complaint proceedings pending with the
CPUC. The ratemaking and complaint cases generally involve challenges
to rates charged by SFPP for intrastate transportation of refined petroleum
products through its pipeline system in the state of California and request
prospective rate adjustments and refunds with respect to tariffed and previously
untariffed charges for certain pipeline transportation and related
services. These matters have been consolidated and assigned to two
administrative law judges. As of the filing of this report, it is
unknown when a decision from the CPUC regarding either of the two groups of
consolidated matters will be issued. Based on a review of these CPUC
proceedings, Kinder Morgan Energy Partners estimates that shippers are seeking
approximately $100 million in reparation and refund payments and approximately
$35 million in annual rate reductions.
Carbon
Dioxide Litigation
Gerald
O. Bailey et al. v. Shell Oil Co. et al., Southern District of Texas
Lawsuit
Kinder
Morgan CO2, Kinder
Morgan Energy Partners, L.P. and Cortez Pipeline Company are among the
defendants in a proceeding in the federal courts for the Southern District of
Texas. Gerald O.
Bailey et al. v. Shell Oil Company et al. (Civil Action Nos. 05-1029 and
05-1829 in the U.S. District Court for the Southern District of
Texas—consolidated by Order dated July 18, 2005). The plaintiffs
assert claims for the underpayment of royalties on carbon dioxide produced from
the McElmo Dome unit, located in southwestern Colorado. The
plaintiffs assert claims for fraud/fraudulent inducement, real estate fraud,
negligent misrepresentation, breach of fiduciary and agency duties, breach of
contract and covenants, violation of the Colorado Unfair Practices Act, civil
theft under Colorado law, conspiracy, unjust enrichment, and open
account. Plaintiffs Gerald O. Bailey, Harry Ptasynski, and W.L. Gray
& Co. also assert claims as private relators under the False Claims Act,
claims on behalf of the State of Colorado and Montezuma County, Colorado, and
for violation of federal and Colorado antitrust laws. The plaintiffs seek
actual damages, treble damages, punitive damages, a constructive trust and
accounting, and declaratory relief. The defendants filed motions for
summary judgment on all claims.
On
April 22, 2008, the federal district court granted defendants’ motions for
summary judgment and ruled that plaintiffs Bailey and Ptasynski take nothing on
their claims, and that the claims of Gray be dismissed with prejudice. The court
entered final judgment in favor of the defendants on April 30,
2008. Defendants filed a motion seeking sanctions against plaintiffs
Bailey and Ptasynski and their attorney. The plaintiffs appealed the
final judgment to the United States Fifth Circuit Court of
Appeals. The parties concluded their briefing to the Fifth Circuit
Court of Appeals in February 2009, and the appeal remains pending.
CO2 Claims
Arbitration
Kinder
Morgan CO2 and Cortez
Pipeline Company were among the named defendants in CO2 Committee, Inc. v. Shell Oil Co.,
et al., an arbitration initiated on November 28, 2005. The
arbitration arose from a dispute over a class action settlement agreement which
became final on July 7, 2003 and disposed of five lawsuits formerly pending in
the U.S. District Court, District of Colorado. The plaintiffs in such
lawsuits primarily included overriding royalty interest owners, royalty interest
owners, and small share working interest owners who alleged underpayment of
royalties and other payments on carbon dioxide produced from the McElmo Dome
Unit.
The
settlement imposed certain future obligations on the defendants in the
underlying litigation. The plaintiffs in the arbitration alleged that, in
calculating royalty and other payments, defendants used a transportation expense
in excess of what is allowed by the settlement agreement, thereby causing
alleged underpayments of approximately $12 million. The plaintiffs also
alleged that Cortez Pipeline Company should have used certain funds to further
reduce its debt, which, in turn, would have allegedly increased the value of
royalty and other payments by approximately $0.5 million. On August 7,
2006, the arbitration panel issued its opinion finding that defendants did not
breach the settlement agreement. On June 21, 2007, the New Mexico
federal district court entered final judgment confirming the August 7, 2006
arbitration decision.
On
October 2, 2007, the plaintiffs initiated a second arbitration (CO2 Committee, Inc. v. Shell
CO2 Company, Ltd., aka Kinder Morgan
CO2 Company, L.P., et al.)
against Cortez Pipeline Company, Kinder Morgan CO2 and an
ExxonMobil entity. The second arbitration asserts claims similar to
those asserted in the first arbitration. On June 3, 2008, the
plaintiffs filed a request with the American Arbitration Association seeking
administration of the arbitration. In October 2008, the New Mexico
federal district court entered an order declaring that the panel in the first
arbitration should decide whether the claims in the second arbitration are
barred by res judicata (an adjudicated issue that cannot be
relitigated). The plaintiffs filed a motion for reconsideration of
that order, which was denied by the New Mexico federal district court in January
2009. Plaintiffs appealed to the Tenth Circuit Court of
Appeals. On December 21, 2009, the Tenth Circuit Court of Appeals
reversed the District Court and ruled that a new arbitration panel should be
convened to decide the claims and defenses asserted by the parties.
180
Kinder
Morgan, Inc. Form 10-K
MMS
Notice of Noncompliance and Civil Penalty
On
December 20, 2006, Kinder Morgan CO2 received a
“Notice of Noncompliance and Civil Penalty: Knowing or Willful
Submission of False, Inaccurate, or Misleading Information—Kinder Morgan CO2 Company,
L.P., Case No. CP07-001” from the U.S. Department of the Interior, Minerals
Management Service, referred to in this note as the MMS. This Notice,
and the MMS’s position that Kinder Morgan CO2 has
violated certain reporting obligations, relates to a disagreement between the
MMS and Kinder Morgan CO2 concerning
the approved transportation allowance to be used in valuing McElmo Dome carbon
dioxide for purposes of calculating federal royalties.
The
Notice of Noncompliance and Civil Penalty assesses a civil penalty of
approximately $2.2 million as of December 15, 2006 (based on a penalty of
$500.00 per day for each of 17 alleged violations) for Kinder Morgan CO2’s alleged
submission of false, inaccurate, or misleading information relating to the
transportation allowance, and federal royalties for CO2 produced
at McElmo Dome, during the period from June 2005 through October
2006. The MMS stated that civil penalties will continue to accrue at
the same rate until the alleged violations are corrected.
On
January 3, 2007, Kinder Morgan CO2 appealed
the Notice of Noncompliance and Civil Penalty to the Office of Hearings and
Appeals of the Department of the Interior. In February 2007,
Kinder Morgan CO2 filed a
motion seeking to stay the accrual of civil penalties during the appeal, which
was denied.
In
July 2008, the parties reached a settlement of the Notice of Noncompliance and
Civil Penalty, subject to final approval by the MMS and the Department of the
Interior. On January 28, 2010, a representative of the MMS notified
Kinder Morgan CO2 that the
Department of the Interior will not approve the settlement on its existing
terms.
MMS
Orders to Report and Pay
On
March 20, 2007, Kinder Morgan CO2 received
an “Order to Report and Pay” from the MMS. The MMS contends that
Kinder Morgan CO2
has over-reported transportation allowances and underpaid royalties in the
amount of approximately $4.6 million for the period from January 1, 2005 through
December 31, 2006 as a result of its use of the Cortez Pipeline tariff as the
transportation allowance in calculating federal royalties. The MMS claims that
the Cortez Pipeline tariff is not the proper transportation allowance and that
Kinder Morgan CO2 must use
its “reasonable actual costs” calculated in accordance with certain federal
product valuation regulations. The MMS set a due date of April 13,
2007 for Kinder Morgan CO2’s payment
of the $4.6 million in claimed additional royalties, with possible late payment
charges and civil penalties for failure to pay the assessed amount.
Kinder
Morgan CO2 has not
paid the $4.6 million, and on April 19, 2007, it submitted a notice of appeal
and statement of reasons in response to the Order to Report and Pay, challenging
the Order and appealing it to the Director of the MMS in accordance with 30
C.F.R. sec. 290.100, et seq.
In
addition to the March 2007 Order to Report and Pay, the MMS issued a second
Order to Report and Pay in August 2007, in which the MMS claims that Kinder
Morgan CO2 has
over-reported transportation allowances and underpaid royalties (due to the use
of the Cortez Pipeline tariff as the transportation allowance for purposes of
federal royalties) in the amount of approximately $8.5 million for the period
from April 2000 through December 2004. Kinder Morgan CO2 filed its
notice of appeal and statement of reasons in response to the second Order in
September 2007, challenging the Order and appealing it to the Director of the
MMS.
In
July 2008, the parties reached a settlement of the March 2007 and August 2007
Orders to Report and Pay, subject to final approval by the MMS and the
Department of the Interior. On January 28, 2010, a representative of
the MMS notified Kinder Morgan CO2 that the
Department of the Interior will not approve the settlement on its existing
terms.
J.
Casper Heimann, Pecos Slope Royalty Trust and Rio Petro LTD, individually and on
behalf of all other private royalty and overriding royalty owners in the Bravo
Dome Carbon Dioxide Unit, New Mexico similarly situated v. Kinder Morgan CO2 Company,
L.P., No. 04-26-CL (8th
Judicial District Court, Union County New Mexico)
This
case involved a purported class action against Kinder Morgan CO2 alleging
that it failed to pay the full royalty and overriding royalty, collectively
referred to as the royalty interests, on the true and proper settlement value of
compressed carbon dioxide produced from the Bravo Dome unit, located in
northeastern New Mexico, during the period beginning January 1,
2000
The
purported class is comprised of current and former owners, during the period
January 2000 to the present, who have private property royalty interests
burdening the oil and gas leases held by the defendant, excluding the
Commissioner of Public Lands, the United States of America, and those private
royalty interests that are not unitized as part of the Bravo Dome
unit.
181
Kinder
Morgan, Inc. Form 10-K
On
September 10, 2009, the parties signed a settlement agreement providing for (i)
a payment of $3.2 million to the class; (ii) a new royalty methodology pursuant
to which future royalties will be based on a price formula that is tied in part
to published crude oil prices; and (iii) a dismissal with prejudice of all
claims. On October 22, 2009, the trial court entered final judgment
approving the settlement. The time period for appeal of the judgment
has not expired and it is final for all purposes. Accordingly, the
case is concluded.
Colorado
Severance Tax Assessment
On
September 16, 2009, the Colorado Department of Revenue issued three Notices of
Deficiency to Kinder Morgan CO2. The
Notices of Deficiency assessed additional state severance tax against Kinder
Morgan CO2
with respect to carbon dioxide produced from the McElmo Dome unit for tax
years 2005, 2006, and 2007. The total amount of tax assessed was $5.7
million, plus interest of $1.0 million, plus penalties of $1.7
million. Kinder Morgan CO2 protested
the Notices of Deficiency and paid the tax and interest under
protest. Kinder Morgan CO2 is now
awaiting the Colorado Department of Revenue’s response to the
protest.
Montezuma
County, Colorado Property Tax Assessment
In
November of 2009, the County Treasurer of Montezuma County, Colorado, issued to
Kinder Morgan CO2 , as
operator of the McElmo Dome Unit, retroactive tax bills for tax year 2008, in
the amount of $2 million. Of this amount, 37.2% is attributable to
Kinder Morgan CO2’s
interest. The retroactive tax bills were based on the assertion that
a portion of the actual value of the carbon dioxide produced from the McElmo
Dome Unit was omitted from the 2008 tax roll due to an alleged over statement of
transportation and other expenses used to calculate the net taxable value. Kinder Morgan CO2 paid the
retroactive tax bills under protest and will file petitions for refunds of the
taxes paid under protest and will vigorously contest Montezuma County’s
position.
Other
In
addition to the matters listed above, audits and administrative inquiries
concerning Kinder Morgan CO2’s payments
on carbon dioxide produced from the McElmo Dome and Bravo Dome units are
currently ongoing. These audits and inquiries involve federal agencies,
the states of Colorado and New Mexico, and county taxing authorities in the
state of Colorado.
Commercial
Litigation Matters
Union Pacific Railroad Company
Easements
SFPP
and UPRR are engaged in a proceeding to determine the extent, if any, to which
the rent payable by SFPP for the use of pipeline easements on rights-of-way held
by UPRR should be adjusted pursuant to existing contractual arrangements for the
ten year period beginning January 1, 2004 (Union Pacific Railroad Company vs.
Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D”,
Kinder Morgan G.P., Inc., et al., Superior Court of the State of
California for the County of Los Angeles, filed July 28, 2004). In
February 2007, a trial began to determine the amount payable for easements on
UPRR rights-of-way. The trial is ongoing and is expected to conclude
by the end of the second quarter of 2010, with a decision from the judge
expected by the end of 2010.
SFPP
and UPRR are also engaged in multiple disputes over the circumstances under
which SFPP must pay for a relocation of its pipeline within the UPRR
right-of-way and the safety standards that govern relocations. In
July 2006, a trial before a judge regarding the circumstances under which SFPP
must pay for relocations concluded, and the judge determined that SFPP must pay
for any relocations resulting from any legitimate business purpose of the
UPRR. SFPP appealed this decision, and in December 2008, the
appellate court affirmed the decision. In addition, UPRR contends
that SFPP must comply with the more expensive American Railway Engineering and
Maintenance-of-Way standards in determining when relocations are necessary and
in completing relocations. Each party is seeking declaratory relief
with respect to its positions regarding the application of these standards with
respect to relocations.
Since
SFPP does not know UPRR’s plans for projects or other activities that would
cause pipeline relocations, it is difficult to quantify the effects of the
outcome of these cases on SFPP. Even if SFPP is successful in
advancing its positions, significant relocations for which SFPP must nonetheless
bear the expense (i.e., for railroad purposes, with the standards in the federal
Pipeline Safety Act applying) would have an adverse effect on our financial
position and results of operations. These effects would be even
greater in the event SFPP is unsuccessful in one or more of these
litigations.
United
States of America, ex rel., Jack J. Grynberg v. K N Energy (Civil Action No.
97-D-1233, filed in the U.S. District Court, District of Colorado).
This
multi-district litigation proceeding involves four lawsuits filed in 1997
against numerous Kinder Morgan Energy Partners companies. These suits
were filed pursuant to the federal False Claims Act and allege underpayment of
royalties
182
Kinder
Morgan, Inc. Form 10-K
due
to mismeasurement of natural gas produced from federal and Indian
lands. The complaints are part of a larger series of similar
complaints filed by Mr. Grynberg against 77 natural gas pipelines (approximately
330 other defendants) in various courts throughout the country which were
consolidated and transferred to the United States District Court for the
District of Wyoming.
In
May 2005, a Special Master appointed in this litigation found that because there
was a prior public disclosure of the allegations and that Grynberg was not an
original source, the Court lacked subject matter jurisdiction. As a
result, the Special Master recommended that the Court dismiss all of the Kinder
Morgan Energy Partners defendants. In October 2006, the United States
District Court for the District of Wyoming upheld the dismissal of each case
against the Kinder Morgan Energy Partners defendants on jurisdictional
grounds. Grynberg appealed this Order to the Tenth Circuit Court of
Appeals. Briefing was completed and oral argument was held on
September 25, 2008. A decision by the Tenth Circuit Court of Appeals
affirming the dismissal of the Kinder Morgan Energy Partners Defendants was
issued on March 17, 2009. Grynberg’s petition for rehearing was
denied on May 4, 2009 and the Tenth Circuit issued its Mandate on May 18,
2009. On October 5, 2009 the United States Supreme Court denied
Grynberg’s Petition for Writ of Certiorari, ending his
appeal. A decision is still pending on Defendants’ Motions for
Sanctions and Requests for Attorney Fees.
Severstal
Sparrows Point Crane Collapse
On
June 4, 2008, a bridge crane owned by Severstal Sparrows Point, LLC and located
in Sparrows Point, Maryland collapsed while being operated by KMBT, a subsidiary
of Kinder Morgan Energy Partners. According to Kinder Morgan Energy
Partners’ investigation, the collapse was caused by unexpected, sudden and
extreme winds. On June 24, 2009, Severstal filed suit against KMBT in
the United States District Court for the District of Maryland, cause no. WMN
09CV1668. Severstal alleges that KMBT was contractually obligated to
replace the collapsed crane and that its employees were negligent in failing to
properly secure the crane prior to the collapse. Severstal seeks
unspecified damages for value of the crane and lost profits. KMBT
denies each of Severstal’s allegations.
JR
Nicholls Tug Incident
On
February 10, 2010, the JR
Nicholls, a tugboat operated by one of Kinder Morgan Energy Partners’
subsidiaries overturned and sank in the Houston Ship Channel. Five
employees were on board and four were rescued, treated and released from a local
hospital. The fifth employee died in the incident. The U.S.
Coast Guard shut down a section of the ship channel for approximately 60
hours. Approximately 2,200 gallons of diesel fuel was released from the
tugboat. Emergency response crews deployed booms and contained the
product, which is substantially cleaned up. Salvage operations were
commenced and the tugboat has been recovered. A full investigation of
the incident is underway.
Leukemia
Cluster Litigation
Richard
Jernee, et al v. Kinder Morgan Energy Partners, et al, No. CV03-03482 (Second
Judicial District Court, State of Nevada, County of Washoe)
(“Jernee”).
Floyd
Sands, et al v. Kinder Morgan Energy Partners, et al, No.
CV03-05326 (Second Judicial District Court, State of Nevada, County
of Washoe) (“Sands”).
On
May 30, 2003, plaintiffs, individually and on behalf of Adam Jernee, filed a
civil action in the Nevada State trial court against Kinder Morgan Energy
Partners and several Kinder Morgan Energy Partners related entities and
individuals and additional unrelated defendants. Plaintiffs in the Jernee matter
claim that defendants negligently and intentionally failed to inspect, repair
and replace unidentified segments of their pipeline and facilities, allowing
harmful substances and emissions and gases to damage the environment and health
of human beings. Plaintiffs claim that Adam Jernee’s death was caused
by leukemia that, in turn, is believed to be due to exposure to industrial
chemicals and toxins. Plaintiffs purport to assert claims for
wrongful death, premises liability, negligence, negligence per se, intentional
infliction of emotional distress, negligent infliction of emotional distress,
assault and battery, nuisance, fraud, strict liability (ultra hazardous acts),
and aiding and abetting, and seek unspecified special, general and punitive
damages.
On
August 28, 2003, a separate group of plaintiffs, represented by the counsel for
the plaintiffs in the Jernee matter, individually and on behalf of Stephanie
Suzanne Sands, filed a civil action in the Nevada State trial court against the
same defendants and alleged the same claims as in the Jernee case with respect
to Stephanie Suzanne Sands. The Jernee case has been consolidated for
pretrial purposes with the Sands case.
In
July, 2009, plaintiffs in both the Sands and Jernee cases agreed to dismiss all
claims against the Kinder Morgan Energy Partners related defendants with
prejudice in exchange for the Kinder Morgan Energy Partners defendants’
agreement that they would not seek to recover their defense costs against the
plaintiffs. The Kinder Morgan Energy Partners defendants filed a
Motion for Approval of Good Faith Settlement which was granted by the court on
August 27, 2009, effectively concluding these cases with respect to all Kinder
Morgan Energy Partners related entities and individuals.
183
Kinder
Morgan, Inc. Form 10-K
Employee
Matters
James
Lugliani vs. Kinder Morgan G.P., Inc. et al. in the Superior Court of
California, Orange County
James
Lugliani, a former Kinder Morgan G.P., Inc. employee, filed suit in January 2010
against various Kinder Morgan G.P., Inc. affiliates. On behalf of himself
and other, similarly situated current and former employees, Mr. Lugliani claims
that the Kinder Morgan G.P., Inc. defendants have violated the wage and hour
provisions of the California Labor Code and Business & Professions Code by
failing to provide meal and rest periods; failing to pay meal and rest period
premiums; failing to pay all overtime wages due; failing to timely pay wages;
failing to pay wages for vacation, holidays and other paid time off; and failing
to keep proper payroll records. The defendants filed their answer in
February 2010 and intend to vigorously defend the case.
Pipeline
Integrity and Releases
From
time to time, despite our best efforts, our pipelines experience leaks and
ruptures. These leaks and ruptures may cause explosions, fire, and
damage to the environment, damage to property and/or personal injury or
death. In connection with these incidents, we may be sued for damages
caused by an alleged failure to properly mark the locations of our pipelines
and/or to properly maintain our pipelines. Depending upon the facts
and circumstances of a particular incident, state and federal regulatory
authorities may seek civil and/or criminal fines and penalties.
Midcontinent
Express Pipeline LLC Construction Incident
On
July 15, 2009, a Midcontinent Express Pipeline LLC contractor and subcontractor
were conducting a nitrogen pressure test on facilities
at a Midcontinent Express Pipeline delivery meter station that was under
construction in Smith
County, Mississippi. An unexpected release occurred during testing,
resulting in one fatality and injuries to four other employees of the contractor
or subcontractor. The United States Occupational Safety and Health
Administration (“OSHA”) completed their investigation. Neither Midcontinent
Express Pipeline LLC nor Kinder Morgan Energy Partners were cited for any
violations by OSHA.
Pasadena
Terminal Fire
On
September 23, 2008, a fire occurred in the pit 3 manifold area of Kinder Morgan
Energy Partners’ Pasadena, Texas liquids terminal facility. One of
our employees was injured and subsequently died. In addition, the pit
3 manifold was severely damaged. On July 13, 2009, a civil lawsuit
was filed by and on behalf of the family of the deceased employee entitled Brandy Williams et. al. v. KMGP
Services Company, Inc. in the 133rd
District Court of Harris County, Texas, case no. 2009-44321. On
December 28, 2009, the case was settled via an Agreed Judgment entered by the
court and the matter is now concluded.
State
of Texas v. Kinder Morgan Liquids Terminals (“KMLT”), Case # D1GV10000017,
53rd
Judicial District Court, Travis County, Travis, Texas.
This
case was filed on January 8, 2010 and brought on behalf of the People of Texas
and the Texas Commission of Environmental Quality (TCEQ) for alleged violations
of the Texas Clean Air Act. Specifically, TCEQ alleges that KMLT had
an unauthorized emission event relating to the pit 3 fire at the Pasadena
Terminal. KMLT is currently in discussions with TCEQ legal representatives and
the Texas Attorney General’s office regarding resolution of this matter. KMLT
does not expect any fines and penalties related to this matter to be
material.
Rockies
Express Pipeline LLC Wyoming Construction Incident
On
November 11, 2006, a bulldozer operated by an employee of Associated Pipeline
Contractors, Inc., a third-party contractor to Rockies Express, struck an
existing subsurface natural gas pipeline owned by Wyoming Interstate Company, a
subsidiary of El Paso Pipeline Group. The pipeline was ruptured,
resulting in an explosion and fire. The incident occurred in a rural
area approximately nine miles southwest of Cheyenne, Wyoming. The
incident resulted in one fatality (the operator of the bulldozer) and there were
no other reported injuries. The cause of the incident was
investigated by the PHMSA. In March 2008, the PHMSA issued a Notice
of Probable Violation, Proposed Civil Penalty and Proposed Compliance Order, or
NOPV, to El Paso Corporation in which it concluded that El Paso failed to comply
with federal law and its internal policies and procedures regarding protection
of its pipeline, resulting in this incident. PHMSA issued a Final
Order to El Paso on November 23, 2009.
PHMSA
has not issued any NOPV’s to Rockies Express and it is not expected that it will
do so. Immediately following the incident, Rockies Express and El
Paso Pipeline Group reached an agreement on a set of additional enhanced safety
protocols designed to prevent the reoccurrence of such an incident.
184
Kinder
Morgan, Inc. Form 10-K
In
September 2007, the family of the deceased bulldozer operator filed a wrongful
death action against Kinder Morgan Energy Partners, Rockies Express and several
other parties in the District Court of Harris County, Texas, 189th Judicial
District, at case number 2007-57916. The plaintiffs seek unspecified
compensatory and exemplary damages plus interest, attorney’s fees and costs of
suit. Kinder Morgan Energy Partners has asserted contractual claims
for complete indemnification for any and all costs arising from this incident,
including any costs related to this lawsuit, against third parties and their
insurers. On March 25, 2008, Kinder Morgan Energy Partners entered
into a settlement agreement with one of the plaintiffs, the decedent’s daughter,
resolving any and all of her claims against it, Rockies Express and its
contractors. In January 2010, Kinder Morgan Energy Partners entered
into a settlement agreement with each of the remaining plaintiffs, effectively
concluding this matter. Kinder Morgan Energy Partners was indemnified
for the full amount of both settlements by one of Rockies Express’
contractors
Charlotte,
North Carolina
On
January 17, 2010, Kinder Morgan Energy Partners’ subsidiary, Southeast Terminals
LLC’s Charlotte #2 Terminal experienced an issue with a pollution control device
known as the Vapor Recovery Unit, which led to a fire and release of gasoline
from the facility to adjacent property and a small creek. There were
no injuries. Kinder Morgan Energy Partners is cooperating fully with
state and federal agencies on the response and remediation.
Barstow,
California
The
United States Department of Navy has alleged that historic releases of methyl
tertiary-butyl ether (“MTBE”), from Calnev Pipe Line Company’s Barstow terminal
(i) have migrated underneath the Navy’s Marine Corps Logistics Base in Barstow,
(ii) have impacted the Navy’s existing groundwater treatment system for
unrelated groundwater contamination not alleged to have been caused by Calnev
and (iii) could affect the Barstow, California Marine Corps Logistic Base’s
water supply system. Although Calnev believes that it has certain
meritorious defenses to the Navy’s claims, it is working with the Navy to agree
upon an Administrative Settlement Agreement and Order on Consent for federal
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)
Removal Action to reimburse the Navy for $0.5 million in past response
actions.
Westridge
Terminal, Burnaby, British Columbia
On
July 24, 2007, a third-party contractor installing a sewer line for the City of
Burnaby struck a crude oil pipeline segment included within Kinder Morgan Energy
Partners’ Trans Mountain pipeline system near its Westridge terminal in Burnaby,
British Columbia, resulting in a release of approximately 1,400 barrels of crude
oil. The release impacted the surrounding neighborhood, several homes
and nearby Burrard Inlet. No injuries were reported. To
address the release, Kinder Morgan Energy Partners initiated a comprehensive
emergency response in collaboration with, among others, the City of Burnaby, the
British Columbia Ministry of Environment, the National Energy Board (Canada),
and the Federal Transportation Safety Board. Cleanup and
environmental remediation is complete and Kinder Morgan Energy Partners has
received a British Columbia Ministry of Environment Certificate of Compliance
confirming complete remediation.
The
National Transportation Safety Board released its investigation report
(“Report”) on the incident on March 18, 2009. The Report confirmed
that an absence of pipeline location marking in advance of excavation and
inadequate communication between the contractor and Kinder Morgan Energy
Partners’ subsidiary Kinder Morgan Canada Inc., the operator of the line, were
the primary causes of the accident. No directives, penalties or
actions of Kinder Morgan Canada Inc. were required as a result of the
Report.
On
July, 22, 2009, the British Columbia Ministry of Environment issued regulatory
charges against the third-party contractor, the engineering consultant to the
sewer line project, Kinder Morgan Canada Inc., and Trans Mountain L.P. (the last
two of which are subsidiaries of Kinder Morgan Energy Partners). The
charges claim that the parties charged caused the release of crude oil, and in
doing so were in violation of various sections of the Environmental, Fisheries
and Migratory Bird Acts. Kinder Morgan Energy Partners is of the view
that the charges have been improperly laid against it, and it intends to
vigorously defend against them.
Litigation
Relating to the “Going Private” Transaction
Beginning
on May 29, 2006, the day after the proposal for the Going Private transaction
was announced, and in the days following, eight putative Class Action lawsuits
were filed in Harris County (Houston), Texas and seven putative Class Action
lawsuits were filed in Shawnee County (Topeka), Kansas against, among others,
Kinder Morgan, Inc., its Board of Directors, the Special Committee of the Board
of Directors, and several corporate officers.
By
order of the Harris County District Court dated June 26, 2006, each of the eight
Harris County cases were consolidated into the Crescente v. Kinder Morgan, Inc. et
al case, Cause No. 2006-33011, in the 164th
Judicial District Court, Harris County, Texas, which challenges the proposed
transaction as inadequate and unfair to Kinder Morgan, Inc.’s
public
185
Kinder
Morgan, Inc. Form 10-K
stockholders.
On September 8, 2006, interim class counsel filed their Consolidated
Petition for Breach of Fiduciary Duty and Aiding and Abetting in which they
alleged that Kinder Morgan, Inc.’s Board of Directors and certain members of
senior management breached their fiduciary duties and the Sponsor Investors
aided and abetted the alleged breaches of fiduciary duty in entering into the
merger agreement. They sought, among other things, to enjoin the merger,
rescission of the merger agreement, disgorgement of any improper profits
received by the defendants, and attorneys’ fees. Defendants filed Answers to the
Consolidated Petition on October 9, 2006, denying the plaintiffs’ substantive
allegations and denying that the plaintiffs are entitled to relief.
By
order of the District Court of Shawnee County, Kansas dated June 26, 2006, each
of the seven Kansas cases were consolidated into the Consol. Case No. 06 C 801;
In Re Kinder Morgan, Inc.
Shareholder Litigation; in the District Court of Shawnee County, Kansas,
Division 12. On August 28, 2006, the plaintiffs filed their Consolidated
and Amended Class Action Petition in which they alleged that Kinder Morgan’s
Board of Directors and certain members of senior management breached their
fiduciary duties and the Sponsor Investors aided and abetted the alleged
breaches of fiduciary duty in entering into the merger agreement. They sought,
among other things, to enjoin the stockholder vote on the merger agreement and
any action taken to effect the acquisition of Kinder Morgan and its assets by
the buyout group, damages, disgorgement of any improper profits received by the
defendants, and attorney’s fees.
In
late 2006, the Kansas and Texas Courts appointed the Honorable Joseph T. Walsh
to serve as Special Master in both consolidated cases “to control all of the
pretrial proceedings in both the Kansas and Texas Class Actions arising out of
the proposed private offer to purchase the stock of the public shareholders of
Kinder Morgan, Inc.” On November 21, 2006, the plaintiffs in In Re Kinder Morgan, Inc.
Shareholder Litigation filed a Third Amended Class Action Petition with
Special Master Walsh. This Petition was later filed under seal with the Kansas
District Court on December 27, 2006.
Following
extensive expedited discovery, the Plaintiffs in both consolidated actions filed
an application for a preliminary injunction to prevent the holding of a special
meeting of shareholders for the purposes of voting on the proposed merger, which
was scheduled for December 19, 2006.
On
December 18, 2006, Special Master Walsh issued a Report and Recommendation
concluding, among other things, that “plaintiffs have failed to demonstrate the
probability of ultimate success on the merits of their claims in this joint
litigation.” Accordingly, the Special Master concluded that the plaintiffs were
“not entitled to injunctive relief to prevent the holding of the special meeting
of Kinder Morgan, Inc. shareholders scheduled for December 19,
2006.”
Plaintiffs
moved for class certification in January 2008.
In
August, September and October 2008, the Plaintiffs in both consolidated cases
voluntarily dismissed without prejudice the claims against those Kinder Morgan,
Inc. directors who did not participate in the buyout (including the dismissal of
the members of the special committee of the board of directors), Kinder Morgan,
Inc. and Knight Acquisition, Inc. In addition, on November 19, 2008, by
agreement of the parties, the Texas trial court issued an order staying all
proceedings in the Texas actions until such time as a final judgment shall be
issued in the Kansas actions. The effect of this stay is that the consolidated
matters will proceed only in the Kansas trial court.
In
February 2009, the parties submitted an agreed upon order which has been entered
by the Kansas trial court certifying a class consisting of “All holders of
Kinder Morgan, Inc. common stock, during the period of August 28, 2006, through
May 30, 2007, and their transferees, successors and assigns. Excluded from the
class are defendants, members of their immediate families or trusts for the
benefit of defendants or their immediate family members, and any majority-owned
affiliates of any defendant.” The parties agreed that the
certification and definition of the above class was subject to revision and
without prejudice to defendants’ right to seek decertification of the class or
modification of the class definition.
The
parties are currently engaged in consolidated discovery in these
matters.
On
August 24, 2006, a civil action entitled City of Inkster Policeman and
Fireman Retirement System, Derivatively on Behalf of Kinder Morgan, Inc.,
Plaintiffs v. Richard D. Kinder, Michael C. Morgan, William V. Morgan, Fayez
Sarofim, Edward H. Austin, Jr., William J. Hybl, Ted A. Gardner, Charles W.
Battey, H.A. True, III, James M. Stanford, Stewart A. Bliss, Edward Randall,
III, Douglas W.G. Whitehead, Goldman Sachs Capital Partners, American
International Group, Inc., The Carlyle Group, Riverstone Holdings LLC, C. Park
Shaper, Steven J. Kean, Scott E. Parker and R. Tim Bradley, Defendants and
Kinder Morgan, Inc., Nominal Defendant; Case 2006-52653, was filed in the
270th
Judicial District Court, Harris County, Texas. This putative derivative lawsuit
was brought against certain of Kinder Morgan, Inc.’s senior officers and
directors, alleging that the proposal constituted a breach of fiduciary duties
owed to Kinder Morgan, Inc. The plaintiff also contends that the Sponsor
Investors aided and abetted the alleged breaches of fiduciary
duty. The plaintiff seeks, among other things, to enjoin the
defendants from consummating the proposal, a declaration that the proposal is
unlawful and unenforceable, the imposition of a constructive trust upon any
benefits improperly received by the defendants, and attorney’s fees. In
November 2007, defendants filed a Joint Motion to Dismiss for Lack of
Jurisdiction, or in the Alternative, Motion for Final Summary Judgment.
Plaintiffs opposed the motion. In February 2008, the court entered a Final
Order
186
Kinder
Morgan, Inc. Form 10-K
granting
defendants’ motion in full, ordering that plaintiff, the City of Inkster
Policeman and Fireman Retirement System, take nothing on any and all of its
claims against any and all defendants. In April 2008, Plaintiffs filed an appeal
of the judgment in favor of all defendants in the Texas Court of Appeal, First
District. In June 2009, the Texas Court of Appeal affirmed the decision of the
trial court dismissing the case in full.
Natural
Gas Pipeline Company of America’s (“NGPL”) Fire
On
October 28, 2009, an explosion and resulting fire occurred in a 10,000 barrel
water tank at NGPL’s compressor station located near St. Elmo,
Illinois. Three Kinder Morgan, Inc. employees were injured as a
result of the explosion and fire. This incident is being investigated
by OSHA, PHMSA and the Chemical Safety Board. To date, no citations
have been issued by any of the investigating agencies and no lawsuits have been
filed.
General
Although
no assurance can be given, we believe that we have meritorious defenses to the
actions set forth in this note and, to the extent an assessment of the matter is
possible, if it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated, we believe that we have established an
adequate reserve to cover potential liability.
Additionally,
although it is not possible to predict the ultimate outcomes, we also believe,
based on our experiences to date, that the ultimate resolution of these matters
will not have a material adverse impact on our business, financial position,
results of operations or cash flows. As of December 31, 2009 and
2008, we have recorded a total reserve for legal fees, transportation rate cases
and other litigation liabilities in the amount of $220.9 million and $234.8 million,
respectively. The reserve is primarily related to various claims from
lawsuits arising from Kinder Morgan Energy Partners’ West Coast products
pipeline transportation rates, and the contingent amount is based on both the
circumstances of probability and reasonability of dollar
estimates. We regularly assess the likelihood of adverse outcomes
resulting from these claims in order to determine the adequacy of our liability
provision.
Environmental
Matters
The
City of Los Angeles v. Kinder Morgan Liquids Terminals, LLC, Shell Oil Company,
Equilon Enterprises LLC; California Superior Court, County of Los Angeles,
Case No. NC041463.
Kinder
Morgan Liquids Terminals LLC, a subsidiary of Kinder Morgan Energy Partners, is
a defendant in a lawsuit filed in 2005 alleging claims for environmental cleanup
costs at the former Los Angeles Marine Terminal in the Port of Los Angeles. The
lawsuit was stayed for the first half of 2009 in order to allow the parties to
work with the regulatory agency concerning the scope of the required
cleanup. The regulatory agency has not yet made any final
decisions concerning cleanup of the former terminal, although the agency is
expected to issue final cleanup orders in 2010.
The
lawsuit stay has now been lifted, and two new defendants have been added to the
lawsuit by the plaintiff in a Third Amended Complaint. Plaintiff’s Third
Amended Complaint alleges that future environmental cleanup costs at the former
terminal will exceed $10 million, and that the plaintiff’s past damages
exceed $2 million. No trial date has yet been set.
Exxon
Mobil Corporation v. GATX Corporation, Kinder Morgan Liquids Terminals, LLC and
Support Terminals Services, Inc.
On
April 23, 2003, Exxon Mobil Corporation (“ExxonMobil”) filed a complaint in the
Superior Court of New Jersey, Gloucester County. The lawsuit relates
to environmental remediation obligations at a Paulsboro, New Jersey liquids
terminal owned by ExxonMobil from the mid-1950s through November 1989, by GATX
Terminals Corporation (“GATX”) from 1989 through September 2000, later owned by
Support Terminals Services, Inc (“Support Terminals”). The terminal
is now owned by Pacific Atlantic Terminals, LLC, and it too is a party to the
lawsuit.
The
complaint seeks any and all damages related to remediating all environmental
contamination at the terminal, and, according to the New Jersey Spill
Compensation and Control Act, treble damages may be available for actual dollars
incorrectly spent by the successful party in the lawsuit. The parties
are currently involved in mandatory mediation and met in June and October
2008. No progress was made at any of the mediations. The
mediation judge has referred the case back to the litigation court
room.
On
June 25, 2007, the New Jersey Department of Environmental Protection, the
Commissioner of the New Jersey Department of Environmental Protection and the
Administrator of the New Jersey Spill Compensation Fund, referred to
collectively as the plaintiffs, filed a complaint against ExxonMobil and Kinder
Morgan Energy Partners’ subsidiary Kinder Morgan Liquids Terminals LLC, formerly
known as GATX. The complaint was filed in Gloucester County, New
Jersey. Both ExxonMobil and Kinder Morgan Liquids Terminals LLC filed
third party complaints against Support Terminals seeking to bring Support
Terminals into the case. Support Terminals filed motions to dismiss
the third party complaints,
187
Kinder
Morgan, Inc. Form 10-K
which
were denied. Support Terminals is now joined in the case and it filed
an Answer denying all claims. The court has consolidated the two
cases.
The
plaintiffs seek the costs and damages that the plaintiffs allegedly have
incurred or will incur as a result of the discharge of pollutants and hazardous
substances at the Paulsboro, New Jersey facility. The costs and
damages that the plaintiffs seek include cleanup costs and damages to natural
resources. In addition, the plaintiffs seek an order compelling the
defendants to perform or fund the assessment and restoration of
those natural resource damages that are the result of the defendants’
actions. Plaintiffs have filed a report asserting that the cost of natural
resource restoration is $81 million. Defendants vigorously dispute
that estimate. In addition, Kinder Morgan Energy Partners believes
that any damages, including restoration damages, would be the responsibility of
the other co-defendants under applicable law and indemnity agreements between
the parties.
Mission
Valley Terminal Lawsuit
In
August 2007, the City of San Diego, on its own behalf and purporting to act
on behalf of the People of the State of California, filed a lawsuit against
Kinder Morgan Energy Partners and several affiliates seeking injunctive relief
and unspecified damages allegedly resulting from hydrocarbon and MTBE impacted
soils and groundwater beneath the city’s stadium property in San Diego arising
from historic operations at the Mission Valley terminal facility. The
case was filed in the Superior Court of California, San Diego County, case
number 37-2007-00073033-CU-OR-CTL. On September 26, 2007, Kinder
Morgan Energy Partners removed the case to the United States District Court,
Southern District of California, case number 07CV1883WCAB. On October
3, 2007, Kinder Morgan Energy Partners filed a Motion to Dismiss all counts of
the Complaint. The court denied in part and granted in part the
Motion to Dismiss and gave the City leave to amend their
complaint. The City submitted its Amended Complaint and Kinder Morgan
Energy Partners filed an Answer. The parties have commenced with
discovery. This site has been, and currently is, under the regulatory
oversight and order of the California Regional Water Quality Control
Board.
Kinder
Morgan Port Manatee Terminal LLC, Palmetto, Florida
On
June 18, 2009, Kinder Morgan Port Manatee Terminal LLC (“KM PMT”) a Kinder
Morgan Energy Partners’ subsidiary, received a Revised Warning Letter from the
Florida Department of Environmental Protection, referred to in this note as the
Florida DEP, advising it of possible regulatory and air permit violations
regarding operations at the Kinder Morgan Port Manatee Florida Terminal
LLC. Kinder Morgan Energy Partners previously conducted a voluntary
internal audit at this facility in March 2008 and identified various
environmental compliance and permitting issues primarily related to air quality
compliance. Kinder Morgan Energy Partners reported its findings from
this audit in a self-disclosure letter to the Florida DEP in March,
2008. Following the submittal of its self-disclosure letter, the
agency conducted numerous inspections of the air pollution control devices at
the terminal and issued this Revised Warning Letter. In addition, KM
PMT received a subpoena from the U.S. Department of Justice for production of
documents related to the service and operation of the air pollution control
devices at the terminal.
In
February 2010, KM PMT entered into a plea agreement with the U.S. Attorney’s
office for the Middle District of Florida to resolve the air permit violations
at the Port Manatee terminal that occurred between 2001 and
2008. During this period of time, former local terminal management
failed to disclose and address the operational condition of control equipment at
the facility, as required by the Clean Air Act. To resolve the
matter, KM PMT has entered into a plea agreement concerning criminal violations
of the Clean Air Act and has agreed to pay a fine of $750,000 and a community
service payment of $250,000 to the National Fish & Wildlife
Foundation. In addition, in order to resolve the matter with the
Florida DEP, KM PMT has entered into a civil Consent Order with the Florida DEP
under which it has agreed to implement an Environmental Compliance Plan and to
pay $336,000 in civil penalties and costs. Kinder Morgan Energy
Partners has fully cooperated with the government’s investigation, and has taken
appropriate measures at the terminal, including replacing and repairing control
equipment, adding new equipment, terminating certain employees, and retraining
current employees on proper environmental procedures.
EPA
Section 114 Information Request
On
January 8, 2010, we received a Clean Air Act Section 114 information request
from the U.S. Environmental Protection Agency (“EPA”) Region V. This
information request requires that we provide the EPA with air permit and various
other information related to natural gas pipeline compressor station operations
in Illinois, Indiana and Ohio. We believe our natural gas compressor
station operations are in substantial compliance with applicable air quality
laws and regulations and are preparing a response to this EPA information
request.
Other
Environmental
We
are subject to environmental cleanup and enforcement actions from time to
time. In particular, the CERCLA generally imposes joint and several
liability for cleanup and enforcement costs on current and predecessor owners
and
188
Kinder
Morgan, Inc. Form 10-K
operators
of a site, among others, without regard to fault or the legality of the original
conduct. Our operations are also subject to federal, state and local
laws and regulations relating to protection of the
environment. Although we believe our operations are in substantial
compliance with applicable environmental law and regulations, risks of
additional costs and liabilities are inherent in pipeline, terminal and carbon
dioxide field and oil field operations, and there can be no assurance that we
will not incur significant costs and liabilities. Moreover, it is
possible that other developments, such as increasingly stringent environmental
laws, regulations and enforcement policies under the terms of authority of those
laws, and claims for damages to property or persons resulting from our
operations, could result in substantial costs and liabilities to
us.
We
are currently involved in several governmental proceedings involving alleged
air, water and waste violations issued by various governmental authorities
related to compliance with environmental regulations. As we receive
notices of non-compliance, we negotiate and settle these matters. We
do not believe that these alleged violations will have a material adverse effect
on our business.
We
are also currently involved in several governmental proceedings involving
groundwater and soil remediation efforts under administrative orders or related
state remediation programs issued by various regulatory authorities related to
compliance with environmental regulations associated with our
assets. We have established a reserve to address the costs associated
with the cleanup.
In
addition, we are involved with and have been identified as a potentially
responsible party in several federal and state superfund
sites. Environmental reserves have been established for those sites
where our contribution is probable and reasonably estimable. In
addition, we are from time to time involved in civil proceedings relating to
damages alleged to have occurred as a result of accidental leaks or spills of
refined petroleum products, natural gas liquids, natural gas and carbon
dioxide. See “—Pipeline Integrity and Releases” above for additional
information with respect to ruptures and leaks from our pipelines.
General
Although
it is not possible to predict the ultimate outcomes, we believe that the
resolution of the environmental matters set forth in this note will not have a
material adverse effect on our business, financial position, results of
operations or cash flows. However, we are not able to reasonably
estimate when the eventual settlements of these claims will occur and changing
circumstances could cause these matters to have a material adverse
impact. As of December 31, 2009, we have accrued an environmental
reserve of $86.3
million, and we believe the establishment of this environmental reserve is
adequate such that the resolution of pending environmental matters will not have
a material adverse impact on our business, cash flows, financial position or
results of operations. In addition, as of December 31, 2009, we have
recorded a receivable of $4.3 million for expected cost recoveries that have
been deemed probable. As of December 31, 2008, our environmental
reserve totaled $85.0 million and our estimated receivable for environmental
cost recoveries totaled $20.9 million, respectively. Additionally,
many factors may change in the future affecting our reserve estimates, such as
(i) regulatory changes, (ii) groundwater and land use near our sites and (iii)
changes in cleanup technology.
Other
We
are a defendant in various lawsuits arising from the day-to-day operations of
our businesses. Although no assurance can be given, we believe, based
on our experiences to date, that the ultimate resolution of such items will not
have a material adverse impact on our business, financial position, results of
operations or cash flows.
17. Regulatory
Matters
The
tariffs we charge for transportation on our interstate common carrier pipelines
are subject to rate regulation by the FERC, under the Interstate Commerce
Act. The Interstate Commerce Act requires, among other things, that
interstate petroleum products pipeline rates be just and reasonable and
nondiscriminatory. Pursuant to FERC Order No. 561, effective January
1, 1995, interstate petroleum products pipelines are able to change their rates
within prescribed ceiling levels that are tied to an inflation
index. FERC Order No. 561-A, affirming and clarifying Order No. 561,
expanded the circumstances under which interstate petroleum products pipelines
may employ cost-of-service ratemaking in lieu of the indexing methodology,
effective January 1, 1995. For each of the years ended December 31,
2009, 2008 and 2007, the application of the indexing methodology did not
significantly affect tariff rates on our interstate petroleum products
pipelines.
Below
is a brief description of our ongoing regulatory matters, including any material
developments that occurred during 2009. This note also contains a
description of any material regulatory matters initiated during 2009 in which we
are involved.
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
189
Kinder
Morgan, Inc. Form 10-K
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 only
occur 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.
Natural
Gas Pipeline Expansion Filings
Rockies
Express Pipeline-East Project
On November 12, 2009,
Kinder Morgan Energy Partners completed and placed into service the remainder of
the Rockies Express-East natural gas pipeline segment, consisting of
approximately 195-miles of 42-inch diameter pipe extending to a terminus near
the town of Clarington in Monroe County, Ohio. Rockies Express-East
is the third and final phase of the Rockies Express Pipeline. On June
29, 2009, Rockies Express Pipeline commenced interim transportation service for
up to 1.6 billion cubic feet per day of natural gas on the first 444 miles of
the Rockies Express-East pipeline segment, which extends from Audrain County,
Missouri to the Lebanon Hub in Warren County, 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 and can make
deliveries to pipeline interconnects owned by Northern Natural Gas Company,
NGPL, ANR, Panhandle Eastern Pipeline Company and a Kinder Morgan Energy
Partners subsidiary, Kinder Morgan Interstate Gas Transmission LLC (referred to
as KMIGT and discussed further below), Missouri Gas Pipeline, Midwestern Gas
Transmission, Trunkline, Columbia Gas, Dominion Transmission, Tennessee Gas,
Texas Eastern, and Texas Gas Transmission. It also connects with the
following local distribution companies: Ameren, Vectren, and Dominion East
Ohio.
Kinder
Morgan Energy Partners owns 50% of Rockies Express Pipeline LLC, the sole owner
of the Rockies Express Pipeline, and virtually all of the pipeline system’s
natural gas transportation capacity has been contracted under long-term firm
commitments from creditworthy shippers. Market conditions for
consumables, labor and construction equipment, along with certain provisions in
the final regulatory orders resulted in increased costs and impacted certain
projected completion dates for the Rockies Express Pipeline, and including
expansions, the current estimate of total Rockies Express Pipeline project
construction costs is approximately $6.8 billion.
Rockies
Express Pipeline LLC Meeker to Cheyenne Expansion Project
Pursuant
to certain rights exercised by EnCana Gas Marketing USA as a result of its
foundation shipper status on the former Entrega Gas Pipeline LLC facilities (now
part of the Rockies Express Pipeline), Rockies Express Pipeline LLC requested
authorization to construct and operate certain facilities that will comprise its
Meeker, Colorado to Cheyenne Hub Rockies Express Pipeline expansion
project. The proposed expansion will add natural gas compression at
its Big Hole compressor station located in Moffat County, Colorado, and its
Arlington compressor station located in Carbon County, Wyoming. Upon
completion, the additional compression will permit the transportation of an
additional 200 million cubic feet per day of natural gas from (i) the Meeker Hub
located in Rio Blanco County, Colorado northward to the Wamsutter Hub located in
Sweetwater County, Wyoming and (ii) the Wamsutter Hub eastward to the Cheyenne
Hub located in Weld County, Colorado.
By
FERC order issued July 16, 2009, Rockies Express Pipeline LLC was granted
authorization to construct and operate this project, and it commenced
construction on August 4, 2009. The expansion is fully
contracted. The additional compression at Big Hole compressor station
was made available as of December 9, 2009 and the additional compression at the
Arlington compressor station is expected to be operational in July
2010. The total FERC authorized cost for the proposed project is
approximately $78 million; however, Rockies Express Pipeline LLC is currently
projecting that the final actual cost will be approximately $25 million
less.
Kinder
Morgan Interstate Gas Transmission Pipeline - Huntsman 2009 Expansion
Project
KMIGT
has filed an application with the FERC for authorization to construct and
operate certain storage facilities necessary to increase the storage capability
of the existing Huntsman Storage Facility, located near Sidney,
Nebraska. KMIGT also requested approval of new incremental rates for
the project facilities under its currently effective Cheyenne Market Center
Service Rate Schedule CMC-2. When fully constructed, the proposed
facilities will create incremental firm storage capacity for up to one million
dekatherms of natural gas, with an associated injection capability of
approximately 6,400 dekatherms per day and an associated deliverability of
approximately 10,400 dekatherms per day. As a result of an open
season, KMIGT and one shipper executed a firm precedent agreement for 100% of
the capacity to be created by the project facilities for a five-year
term. By FERC order issued September 30, 2009, KMIGT was granted
authorization to construct and operate the project, and construction of the
project commenced on October 12, 2009. KMIGT has received FERC
approval to commence the expanded storage service effective February 1,
2010.
190
Kinder
Morgan, Inc. Form 10-K
Kinder
Morgan Louisiana Pipeline LLC – Docket No. CP06-449-000
On
April 16, 2009, Kinder Morgan Energy Partners’ subsidiary Kinder
Morgan Louisiana Pipeline LLC received authorization from the FERC to begin
service on Leg 2 of the approximately 133-mile, 42-inch diameter Kinder Morgan
Louisiana Pipeline. Natural gas transportation service on Leg 2
commenced April 18, 2009, and on June 21, 2009, Kinder Morgan Louisiana Pipeline
LLC completed pipeline construction and placed the remaining portion of the
pipeline system into service. The Kinder Morgan Louisiana Pipeline
project cost approximately $1 billion to complete and 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, to various delivery points in Louisiana. The pipeline
interconnects with multiple third-party pipelines and all of the capacity on the
pipeline system has been fully subscribed by Chevron and Total under 20-year
firm transportation contracts. Total’s contract became effective on
June 21, 2009, and Chevron’s contract became effective on October 1,
2009.
Midcontinent
Express Pipeline LLC – Docket Nos. CP08-6-000 and CP09-56-000
On
April 10, 2009, Midcontinent Express Pipeline LLC placed Zone 1 of the
Midcontinent Express natural gas pipeline system into interim
service. Zone 1 extends from Bennington, Oklahoma to the interconnect
with Columbia Gulf Transmission Company in Madison Parish,
Louisiana. It has a design capacity of approximately 1.5 billion
cubic feet per day. On August 1, 2009, construction of the pipeline
was completed, and Zone 2 was placed into service. Zone 2 extends
from the Columbia Gulf interconnect to the terminus of the system in Choctaw
County, Alabama. It has a design capacity of approximately 1.2
billion cubic feet per day. In an order issued September 17, 2009,
the FERC approved Midcontinent Express’ (i) amendment to move one compressor
station in Mississippi and modify the facilities at another station in Texas
(both stations were among the facilities certificated in the July 2008 Order
authorizing the system’s construction) 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
Midcontinent Express Pipeline is owned by Midcontinent Express Pipeline LLC, a
50/50 joint venture between Kinder Morgan Energy Partners and Energy Transfer
Partners, L.P. The pipeline originates near Bennington, Oklahoma and
extends from southeast Oklahoma, across northeast Texas, northern Louisiana and
central Mississippi, and terminates at an interconnection with the Transco
Pipeline near Butler, Alabama. The approximate 500-mile natural gas
pipeline system connects the Barnett Shale, Bossier Sands and other natural gas
producing regions 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. The entire Midcontinent
Express project cost approximately $2.3 billion to complete.
Fayetteville
Express Pipeline LLC – Docket No.CP09-433-000
Pipeline
system development work continues on the previously announced Fayetteville
Express Pipeline project. The Fayetteville Express Pipeline is owned
by Fayetteville Express Pipeline LLC, another 50/50 joint venture between Kinder
Morgan Energy Partners and Energy Transfer Partners, L.P. The
Fayetteville Express Pipeline is a 187-mile, 42-inch diameter natural gas
pipeline that will begin in Conway County, Arkansas, continue eastward through
White County, Arkansas, and will terminate at an interconnection with Trunkline
Gas Company’s pipeline in Panola County, Mississippi. 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.
On
June 15, 2009, Fayetteville Express filed its certificate application with the
FERC. On October 15, 2009, the FERC issued its Environmental
Assessment finding that, subject to compliance with certain conditions, the
environmental impact of the Fayetteville Express Pipeline could be adequately
mitigated. On December 17, 2009, the FERC approved and issued the
pipeline’s certificate application authorizing construction. 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, and the pipeline is expected to be in service by late 2010 or early
2011. The estimate of the total costs of this pipeline project is
approximately $1.2 billion (consistent with Kinder Morgan Energy Partners’
January 20, 2010 fourth quarter earnings press release).
18. Recent
Accounting Pronouncements
In
August 2009, the FASB issued Accounting Standards Update (“ASU”) ASU No.
2009-05, “Measuring Liabilities at Fair Value.” This ASU amends the
“Fair Value Measurements and Disclosures” Topic of the Codification to provide
further guidance on how to measure the fair value of a liability. ASU
No. 2009-05 is effective for the first reporting period beginning after issuance
(September 30, 2009 for us), and the adoption of this ASU did not have a
material impact on our consolidated financial statements.
In
December 2009, the FASB issued Accounting Standards Update No. 2009-16,
“Accounting for Transfers of Financial Assets” and Accounting Standards Update
No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved
with
191
Kinder
Morgan, Inc. Form 10-K
Variable
Interest Entities.” ASU No. 2009-16 amended the Codification’s
“Transfers and Servicing” Topic to include the provisions included within the
FASB’s previous Statement of Financial Accounting Standards (“SFAS”) No. 166,
“Accounting for Transfers of Financial Assets—an amendment of FASB Statement No.
140,” issued June 12, 2009. ASU No. 2009-17 amended the
Codification’s “Consolidations” Topic to include the provisions included within
the FASB’s previous SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),”
also issued June 12, 2009. These two Updates change the way entities
must account for securitizations and special-purpose entities. ASU
No. 2009-16 requires more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. ASU
No. 2009-17 changes how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. For us, both Updates were effective
January 1, 2010; however, the adoption of these Updates did not have a material
impact on our consolidated financial statements.
On
January 6, 2010, the FASB issued ASU No. 2010-03, “Extractive Industries-Oil and
Gas: Oil and Gas Reserve Estimation and Disclosure (Topic 932),” which aligns
U.S. GAAP with the Security and Exchange Commission’s (“SEC”) final rule on the
“Modernization of Oil and Gas Reporting.” The FASB and SEC disclosure
requirements for oil and gas companies have been updated to include expanded
disclosure for oil and gas activities, and certain definitions have also been
changed that will impact the determination of oil and gas reserve
quantities. The provisions of the new requirements are effective for
registration statements filed on or after January 1, 2010, and for annual
reports for fiscal years ending on or after December 31, 2009. We
have fully adopted the provisions required pursuant to the SEC’s final rule and
ASU No. 2010-03; however, we are not able to disclose the impact of these new
guidelines due to the impracticability of the effort that would be required to
prepare reserve reports under both the old and new rules. For further
disclosures on our oil and gas producing activities, see Note 20.
In
January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair
Value Measurements.” This ASU requires both the gross presentation of
activity within the Level 3 fair value measurement roll forward and the details
of transfers in and out of Level 1 and 2 fair value measurements. It
also clarifies certain disclosure requirements on the level of disaggregation of
fair value measurements and disclosures on inputs and valuation
techniques. For us, this ASU was effective January 1, 2010 (except
for the Level 3 roll forward which is effective for us January 1, 2011);
however, because this ASU pertains to disclosure requirements only, the adoption
of this ASU will not have a material impact on our consolidated financial
statements, except ASU No. 2010-17’s impact on the Power segment as described in
Items 1 and 2, preceding.
19. Quarterly
Financial Data (Unaudited)
|
Three
Months Ended
|
||||||||||||||||
|
March
31,
2009
|
June
30,
2009
|
September
30,
2009
|
December
31,
2009
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Revenues
|
$ | 1,828.9 | $ | 1,693.3 | $ | 1,712.3 | $ | 1.950.7 | ||||||||
|
Operating
income
|
$ | 309.9 | $ | 346.7 | $ | 391.2 | $ | 359.4 | ||||||||
|
Income
from continuing operations before income taxes
|
$ | 225.7 | $ | 275.4 | $ | 329.1 | $ | 269.2 | ||||||||
|
Income
from continuing operations
|
$ | 145.1 | $ | 208.4 | $ | 229.5 | $ | 190.8 | ||||||||
|
Net
income
|
$ | 144.9 | $ | 209.1 | $ | 229.4 | $ | 190.7 | ||||||||
|
Net
income attributable to noncontrolling interests
|
$ | 29.6 | $ | 79.3 | $ | 106.6 | $ | 62.6 | ||||||||
|
Net
income attributable to Kinder Morgan, Inc.
|
$ | 115.3 | $ | 129.8 | $ | 122.8 | $ | 128.1 | ||||||||
|
Three
Months Ended
|
||||||||||||||||
|
March
31,
2008
|
June
30,
2008
|
September
30,
2008
|
December
31,
2008
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Revenues
|
$ | 2,895.0 | $ | 3,560.5 | $ | 3,296.6 | $ | 2,342.7 | ||||||||
|
Operating
income (loss)
|
$ | 476.2 | $ | (3,638.1 | ) | $ | 398.3 | $ | 291.5 | |||||||
|
Income
(loss) from continuing operations before income taxes
|
$ | 319.1 | $ | (3,714.5 | ) | $ | 303.6 | $ | 193.8 | |||||||
|
Income
(loss) from continuing operations
|
$ | 232.0 | $ | (3,733.9 | ) | $ | 215.7 | $ | 83.9 | |||||||
|
Net
income (loss)
|
$ | 231.9 | $ | (3,734.2 | ) | $ | 215.5 | $ | 83.6 | |||||||
|
Net
income attributable to noncontrolling interests
|
$ | 126.2 | $ | 126.4 | $ | 106.8 | $ | 36.7 | ||||||||
|
Net
income (loss) attributable to Kinder Morgan, Inc.
|
$ | 105.7 | $ | (3,860.6 | ) | $ | 108.7 | $ | 46.9 | |||||||
192
Kinder
Morgan, Inc. Form 10-K
20. Supplemental
Information on Oil and Gas Producing Activities (Unaudited)
The
following table sets forth productive wells, service wells and drilling wells in
the oil and gas fields in which Kinder Morgan Energy Partners own interests as
of December 31, 2009. These oil and gas producing fields are located
in the Permian Basin area of West Texas. When used with respect to
acres or wells, “gross” refers to the total acres or wells in which it has a
working interest, and “net” refers to gross acres or wells multiplied, in each
case, by the percentage working interest owned by Kinder Morgan Energy
Partners:
|
Productive Wells
(a)
|
Service Wells
(b)
|
Drilling Wells
(c)
|
||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||
|
Crude
Oil
|
2,290 | 1,423 | 983 | 759 | 4 | 4 | ||||||||||||||||||
|
Natural
Gas
|
5 | 2 | 31 | 15 | - | - | ||||||||||||||||||
|
Total Wells
|
2,295 | 1,425 | 1,014 | 774 | 4 | 4 | ||||||||||||||||||
__________
|
(a)
|
Includes
active wells and wells temporarily shut-in. As of December 31,
2009, Kinder Morgan Energy Partners did not operate any productive wells
with multiple completions.
|
|
(b)
|
Consists
of injection, water supply, disposal wells and service wells temporarily
shut-in. A disposal well is used for disposal of salt water
into an underground formation; a service well is a well drilled in a known
oil field in order to inject liquids that enhance recovery or dispose of
salt water.
|
|
(c)
|
Consists
of development wells in the process of being drilled as of December 31,
2009. A
development well is a well drilled in an already discovered oil
field.
|
The
following table reflects net productive and dry wells that were completed in
each of the three years ended December 31, 2009, 2008 and 2007:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Productive
|
||||||||||||
|
Development
|
42 | 47 | 31 | |||||||||
|
Exploratory
|
- | - | - | |||||||||
|
Dry
|
||||||||||||
|
Development
|
- | - | - | |||||||||
|
Exploratory
|
- | - | - | |||||||||
|
Total
Wells
|
42 | 47 | 31 | |||||||||
__________
|
Note:
|
The
above table includes wells that were completed during each year regardless
of the year in which drilling was initiated, and does not include any
wells where drilling operations were not completed as of the end of the
applicable year. Development wells include wells drilled in the
proved area of an oil or gas
resevoir.
|
The
following table reflects the developed and undeveloped oil and gas acreage that
were held as of December 31, 2009:
|
Gross
|
Net
|
|||||||
|
Developed
Acres
|
72,435 | 67,748 | ||||||
|
Undeveloped
Acres
|
9,715 | 9,056 | ||||||
|
Total
|
82,150 | 76,804 | ||||||
193
Kinder
Morgan, Inc. Form 10-K
Operating
Statistics
Operating
statistics from Kinder Morgan Energy Partners’ oil and gas producing activities
for each of the years 2009, 2008 and 2007 are shown in the following
table:
Results
of Operations for Oil and Gas Producing Activities – Unit Prices and
Costs
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Consolidated
Companies(a)
|
||||||||||||
|
Production
costs per barrel of oil equivalent(b)(c)(d)
|
$ | 11.44 | $ | 15.70 | $ | 12.84 | ||||||
|
Crude
oil production (MBbl/d)
|
37.4 | 36.2 | 35.6 | |||||||||
|
SACROC
crude oil production (MBbl/d)
|
25.1 | 23.3 | 23.0 | |||||||||
|
Yates
crude oil production (MBbl/d)
|
11.8 | 12.3 | 12.0 | |||||||||
|
Natural
gas liquids production (MBbl/d)(d)
|
5.4 | 4.8 | 5.5 | |||||||||
|
Natural
gas liquids production from gas plants(MBbl/d)(e)
|
4.0 | 3.5 | 4.1 | |||||||||
|
Total
natural gas liquids production(MBbl/d)
|
9.5 | 8.3 | 9.6 | |||||||||
|
SACROC
natural gas liquids production (MBbl/d)(d)
|
5.3 | 4.6 | 5.2 | |||||||||
|
Yates
natural gas liquids production (MBbl/d)(d)
|
0.1 | 0.2 | 0.2 | |||||||||
|
Natural
gas production (MMcf/d)(d)(f)
|
0.9 | 1.4 | 0.8 | |||||||||
|
Natural
gas production from gas plants(MMcf/d)(e)(f)
|
0.7 | 0.2 | 0.3 | |||||||||
|
Total
natural gas production(MMcf/d)(f)
|
1.6 | 1.6 | 1.1 | |||||||||
|
Yates
natural gas production (MMcf/d)(d)(f)
|
0.8 | 1.3 | 0.7 | |||||||||
|
Average
sales prices including hedge gains/losses:
|
||||||||||||
|
Crude
oil price per Bbl(g)
|
$ | 49.55 | $ | 49.42 | $ | 36.05 | ||||||
|
Natural
gas liquids price per Bbl(g)
|
$ | 37.70 | $ | 63.48 | $ | 52.22 | ||||||
|
Natural
gas price per Mcf(h)
|
$ | 3.45 | $ | 7.73 | $ | 6.08 | ||||||
|
Total
natural gas liquids price per Bbl(e)
|
$ | 37.96 | $ | 63.00 | $ | 52.91 | ||||||
|
Total
natural gas price per Mcf(e)
|
$ | 3.53 | $ | 7.63 | $ | 5.89 | ||||||
|
Average
sales prices excluding hedge gains/losses:
|
||||||||||||
|
Crude
oil price per Bbl(g)
|
$ | 59.03 | $ | 97.70 | $ | 69.63 | ||||||
|
Natural
gas liquids price per Bbl(g)
|
$ | 37.70 | $ | 63.48 | $ | 52.22 | ||||||
|
Natural
gas price per Mcf(h)
|
$ | 3.45 | $ | 7.73 | $ | 6.08 | ||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated subsidaries.
|
|
(b)
|
Computed
using production costs, excluding transportation costs, as defined by the
SEC. Natural gas volumes were converted to barrels of oil
equivalent using a conversion factor of six mcf of natural gas to one
barrel of oil.
|
|
(c)
|
Production
costs include labor, repairs and maintenance, materials, supplies, fuel
and power, and general and administrative expenses directly related to oil
and gas producing activities.
|
|
(d)
|
Includes
only production attributable to leasehold ownership.
|
|
(e)
|
Includes
production attributable to Kinder Morgan Energy Partners’ ownership in
processing plants and third party processing
agreements.
|
|
(f)
|
Excludes
natural gas production used as fuel.
|
|
(g)
|
Hedge
gains/losses for crude oil and natural gas liquids are included with crude
oil.
|
|
(h)
|
Natural
gas sales were not hedged.
|
The
remaining supplementary information on oil and gas producing activities is
presented as required by the disclosure rules prescribed by the
SEC. The supplemental information includes capitalized costs related
to oil and gas producing activities; costs incurred for the acquisition of oil
and gas producing activities; exploration and development activities; and the
results of operations from oil and gas producing activities.
Supplemental
information is also provided for the estimated quantities of proved oil and gas
reserves; the standardized measure of discounted future net cash flows
associated with proved oil and gas reserves; and a summary of the changes in the
standardized measure of discounted future net cash flows associated with proved
oil and gas reserves.
194
Kinder
Morgan, Inc. Form 10-K
Capitalized
costs consisted of the following (in millions):
Capitalized
Costs Related to Oil and Gas Producing Activities
|
As
of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Consolidated
Companies(a)
|
||||||||||||
|
Wells
and equipment, facilities and other
|
$ | 2,920.7 | $ | 2,595.4 | $ | 2,081.3 | ||||||
|
Leasehold
|
433.5 | 429.8 | 449.3 | |||||||||
|
Total
proved oil and gas properties
|
3,354.2 | 3,025.2 | 2,530.6 | |||||||||
|
Accumulated
depreciation and depletion
|
(1,764.0 | ) | (1,155.6 | ) | (787.6 | ) | ||||||
|
Net
capitalized costs
|
$ | 1,590.2 | $ | 1,869.6 | $ | 1,743.0 | ||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated subsidaries. Includes
capitalized asset retirement costs and associated accumulated
depreciation. There are no capitalized costs associated with
unproved oil and gas properties for the periods
reported.
|
The
costs incurred for property acquisition, exploration and development were as
follows (in millions):
Costs
Incurred in Exploration, Property Acquisitions and Development
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
||||||||||||||
|
Consolidated
Companies(a)
|
|||||||||||||||||
|
Property
Acquisition
|
|||||||||||||||||
|
Proved
oil and gas properties
|
$ | 5.3 | $ | - | $ | - | $ | - | |||||||||
|
Development
|
330.3 | 495.2 | 156.9 | 87.5 | |||||||||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated subsidaries. There are no
costs incurred associated with unproved oil and gas properties for the
periods reported. All capital expenditures were made to develop
our proved oil and gas properties and no exploration costs were incurred
for the periods reported.
|
Kinder
Morgan Energy Partners’ results of operations from oil and gas producing
activities are shown in the following table (in millions):
Results
of Operations for Oil and Gas Producing Activities
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Year
Ended December 31,
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
||||||||||||||
|
2009
|
2008
|
2007
|
2007
|
|||||||||||||
|
Consolidated
Companies(a)
|
||||||||||||||||
|
Revenues(b)
|
$ | 767.0 | $ | 785.5 | $ | 352.0 | $ | 237.7 | ||||||||
|
Expenses:
|
||||||||||||||||
|
Production
costs(c)
|
188.8 | 308.4 | 147.2 | 96.7 | ||||||||||||
|
Other
operating expense
|
53.3 | 99.0 | 34.9 | 22.0 | ||||||||||||
|
Depreciation,
depletion and amortization expenses
|
441.4 | 342.2 | 151.9 | 106.6 | ||||||||||||
|
Total
expenses
|
683.5 | 749.6 | 334.0 | 225.3 | ||||||||||||
|
Results
of operations for oil and gas producing activities
|
$ | 83.5 | $ | 35.9 | $ | 18.0 | $ | 12.4 | ||||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated subsidaries.
|
|
(b)
|
Revenues
include losses attributable to Kinder Morgan Energy Partners’ hedging
contracts of $129.5 million, $693.3 million, $311.5 million and $122.7
million for the years ended December 31, 2009 and 2008, seven months ended
December 31, 2007 and five months ended May 31, 2007,
respectively.
|
|
(c)
|
The
decrease in operating expenses in 2009 compared to 2008 was primarily due
to (i) lower prices charged by the industry’s material and service
providers (for items such as outside services, maintenance, and well
workover services), which impacted rig costs, other materials and
services, and capital and exploratory costs, (ii) lower fuel and utility
rates and (iii) the successful renewal of lower priced service and supply
contracts negotiated since the end of
2008.
|
195
Kinder
Morgan, Inc. Form 10-K
|
(d)
|
Consists
primarily of carbon dioxide
expense.
|
The
table below represents estimates, as of December 31, 2009, of proved crude oil,
natural gas liquids and natural gas reserves prepared by Netherland, Sewell and
Associates, Inc. (independent oil and gas consultants) of Kinder Morgan CO2 Company,
L.P. and its consolidated subsidiaries’ interests in oil and gas properties, all
of which are located in the state of Texas. The technical persons
responsible for preparing the reserves estimates presented in this Note meet the
requirements regarding qualifications, independence, objectivity, and
confidentiality set forth in the standards pertaining to the Estimating and
Auditing of Oil and Gas Reserves Information promulgated by the Society of
Petroleum Engineers. They are independent petroleum engineers,
geologists, geophysicists, and petrophysicists; they do not own an interest in
our oil and gas properties and we do not employ them on a contingent
basis. This data has been prepared using current prices and costs, as
discussed in subsequent paragraphs of this document, and the estimates of
reserves and future revenues in this report conform to the guidelines of the
SEC.
We
believe the geologic and engineering data examined provides reasonable assurance
that the proved reserves are recoverable in future years from known reservoirs
under existing economic and operating conditions. Estimates of proved
reserves are subject to change, either positively or negatively, as additional
information becomes available and contractual and economic conditions
change.
Furthermore,
our management is responsible for establishing and maintaining adequate internal
control over financial reporting, which includes the estimation of our oil and
gas reserves. We maintain internal controls and guidance to ensure
the reliability of our crude oil, natural gas liquids and natural gas reserves
estimations, as follows:
|
|
·
|
no
employee’s compensation is tied to the amount of recorded
reserves;
|
|
|
·
|
we
follow comprehensive SEC compliant internal policies to determine and
report proved reserves, and its reserve estimates are made by independent
oil and gas reservoir engineers or under their direct
supervision;
|
|
|
·
|
we
review our reported proved reserves at each year-end, and at each year-end
the CO2–KMP
business segment managers and the Vice President (President, CO2–KMP)
reviews all significant reserves changes and all new proved developed and
undeveloped reserves additions; and
|
|
|
·
|
our
CO2–KMP
business segment reports independently of our other six remaining
reportable business segments.
|
For
more information on our controls and procedures, see Item 9A “Controls and
Procedures—Management’s Report on Internal Control over Financial Reporting”
included in our Annual Report on Form 10-K for the year ended December 31,
2009.
Proved
oil and gas reserves are the estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, that is, current prices and
costs calculated as of the date the estimate is made. Beginning with
2009, pricing is applied based upon the twelve month unweighted arithmetic
average of the first day of the month price for the year. For prior
years, pricing was based on the price as of year end. Future
development and production costs are determined based upon actual cost at
year-end. Proved developed reserves are the quantities of crude oil,
natural gas liquids and natural gas expected to be recovered through existing
investments in wells and field infrastructure under current operating
conditions. Proved undeveloped reserves require additional
investments in wells and related infrastructure in order to recover the
production.
During
2009, our continued investments in wells and oil field infrastructure resulted
in the reclassification of 7.4 million barrels of crude oil and 0.4 million
barrels of natural gasoline liquids from proved undeveloped to the proved
developed classification of reserves. These
reclassifications reflect the transfer of 29.2% of crude oil and 13.7% of
natural gasoline liquids from the proved undeveloped reserves reported as of
December 31, 2008 to the proved developed classification of reserves reported as
of December 31, 2009. We currently expect that the proved undeveloped
reserves reported as of December 31, 2009 will be developed within the next five
years.
During
2009, we filed estimates of our oil and gas reserves for the year 2008 with the
Energy Information Administration of the U. S. Department of Energy on Form
EIA-23. The data on Form EIA-23 was presented on a different basis,
and included 100% of the oil and gas volumes from Kinder Morgan Energy Partner
operated properties only, regardless of its net interest. The
difference between the oil and gas reserves reported on Form EIA-23 and those
reported in this report exceeds 5%.
196
Kinder
Morgan, Inc. Form 10-K
Reserve
Quantity Information
|
Consolidated
Companies(a)
|
||||||||||||
|
Crude
Oil
(MBbls)
|
NGLs
(MBbls)
|
Natural
Gas
(MMcf)(b)
|
||||||||||
|
Proved
developed and undeveloped reserves:
|
||||||||||||
|
As
of December 31, 2006
|
123,978 | 10,333 | 291 | |||||||||
|
Revisions
of previous estimates(c)
|
10,361 | 2,784 | 1,077 | |||||||||
|
Production
|
(12,984 | ) | (2,005 | ) | (290 | ) | ||||||
|
As
of December 31, 2007
|
121,355 | 11,112 | 1,078 | |||||||||
|
Revisions
of previous estimates(d)
|
(29,536 | ) | (2,490 | ) | 695 | |||||||
|
Production
|
(13,240 | ) | (1,762 | ) | (499 | ) | ||||||
|
As
of December 31, 2008
|
78,579 | 6,860 | 1,274 | |||||||||
|
Revisions
of previous estimates(e)
|
15,900 | 1,018 | (293 | ) | ||||||||
|
Production
|
(13,688 | ) | (1,995 | ) | (298 | ) | ||||||
|
Purchases
of reserves in place
|
53 | 37 | 15 | |||||||||
|
As
of December 31, 2009
|
80,844 | 5,920 | 698 | |||||||||
|
Proved
developed reserves:
|
||||||||||||
|
As
of December 31, 2006
|
69,073 | 5,877 | 291 | |||||||||
|
As
of December 31, 2007
|
70,868 | 5,517 | 1,078 | |||||||||
|
As
of December 31, 2008
|
53,346 | 4,308 | 1,274 | |||||||||
|
As
of December 31, 2009
|
47,058 | 2,665 | 698 | |||||||||
|
Proved
undeveloped reserves:
|
||||||||||||
|
As
of December 31, 2006
|
54,905 | 4,456 | - | |||||||||
|
As
of December 31, 2007
|
50,487 | 5,595 | - | |||||||||
|
As
of December 31, 2008
|
25,233 | 2,552 | - | |||||||||
|
As
of December 31, 2009
|
33,786 | 3,255 | - | |||||||||
__________
| (a) | Amounts relate to Kinder Morgan CO2 Company, L.P. and its consolidated subsidiaries. |
|
(b)
|
Natural
gas reserves are computed at 14.65 pounds per square inch absolute and 60
degrees fahrenheit.
|
|
(c)
|
Associated
with an expansion of the carbon dioxide flood project area of the SACROC
unit.
|
|
(d)
|
Predominantly
due to lower product prices used to determine reserve
volumes.
|
|
(e)
|
Predominantly
due to higher product prices resulting in an expanded economic carbon
dioxide project area.
|
The
standardized measure of discounted cash flows and summary of the changes in the
standardized measure computation from year-to-year are prepared in accordance
with the “Extractive Activities—Oil and Gas” Topic of the
Codification. The assumptions that underly the computation of the
standardized measure of discounted cash flows, presented in the table below, may
be summarized as follows:
|
|
·
|
the
standardized measure includes our estimate of proved crude oil, natural
gas liquids and natural gas reserves and projected future production
volumes based upon year-end economic
conditions;
|
|
|
·
|
for
2009, pricing is applied based upon the 12 month unweighted arithmetic
average of the first day of the month price for the year, and for prior
years was based upon the price as of the end of the
year;
|
|
|
·
|
future
development and production costs are determined based upon actual cost at
year-end;
|
|
|
·
|
the
standardized measure includes projections of future abandonment costs
based upon actual costs at year-end;
and
|
|
|
·
|
a
discount factor of 10% per year is applied annually to the future net cash
flows.
|
197
Kinder
Morgan, Inc. Form 10-K
The
standardized measure of discounted future net cash flows from proved reserves
were as follows (in millions):
Standardized
Measure of Discounted Future Net Cash Flows From
Proved
Oil and Gas Reserves
|
As
of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Consolidated
Companies(a)
|
||||||||||||
|
Future
cash inflows from production
|
$ | 4,898.0 | $ | 3,498.0 | $ | 12,099.5 | ||||||
|
Future
production costs
|
(1,951.5 | ) | (1,671.6 | ) | (3,536.2 | ) | ||||||
|
Future
development costs(b)
|
(1,179.7 | ) | (910.3 | ) | (1,919.2 | ) | ||||||
|
Undiscounted
future net cash flows
|
1,766.8 | 916.1 | 6,644.1 | |||||||||
|
10%
annual discount
|
(503.5 | ) | (257.7 | ) | (2,565.7 | ) | ||||||
|
Standardized
measure of discounted future net cash flows
|
$ | 1,263.3 | $ | 658.4 | $ | 4,078.4 | ||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated subsidaries.
|
|
(b)
|
Includes
abandonment costs.
|
The
following table represents the estimate of changes in the standardized measure
of discounted future net cash flows from proved reserves (in
millions):
Changes
in the Standardized Measure of Discounted Future Net Cash Flows
From
Proved
Oil and Gas Reserves
|
As
of December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Consolidated
Companies(a)
|
||||||||||||
|
Present
value as of January
1
|
$ | 658.4 | $ | 4,078.4 | $ | 2,207.8 | ||||||
|
Changes
during the year:
|
||||||||||||
|
Revenues
less production and other costs(b)
|
(652.7 | ) | (1,012.4 | ) | (722.1 | ) | ||||||
|
Net
changes in prices, production and other costs(b)
|
915.7 | (3,076.9 | ) | 2,153.2 | ||||||||
|
Development
costs incurred
|
330.3 | 495.2 | 244.5 | |||||||||
|
Net
changes in future development costs
|
(445.4 | ) | 231.1 | (547.8 | ) | |||||||
|
Purchases
of reserves in place
|
- | - | - | |||||||||
|
Revisions
of previous quantity estimates(c)
|
391.1 | (417.1 | ) | 510.8 | ||||||||
|
Accretion
of discount
|
65.9 | 392.9 | 198.1 | |||||||||
|
Timing
differences and other
|
- | (32.8 | ) | 33.9 | ||||||||
|
Net
change for the year
|
604.9 | (3,420.0 | ) | 1,870.6 | ||||||||
|
Present
value as of December
31
|
$ | 1,263.3 | $ | 658.4 | $ | 4,078.4 | ||||||
__________
|
(a)
|
Amounts
relate to Kinder Morgan CO2 Company, L.P. and its consolidated
subsidaries.
|
|
(b)
|
Excludes
the effect of losses attributable to Kinder Morgan Energy Partners’
hedging contracts of $129.5 million, $639.3 million and $434.2 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(c)
|
2009
revisions are primarily due to higher product prices resulting in an
expanded economic carbon dioxide project area . 2008 revisions
are predominately due to lower product prices used to determine reserve
volumes. 2007 revisions are associated with an expansion of the
carbon dioxide flood project area for the SACROC
unit.
|
198
Kinder
Morgan, Inc. Form 10-K
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
KINDER
MORGAN, INC.
(Registrant)
|
||
|
By
|
/s/
Kimberly A. Dang
|
||
|
|
Kimberly
A. Dang
Vice
President and Chief Financial Officer
|
||
|
Date:
March 5, 2010
|
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities set forth below and as of the date set forth above.
|
|
||
|
/s/
Kimberly A. Dang
|
Vice
President and Chief Financial Officer (Principal
|
|
|
Kimberly
A. Dang
|
Financial
Officer and Principal Accounting Officer)
|
|
|
|
||
|
/s/
Richard D. Kinder
|
Director,
Chairman and Chief Executive Officer
|
|
|
Richard
D. Kinder
|
(Principal
Executive Officer)
|
|
|
|
||
|
/s/
Kenneth A. Pontarelli
|
Director
|
|
|
Kenneth
A. Pontarelli
|
||
|
|
||
|
/s/
C. Park Shaper
|
Director
|
|
|
C.
Park Shaper
|
199