Knight Inc. Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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þ
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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, 2007
or
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o
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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
Knight
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
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(Address
of principal executive offices, including zip
code)
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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:
Yeso No þ
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act:
Yes
o No
þ
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 þ No o
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. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer o Accelerated
filer o Non-accelerated
filer þ Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was $0 at June 29, 2007.
The
number of shares outstanding of the registrant’s common stock, $0.01 par value,
as of March 28, 2008 was 100 shares.
Knight
Inc. Form 10-K
CONTENTS
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2
Knight
Inc. Form 10-K
KNIGHT
INC. AND SUBSIDIARIES
CONTENTS
(Continued)
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209-211
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Note: Individual
financial statements of the parent company are omitted pursuant to the
provisions of Accounting Series Release No. 302.
3
Knight
Inc. Form 10-K
In
this report, unless the context requires otherwise, references to “we,” “us,”
“our,” or the “Company” are intended to mean Knight Inc. (a private Kansas
corporation incorporated on May 18, 1927, formerly known as Kinder Morgan, Inc.)
and its consolidated subsidiaries. All dollars are United States dollars, except
where stated otherwise. Canadian dollars are designated as C$. To convert
December 31, 2007 balances denominated in Canadian dollars to U.S. dollars, we
used the December 31, 2007 Bank of Canada closing exchange rate of 1.012 U.S.
dollars per Canadian dollar. 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 “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. The following discussion should be read in conjunction with
the accompanying Consolidated Financial Statements and related
Notes.
(A)
General Development of Business
We
are one of the largest energy transportation and storage companies in North
America. We own all the common equity of the general partner of Kinder Morgan
Energy Partners, L.P. (“Kinder Morgan Energy Partners”), a publicly traded
pipeline limited partnership, as well as a significant limited partner interest
in Kinder Morgan Energy Partners. Due to our implementation of Emerging Issues
Task Force (“EITF”) No. 04-5, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights, we have
included Kinder Morgan Energy Partners and its consolidated subsidiaries in our
consolidated financial statements effective January 1, 2006. This means that the
accounts, balances and results of operations of Kinder Morgan Energy Partners
and its consolidated subsidiaries are now presented on a consolidated basis with
ours and those of our other consolidated subsidiaries for financial reporting
purposes, instead of equity method accounting as previously reported. See Note
1(B) of the accompanying Notes to Consolidated Financial Statements. Additional
information concerning our investment in Kinder Morgan Energy Partners and its
various businesses is contained in Note 2 of the accompanying Notes to
Consolidated Financial Statements and in Kinder Morgan Energy Partners’ 2007
Annual Report on Form 10-K. We operate or own an interest in approximately
37,000 miles of pipelines and 165 terminals. Our pipelines transport natural
gas, gasoline, 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 independent provider of carbon dioxide,
commonly called “CO2,” for
enhanced oil recovery projects in North America. Our executive offices are
located at 500 Dallas Street, Suite 1000, Houston, Texas 77002 and our telephone
number is (713) 369-9000.
In
May 2001, Kinder Morgan Management, LLC (“Kinder Morgan Management”), one of our
indirect subsidiaries (we own its only two voting shares), issued and sold its
limited liability shares in an underwritten initial public offering. The net
proceeds from the offering were used by Kinder Morgan Management to buy i-units
from Kinder Morgan Energy Partners for $991.9 million. Upon purchase of the
i-units, Kinder Morgan Management became a limited partner in Kinder Morgan
Energy Partners and was delegated by Kinder Morgan Energy Partners’ general
partner, the responsibility to manage and control the business and affairs 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.
In
the initial public offering, we purchased 10% of the Kinder Morgan Management
shares, with the balance purchased by the public. The equity interest in Kinder
Morgan Management (which is consolidated in our financial statements) owned by
the public is reflected as minority interest on our balance sheet. The earnings
recorded by Kinder Morgan Management that are attributed to its shares held by
the public are reported as “minority interest” in our Consolidated Statements of
Operations. Subsequent to the initial public offering by Kinder Morgan
Management of its shares, our ownership interest in Kinder Morgan Management has
changed because (i) we recognize our share of Kinder Morgan Management’s
earnings, (ii) we record the receipt of distributions attributable to the Kinder
Morgan Management shares that we own, (iii) Kinder Morgan Management has made
additional sales of its shares (both through public and private offerings), (iv)
pursuant to an option feature that was previously available to Kinder Morgan
Management shareholders but no longer exists, we exchanged certain of the Kinder
Morgan Energy Partners’ common units held by us for Kinder Morgan Management
shares held by the public and (v) we sold some Kinder Morgan Management shares
we owned in order to generate taxable gains to offset expiring tax loss
carryforwards. At December 31, 2007, we owned 10.3 million Kinder Morgan
Management shares representing 14.3% of Kinder Morgan Management’s total
outstanding shares. Additional information concerning the business of, and our
investment in and obligations to, Kinder Morgan Management is contained in Note
3 of the accompanying Notes to Consolidated Financial Statements and in Kinder
Morgan Management’s 2007 Annual Report on Form 10-K.
4
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Items 1. and 2. Business
and Properties. (continued)
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Knight
Form 10-K
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On
November 30, 2005, we completed the acquisition of Terasen Inc., referred to in
this report as Terasen. At the time of acquisition, Terasen’s two core
businesses were its natural gas distribution business, (which we subsequently
sold, see below) and its petroleum pipeline business (part of which, Corridor
Pipeline, we subsequently sold, see below).
On
August 28, 2006, we entered into an agreement and plan of merger whereby
generally each share of our common stock would be converted into the right to
receive $107.50 in cash without interest. We in turn would merge with a wholly
owned subsidiary of Knight Holdco LLC, a privately owned company in which
Richard D. Kinder, our Chairman and Chief Executive Officer, would be a major
investor. Our board of directors, on the unanimous recommendation of a special
committee composed entirely of independent directors, approved the agreement and
recommended that our stockholders approve the merger. Our stockholders voted to
approve the proposed merger agreement at a special meeting held on December 19,
2006. On May 30, 2007, the merger closed, with Kinder Morgan, Inc. continuing as
the surviving legal entity and subsequently renamed “Knight Inc.” Additional
investors in Knight Holdco LLC include the following: other senior members of
our management, most of whom are also senior officers of Kinder Morgan G.P.,
Inc. and of Kinder Morgan Management; our co-founder William V. Morgan; Kinder
Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; and affiliates
of (i) Goldman Sachs Capital Partners; (ii) American International Group, Inc.;
(iii) The Carlyle Group; and (iv) Riverstone Holdings LLC. This transaction is
referred to in this report as “the Going Private transaction.” We are now
privately owned. See Note 1(B) of the accompanying Notes to Consolidated
Financial Statements for a discussion of our new basis of accounting as a result
of this transaction. Upon closing of the Going Private transaction, our common
stock is no longer traded on the New York Stock Exchange.
In
February 2007, we entered into a definitive agreement to sell our Canada-based
retail natural gas distribution operations to Fortis Inc., for approximately
C$3.7 billion including cash and assumed debt, and as a result of a
redetermination of fair value in light of this proposed sale, we recorded a
goodwill impairment charge in the fourth quarter of 2006. This sale was
completed in May 2007 (see Notes 6 and 7 of the accompanying Notes to
Consolidated Financial Statements). In prior periods, we referred to these
operations principally as the Terasen Gas business segment.
In
March 2007, we entered into an agreement to sell the Corridor Pipeline System to
Inter Pipeline Fund in Canada for approximately C$760 million, including debt.
This sale was completed in June 2007. Inter Pipeline Fund also assumed all of
the debt associated with the expansion taking place on Corridor at the time of
the sale.
Also
in March 2007, we completed the sale of our U.S. retail natural gas distribution
and related operations to GE Energy Financial Services, a subsidiary of General
Electric Company, and Alinda Investments LLC for $710 million and an adjustment
for working capital. In prior periods, we referred to these operations as the
Kinder Morgan Retail business segment. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the financial results of the Terasen Gas,
Corridor and Kinder Morgan Retail operations have been reclassified to
discontinued operations for all periods presented. Refer to the heading
“Discontinued Operations” included elsewhere in Management’s Discussion and
Analysis for additional information regarding discontinued
operations.
On
April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to
Kinder Morgan Energy Partners for approximately $550 million. The transaction
was approved by the independent members of our board of directors and those of
Kinder Morgan Management following the receipt, by each board, of separate
fairness opinions from different investment banks. The Trans Mountain pipeline
system transports crude oil and refined products from Edmonton, Alberta, Canada
to marketing terminals and refineries in British Columbia and the State of
Washington. An impairment of the Trans Mountain pipeline system was recorded in
the first quarter of 2007; see Note 1(I) of the accompanying Notes to
Consolidated Financial Statements.
On
July 27, 2007, Kinder Morgan Energy Partners’ general partner, Kinder Morgan
G.P., Inc., a Delaware corporation and our subsidiary, issued and sold 100,000
shares of Series A fixed-to-floating rate term cumulative preferred stock due
2057, receiving net proceeds of $98.6 million. The consent of holders of a
majority of these preferred shares is required with respect to a commencement of
or a filing of a voluntary bankruptcy proceeding with respect to Kinder Morgan
Energy Partners, or either of two of Kinder Morgan Energy Partners’
subsidiaries: SFPP, L.P. and Calnev Pipe Line LLC.
On
December 10, 2007, we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment to Myria Acquisition Inc.
(“Myria”), a Delaware corporation, for approximately $5.9 billion, subject to
certain adjustments. The sale closed on February 15, 2008. We will continue to
operate NGPL’s assets pursuant to a 15-year operating agreement. Myria is
comprised of a syndicate of investors led by Babcock & Brown, an
international investment and specialized fund and asset management
group.
Our
business strategy is to: (i) focus on fee-based energy transportation and
storage assets that are core to the energy infrastructure of growing markets
within North America, (ii) increase utilization of our existing assets while
controlling costs, operating safely and employing environmentally sound
operating practices, (iii) leverage economies of scale from
5
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Items 1. and 2. Business
and Properties. (continued)
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Knight
Form 10-K
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incremental
acquisitions and expansions of properties that fit within our strategy and are
accretive to cash flow and (iv) maximize the benefits of our financial structure
to create and return value to our stockholders as discussed
following.
We
intend to maintain a capital structure that provides flexibility and stability,
while returning value to our shareholders. During 2007, we utilized cash
generated from operations (including cash received from distributions
attributable to our investment in Kinder Morgan Energy Partners) to pay common
stock dividends (prior to the Going Private transaction), finance our capital
expenditures program and pay down debt. We also made significant asset sales
during 2007, including the sale of our U.S. retail natural gas distribution and
related operations, the Terasen Gas business segment, the Corridor pipeline
system, and the TransMountain pipeline system, which we sold to Kinder Morgan
Energy Partners. We used the proceeds from these sales to pay down debt. In
addition, during 2007, we announced the sale of our Colorado Power assets and an
80% interest in our Natural Gas Pipeline Company of America business segment.
These sales closed in the first quarter of 2008 and the proceeds from these
sales were also used to pay down debt. We expect to benefit from accretive
acquisitions and capital expansions (primarily by Kinder Morgan Energy
Partners). Kinder Morgan Energy Partners has a multi-year history of making
accretive investments, which benefit us through our limited and general partner
interests. This strategy is expected to continue, although we can provide no
assurance that such investments will occur in the future.
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 respective boards of directors, if required. 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.
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 “Risk Factors” elsewhere in this report, there are factors that
could affect our ability to carry out our strategy or affect its level of
success even if carried out.
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·
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Going Private
Transaction
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As
discussed above, on May 30, 2007, we completed the Going Private transaction,
which was financed through a combination of debt and equity financing. The debt
financing consisted of senior secured credit facilities provided by a credit
agreement and related security and other agreements. Our obligations under the
credit agreement are secured by liens on the capital stock of each of our wholly
owned subsidiaries and substantially all of our and our subsidiaries’ assets
(excluding those of Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners,
Kinder Morgan Management and their respective subsidiaries). See Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources—Significant Financing Transactions”
for further details regarding the debt financing.
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·
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Sale of U.S. Retail
Operations
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In
March 2007, we completed the sale of our U.S. retail natural gas distribution
and related operations to GE Energy Financial Services, a subsidiary of General
Electric Company, and Alinda Investments L.L.C. for $710 million and an
adjustment for working capital. The financial results of these operations have
been reclassified to discontinued operations for all periods
presented.
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·
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Sale of Terasen Gas Business
Segment
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In
May 2007, we completed the sale of our Canada-based retail natural gas
distribution operations to Fortis Inc. for approximately $3.4 billion (C$3.7
billion) including cash and assumed debt. The financial results of these
operations have been reclassified to discontinued operations for all periods
presented.
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·
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Sale of Corridor Pipeline
System
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In
June 2007, we completed the sale of the Corridor Pipeline System to Inter
Pipeline Fund for approximately $711 million (C$760 million) plus assumption of
all construction debt. The financial results of these operations have been
reclassified to discontinued operations for all periods presented.
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·
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Sale of 80% Ownership Interest
in NGPL Business Segment
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On
December 10, 2007, we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment to Myria for approximately $5.9
billion, subject to certain adjustments. The sale closed on February 15, 2008.
We will continue to operate NGPL’s assets pursuant to a 15-year operating
agreement. Myria is comprised of a syndicate of investors led by Babcock &
Brown, an international investment and specialized fund and asset management
group.
6
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Items 1. and 2. Business
and Properties. (continued)
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Knight
Form 10-K
|
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·
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Debt Securities
Buyback
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On
February 21, 2008, we commenced a cash tender offer to purchase up to $1.6
billion of Knight Inc.’s outstanding debt securities. In March 2008, we paid
$1.6 billion in cash to repurchase $1.67 billion par value of debt securities.
Proceeds from the completed sale of an 80% ownership interest in our NGPL
business segment were used to fund this debt security purchase.
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·
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Repayment of Senior Secured
Credit Facilities Debt
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In
June 2007, we repaid the borrowings outstanding under the $455 million Tranche C
term loan portion of our senior secured credit facilities. On February 15, 2008,
we used a portion of the proceeds from the above-referenced sale of an interest
in our NGPL business segment to repay the remaining $4.6 billion outstanding
under our senior secured credit facilities.
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·
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NGPL Re-Contracting
Transportation and Storage
Capacity
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In
2007, NGPL extended long-term firm transportation and storage contracts with
some of its largest shippers. Combined, the contracts represent approximately
0.44 million Dth per day of annual firm transportation service.
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·
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NGPL Storage
Expansions
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In
April 2007, NGPL placed into service a $72.3 million expansion at its North
Lansing field in East Texas that added 10 Bcf of natural gas storage service
capacity. On December 7, 2007, NGPL filed an application with the Federal Energy
Regulatory Commission, referred to in this report as the FERC, seeking approval
to expand its Herscher Galesville storage field in Kankakee County, Illinois to
add 10 Bcf of incremental firm storage service for five expansion shippers. This
project is fully supported by contracts ranging from five to ten
years.
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·
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NGPL Amarillo-Gulf Coast Line
Expansion
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NGPL
added a new compressor station to Segment 17 of its Amarillo-Gulf Coast line
that provides 140 MMcf per day of additional capacity. The $17 million project
was placed in service January 6, 2007, and all of the additional capacity is
fully contracted.
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·
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NGPL Louisiana Line
Expansion
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In
October 2006, NGPL filed with the FERC seeking approval to expand its Louisiana
Line by 200,000 Dth per day. This $88 million project is supported by five-year
agreements that fully subscribe the additional capacity. On July 2, 2007, the
FERC issued an order granting construction and operation of the requested
facilities. NGPL accepted the order on July 6, 2007. This expansion was placed
in service during the first quarter of 2008.
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·
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Kinder Morgan Illinois
Pipeline
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In
July 2007, Kinder Morgan Illinois Pipeline received FERC approval to build
facilities to supply natural gas transportation service for The Peoples Gas
Light and Coke Co., who has signed a 10-year agreement for all the capacity. The
$18 million project, which has a capacity of 360,000 Dth per day, was placed in
service in December 2007.
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·
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Products Pipelines – KMP North
System Sale
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Effective
October 5, 2007, Kinder Morgan Energy Partners sold its North System natural gas
liquids and refined petroleum products pipeline system and its 50% ownership
interest in the Heartland Pipeline Company to ONEOK Partners, L.P. for
approximately $298.6 million in cash. We accounted for the North System business
as a discontinued operation for all periods presented in this
report.
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·
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Products Pipelines – KMP
Pacific Operations East Line
Expansion
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In
December 2007, Kinder Morgan Energy Partners completed a second expansion of its
Pacific operations’ East Line pipeline segment. This expansion consisted of
replacing approximately 130 miles of 12-inch diameter pipe between El Paso,
Texas and Tucson, Arizona with new 16-inch diameter pipe, constructing
additional pump stations, and adding new storage tanks at Tucson. The project,
completed at a cost of approximately $154 million, will increase East Line
capacity by 36% (to approximately 200,000 barrels per day) to meet the demand
for refined petroleum products, and will provide a platform for further
incremental expansions through horsepower additions to the system.
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·
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Products Pipelines – KMP CALNEV
Pipeline System Expansion
|
On
July 23, 2007, following the FERC’s expedited approval of Kinder Morgan Energy
Partners’ CALNEV Pipeline’s proposed tariff rate structure, Kinder Morgan Energy
Partners announced its continuing development of the approximate $426 million
expansion of the pipeline system into Las Vegas, Nevada. The expansion involves
the construction of a new 16-inch diameter pipeline, which will parallel
existing utility corridors between Colton, California and Las Vegas in order to
minimize environmental impacts. System capacity would increase to approximately
200,000 barrels per day upon completion of the expansion, and could be increased
as necessary to
7
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Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
over
300,000 barrels per day with the addition of pump stations. The CALNEV expansion
is expected to be complete in early 2011.
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|
·
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Products Pipelines – KMP Cochin
Pipeline System Ownership Interest Increased to
100%
|
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 from affiliates of BP 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.
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·
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Natural Gas Pipelines – KMP
Rockies Express Pipeline
|
On
February 14, 2007, the first phase of the Rockies Express pipeline system, the
327-mile REX-Entrega Project, was placed in service at a cost of approximately
$745 million and provided up to 500 million cubic feet per day of natural gas
capacity from the Meeker Hub in Rio Blanco County, Colorado and Wamsutter Hub in
Sweetwater County, Wyoming to the Cheyenne Hub in Weld County,
Colorado.
The
Rockies Express pipeline project is an approximate $4.9 billion, 1,679-mile
natural gas pipeline system, which is owned and currently being developed by
Rockies Express Pipeline LLC. The Rockies Express pipeline project is to be
completed in three phases: (i) a 327-mile, $745 million pipeline running from
the Meeker Hub to the Cheyenne Hub with a nominal capacity of 500 million cubic
feet per day; (ii) a 713-mile, $1.6 billion pipeline from the Cheyenne Hub to an
interconnect in Audrain County, Missouri, transporting up to 1.5 billion cubic
feet per day; and (iii) a 639-mile, $2.6 billion pipeline from Audrain County,
Missouri to Clarington, located in Monroe County, Ohio. When fully completed,
the Rockies Express pipeline system will have the capability to transport 1.8
billion cubic feet per day of natural gas, and binding firm commitments have
been secured for all of the pipeline capacity. On January 12, 2008, interim
service on the REX-West Project (second phase) commenced. Full service on the
REX-West system for 1.5 billion cubic feet per day of contracted capacity is
expected to commence in mid-April 2008. See Items 1 and 2 Business and
Properties, (C) Narrative Description of Business, Natural Gas Pipelines – KMP,
Rockies Express Pipeline for more information.
|
|
·
|
Natural Gas Pipelines – KMP
Texas Intrastate Pipeline
Project
|
On
May 14, 2007, Kinder Morgan Energy Partners announced plans to construct a $72
million natural gas pipeline designed to bring new supplies out of East Texas to
markets in the Houston and Beaumont, Texas areas. The new pipeline will consist
of approximately 63 miles of 24-inch diameter pipe and multiple interconnections
with other pipelines. It will connect the Kinder Morgan Tejas system in Harris
County, Texas to the Kinder Morgan Texas Pipeline system in Polk County near
Goodrich, Texas. In addition, Kinder Morgan Energy Partners entered into a
long-term binding agreement with CenterPoint Energy Services, Inc. to provide
firm transportation for a significant portion of the initial project capacity,
which will consist of approximately 225 million cubic feet per day of natural
gas using existing compression and be expandable to over 400 million cubic feet
per day with additional compression.
|
|
·
|
Natural Gas Pipelines – KMP
Kinder Morgan Louisiana
Pipeline
|
On
June 22, 2007, the FERC issued an order granting construction and operation of
the Kinder Morgan Louisiana Pipeline project, and Kinder Morgan Energy Partners
officially accepted the order on July 10, 2007. The Kinder Morgan Louisiana
Pipeline is expected to cost approximately $510 million and will provide
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 and will provide
interconnects with many other natural gas pipelines, including NGPL. The project
is supported by fully subscribed capacity and long-term customer commitments
with Chevron and Total and is expected to be in service by January 1,
2009.
|
|
·
|
Natural Gas Pipelines – KMP
Kinder Morgan Interstate Gas Transmission Colorado Lateral
Project
|
On
August 6, 2007, Kinder Morgan Interstate Gas Transmission LLC filed for
regulatory approval to construct and operate a 41-mile, $29 million natural gas
pipeline from the Cheyenne Hub to markets in and around Greeley, Colorado. When
completed, the Colorado Lateral expansion project will provide firm
transportation of up to 55 million cubic feet per day to a local utility under
long-term contract. On February 21, 2008, the FERC granted the certification
application.
|
|
·
|
Natural Gas Pipelines – KMP
Midcontinent Express
Pipeline
|
On
October 9, 2007, Midcontinent Express Pipeline LLC filed an application with the
FERC requesting a certificate of public convenience and necessity that would
authorize construction and operation of the approximate 500-mile
8
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
Midcontinent
Express Pipeline natural gas transmission system. Kinder Morgan Energy Partners
currently owns a 50% interest in Midcontinent Express Pipeline LLC and Energy
Transfer Partners L.P. owns the remaining interest. The Midcontinent Express
Pipeline will create long-haul, firm natural gas transportation takeaway
capacity, either directly or indirectly, from natural gas producing regions
located in Texas, Oklahoma and Arkansas. The total project is expected to cost
approximately $1.3 billion, and will have an initial transportation capacity of
approximately 1.4 billion cubic feet per day of natural gas.
The
Midcontinent Express Pipeline will originate near Bennington, Oklahoma and
terminate at an interconnect with Williams’ Transcontinental Gas Pipe Line
Corporation’s natural gas pipeline system near Butler, Alabama. It will also
connect to NGPL’s natural gas pipeline and to Energy Transfer Partners’ 135-mile
natural gas pipeline, which extends from the Barnett Shale natural gas producing
area in North Texas to an interconnect with the Texoma Pipeline near Paris,
Texas. The Midcontinent Express Pipeline now has long-term binding commitments
from multiple shippers for approximately 1.2 billion cubic feet per day and, in
order to provide a seamless transportation path from various locations in
Oklahoma, the pipeline has also executed a firm capacity lease agreement with
Enogex, Inc., an Oklahoma-based intrastate natural gas gathering and pipeline
company that is wholly owned by OGE Energy Corp. Subject to the receipt of
regulatory approvals, construction of the pipeline is expected to commence in
August 2008 and the pipeline is expected to be in service during the first
quarter of 2009.
In
January 2008, in conjunction with the signing of additional binding
transportation commitments, Midcontinent Express Pipeline LLC and MarkWest
Pioneer, LLC (“Mark West”) entered into an option agreement that provides
MarkWest a one-time right to purchase a 10% ownership interest in Midcontinent
Express Pipeline LLC after the pipeline is fully constructed and placed into
service. If the option is exercised, Kinder Morgan Energy Partners and Energy
Transfer Partners will each own 45% of Midcontinent Express Pipeline LLC, while
MarkWest will own the remaining 10%.
|
|
·
|
Natural Gas Pipelines – KMP
Kinder Morgan Interstate Gas Transmission Pipeline System
Expansion
|
On
October 17, 2007, Kinder Morgan Energy Partners announced that it will invest
approximately $23 million to expand its Kinder Morgan Interstate Gas
Transmission pipeline system in order to serve five separate industrial plants
(four of which produce ethanol) near Grand Island, Nebraska. The project is
fully subscribed with long-term customer contracts, and subject to the receipt
of regulatory approvals filed December 21, 2007, the expansion project is
expected to be fully operational by the fall of 2008.
|
|
·
|
Natural Gas Pipelines – KMP
TransColorado Gas Transmission
Expansion
|
On
December 31, 2007, TransColorado Gas Transmission LLC completed an approximate
$50 million expansion to provide up to 250 million cubic feet per day of natural
gas transportation, starting January 1, 2008, from the Blanco Hub to an
interconnect with the Rockies Express pipeline system at the Meeker
Hub.
|
|
·
|
CO2 – KMP Carbon Dioxide Expansion
Projects
|
On
January 17, 2007, Kinder Morgan Energy Partners announced that its CO2 business
segment will invest approximately $120 million to further expand its operations
and enable it to meet the increased demand for carbon dioxide in the Permian
Basin. The expansion activities will take place in southwest Colorado and
include developing a new carbon dioxide source field (named the Doe Canyon Deep
Unit that went in service during the first quarter of 2008) and adding
infrastructure at both the McElmo Dome Unit and the Cortez Pipeline. The entire
expansion is expected to be completed by the middle of 2008.
|
|
·
|
Terminals – KMP Biodiesel
Liquids Terminal Expansion
|
On
February 28, 2007, Kinder Morgan Energy Partners announced plans to invest up to
$100 million to expand its liquids terminal facilities in order to help serve
the growing biodiesel market. Kinder Morgan Energy Partners entered into
long-term agreements as lessor with Green Earth Fuels, LLC to build tankage that
will handle biodiesel at Kinder Morgan Energy Partners’ Houston Ship Channel
liquids facility. Green Earth Fuels, LLC completed construction on an 86 million
gallon biodiesel production facility at Kinder Morgan Energy Partners’ Galena
Park, Texas liquids terminal in the fourth quarter of 2007.
|
|
·
|
Terminals – KMP Vancouver
Wharves Terminal Acquisition
|
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 $57.2
million, consisting of $38.8 million in cash and $18.4 million in assumed
liabilities. The Vancouver Wharves facility is located on the north shore of the
Port of Vancouver’s main harbor, and includes five deep-sea vessel berths
situated on a 139-acre site. The terminal assets include significant rail
infrastructure, dry bulk and liquid storage, and material handling systems which
allow the terminal to handle over 3.5 million tons of cargo
annually.
9
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
|
|
·
|
Terminals – KMP Louisiana
Terminal Assets Expansion
|
On
July 10, 2007, Kinder Morgan Energy Partners announced a combined $41 million
investment for two terminal expansions to help meet the growing need for
terminal services in key markets along the Gulf Coast. The investment consists
of (i) the construction of a terminal that will include liquids storage,
transfer and packaging facilities at the Rubicon Plant site in Geismar,
Louisiana; and (ii) the purchase of liquids storage tanks from Royal Vopak in
Westwego, Louisiana. The tanks have a storage capacity of approximately 750,000
barrels for vegetable oil, biodiesel, ethanol and other liquids products. The
new terminal being built in Geismar will be capable of handling inbound and
outbound material via pipeline, rail, truck and barge/vessel. Construction is
expected to be complete by the fourth quarter of 2008.
|
|
·
|
Terminals – KMP Steel Terminals
Acquisition
|
Effective
September 1, 2007, Kinder Morgan Energy Partners acquired five bulk terminal
facilities from Marine Terminals, Inc. for an aggregate consideration of
approximately $101.5 million, consisting of $100.3 million in cash and an
assumed liability of $1.2 million. The acquired assets and operations are
primarily involved in the handling and storage of steel and alloys, and also
provide stevedoring and harbor services, scrap handling, and scrap processing
services to customers in the steel and alloys industry. The operations are
located in Blytheville, Arkansas; Decatur, Alabama; Hertford, North Carolina;
and Berkley, South Carolina. Combined, the five facilities handled approximately
13.7 million tons of steel products in 2006. Under long-term contracts, the
acquired terminal facilities will continue to provide handling, processing,
harboring and warehousing services to Nucor Corporation, one of the nation’s
largest steel and steel products companies.
|
|
·
|
Terminals – KMP Petroleum Coke
Terminal Project
|
On
January 16, 2008, Kinder Morgan Energy Partners announced that it plans to
invest approximately $56 million to construct a petroleum coke terminal at the
BP refinery located in Whiting, Indiana. Kinder Morgan Energy Partners has
entered into a long-term contract to build and operate the facility, which will
handle approximately 2.2 million tons of petroleum coke per year from a coker
unit BP plans to construct to process heavy crude oil from Canada. The facility
is expected to be in service in mid-year 2011.
|
|
·
|
Trans Mountain – KMP Sale of
Trans Mountain to Kinder Morgan Energy
Partners
|
On
April 30, 2007, we sold the Trans Mountain pipeline system to Kinder Morgan
Energy Partners for $549.1 million. The Trans Mountain pipeline system, which
transports crude oil and refined products from Edmonton, Alberta, Canada to
marketing terminals and refineries in British Columbia and the state of
Washington, currently transports approximately 260,000 barrels per day. An
additional expansion that will increase capacity of the pipeline to 300,000
barrels per day is expected to be in service by November 2008.
|
|
·
|
Trans Mountain – KMP Trans
Mountain Pipeline Expansion
|
On
August 23, 2007, Kinder Morgan Energy Partners announced that it has begun
construction on the approximately C$485 million Anchor Loop project, the second
phase of the Trans Mountain pipeline system expansion that will increase
pipeline capacity from approximately 260,000 to 300,000 barrels of crude oil per
day. The project is expected to be complete by November 2008. In April 2007,
Kinder Morgan Energy Partners commissioned 10 new pump stations which boosted
capacity on Trans Mountain from 225,000 to approximately 260,000 barrels per
day.
|
|
·
|
Kinder Morgan Management Public
Offering
|
On
May 17, 2007, Kinder Morgan Management closed the public offering of 5,700,000
of its shares at a price of $52.26 per share. The net proceeds from the offering
were used by Kinder Morgan Management to buy additional i-units from Kinder
Morgan Energy Partners. Kinder Morgan Energy Partners used the proceeds of
$297.9 million from its i-unit issuance to reduce the borrowings under its
commercial paper program.
|
|
·
|
Kinder Morgan Energy Partners
Public Offerings
|
In
December 2007, Kinder Morgan Energy Partners completed a public offering of
7,130,000 of its common units, including common units sold pursuant to the
underwriters’ over-allotment option, at a price of $48.09 per unit, less
underwriting expenses. Kinder Morgan Energy Partners received net proceeds of
$342.9 million for the issuance of these 7,130,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
On
February 12, 2008, Kinder Morgan Energy Partners completed an additional
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.
10
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
In
March 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units, including common units sold pursuant to the
underwriters’ over-allotment option, at a price of $57.70 per unit, less
commissions and underwriting expenses. Kinder Morgan Energy Partners received
net proceeds of $324.2 million for the issuance of these common units, and used
the proceeds to reduce the borrowings under its commercial paper
program.
|
|
·
|
Kinder Morgan Energy Partners
Debt Offerings
|
On
January 30, 2007, Kinder Morgan Energy Partners completed a public offering of
senior notes. Kinder Morgan Energy Partners issued a total of $1.0 billion in
principal amount of senior notes, consisting of $600 million of 6.00% notes due
February 1, 2017 and $400 million of 6.50% notes due February 1, 2037. Kinder
Morgan Energy Partners received proceeds from the issuance of the notes, after
underwriting discounts and commissions, of $992.8 million, and used the proceeds
to reduce the borrowings under its commercial paper program.
On
June 21, 2007, Kinder Morgan Energy Partners closed a public offering of $550
million in principal amount of 6.95% senior notes. The notes are due January 15,
2038. Kinder Morgan Energy Partners received proceeds from the issuance of the
notes, after underwriting discounts and commissions, of $543.9 million, and used
the proceeds to reduce its commercial paper debt.
On
August 28, 2007, Kinder Morgan Energy Partners closed a public offering of $500
million in principal amount of 5.85% senior notes. The notes are due September
15, 2012. Kinder Morgan Energy Partners received proceeds from the issuance of
the notes, after underwriting discounts and commissions, of $497.8 million, and
used the proceeds to reduce its commercial paper debt.
On
February 12, 2008, Kinder Morgan Energy Partners completed a public offering of
$900 million in principal amount of senior notes, consisting of $600 million of
5.95% notes due February 15, 2018, and $300 million of 6.95% notes due January
15, 2038. Kinder Morgan Energy Partners received proceeds from the issuance of
the notes, after underwriting discounts and commissions, of approximately $894.1
million, and used the proceeds to reduce the borrowings under its commercial
paper program.
|
|
·
|
Kinder Morgan Energy Partners
Cash Distribution Expectations for
2008
|
On
November 26, 2007, Kinder Morgan Energy Partners announced that it expects to
declare cash distributions of $4.02 per unit for 2008, an almost 16% increase
over cash distributions of $3.48 per unit for 2007. This expectation includes
contributions from assets owned by Kinder Morgan Energy Partners as of the
announcement date and does not include any potential benefits from unidentified
acquisitions. Additionally, this expectation does not take into account any
capital costs associated with financing the payment of reparations sought by
shippers on Kinder Morgan Energy Partners’ Pacific operations’ interstate
pipelines. The expected growth in distributions in 2008 will be fueled by
incremental earnings from Rockies Express-West (the western portion of the
Rockies Express Pipeline), higher realized prices on crude oil production
inclusive of hedges (budgeted production volumes for the SACROC oil field unit
in 2008 are approximately equal to the volumes realized in 2007), and an
anticipated strong performance from Kinder Morgan Energy Partners’ remaining
business portfolio.
|
|
·
|
Kinder Morgan Energy Partners
2007 Capital Expenditures
|
During
2007, Kinder Morgan Energy Partners spent $1,691.6 million for additions to its
property, plant and equipment, including both expansion and maintenance
projects. Capital expenditures included the following:
|
|
·
|
$480.0
million in the Terminals – KMP segment, largely related to expanding the
petroleum products storage capacity at liquids terminal facilities,
including the construction of additional liquids storage tanks at
facilities in Canada and at facilities located on the Houston Ship Channel
and the New York Harbor, and to various expansion projects and
improvements undertaken at multiple terminal
facilities;
|
|
|
·
|
$382.5
million in the CO2 –
KMP segment, mostly related to additional infrastructure, including wells
and injection and compression facilities, to support the expanding carbon
dioxide flooding operations at the SACROC and Yates oil field units in
West Texas and to expand Kinder Morgan Energy Partners’ capacity to
produce and deliver CO2 from
the McElmo Dome and Doe Canyon source
fields;
|
|
|
·
|
$305.7
million in the Trans Mountain – KMP segment, mostly related to pipeline
expansion and improvement projects undertaken to increase crude oil and
refined products delivery volumes;
|
|
|
·
|
$264.0
million in the Natural Gas Pipelines – KMP segment, mostly related to
current construction of the Kinder Morgan Louisiana Pipeline and to
various expansion and improvement projects on the Texas intrastate natural
gas pipeline systems, including the development of additional natural gas
storage capacity at natural gas storage facilities located at Markham and
Dayton, Texas; and
|
11
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
|
|
·
|
$259.4
million in the Products Pipelines – KMP segment, mostly related to the
continued expansion work on the Pacific operations’ East Line products
pipeline, completion of construction projects resulting in additional
capacity, and an additional refined products line on the CALNEV Pipeline
in order to increase delivery service to the growing Las Vegas, Nevada
market.
|
Including
its share of capital expenditures for both the Rockies Express and Midcontinent
Express natural gas pipeline projects, Kinder Morgan Energy Partners’ capital
expansion program in 2007 was approximately $2.6 billion. Including all of its
business acquisition expenditures, Kinder Morgan Energy Partners’ total spending
in 2007 was $3.3 billion. Kinder Morgan Energy Partners’ capital expansion
program will continue to be significant in 2008, as it expects to invest
approximately $3.3 billion in expansion capital expenditures (including its
share of capital expenditures for both the Rockies Express and Midcontinent
Express natural gas pipeline projects), which will help drive its earnings and
cash flow growth in 2009 and beyond.
(B)
Financial Information about Segments
Note
15 of the accompanying Notes to Consolidated Financial Statements contains
financial information about our business segments.
(C)
Narrative Description of Business
We
are an energy infrastructure provider. Our principal business segments are: (1)
Natural Gas Pipeline Company of America and certain affiliates, referred to as
Natural Gas Pipeline Company of America or NGPL, a major interstate natural gas
pipeline and storage system; (2) Power, a business that owns and operates
natural gas-fired electric generation facilities; (3) Express Pipeline System,
the ownership of a one-third interest in a crude oil pipeline system, which we
operate and account for under the equity method; (4) 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; (5) Natural Gas Pipelines – KMP, the ownership and
operation of major interstate and intrastate natural gas pipeline and storage
systems; (6) CO2 – KMP, (i)
the production, transportation and marketing of carbon dioxide (“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; (7) 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 (8) Trans
Mountain – KMP, the ownership and operation of a pipeline system that transports
crude oil and refined petroleum products from Edmonton, Alberta, Canada to
marketing terminals and refineries in British Columbia, Canada and the state of
Washington, U.S.A. During 2006 and 2007, we reached agreements to sell certain
businesses and assets in which we no longer have any continuing interest,
including Terasen Gas, Corridor, North System and our Kinder Morgan Retail
segment. Accordingly, the activities and assets related to these sales are
presented as discontinued items in the accompanying consolidated financial
statements (see Note 7 of the accompanying Notes to Consolidated Financial
Statements). Notes 5 and 15 of the accompanying Notes to Consolidated Financial
Statements contain additional information on asset sales and our business
segments. As discussed following, certain of our operations are regulated by
various federal and state regulatory bodies.
Natural
gas transportation, storage and retail sales accounted for approximately 88.1%,
90.3%, 91.2% and 92.8% of our consolidated revenues in the seven months ended
December 31, 2007, the five months ended May 31, 2007, and in 2006 and 2005,
respectively. During the seven months ended December 31, 2007, the five months
ended May 31, 2007, and in 2006 and 2005, we did not have revenues from any
single customer that exceeded 10% of our consolidated operating revenues. Our
equity in the earnings of Kinder Morgan Energy Partners (before reduction for
the minority interest in Kinder Morgan Management) constituted approximately 54%
of our income from continuing operations before interest and income taxes in
2005. The following table gives our segment earnings, our earnings attributable
to our investment in Kinder Morgan Energy Partners (net of pre-tax minority
interest) and the percent of the combined total each represents, for the seven
months ended December 31, 2007, the five months ended May 31, 2007 and in
2006.
12
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||||
|
Seven
Months Ended
December
31, 2007
|
Five
Months Ended
May
31, 2007
|
Year
Ended
December
31, 2006
|
|||||||||||||||||||
|
Amount
|
%
of Total
|
Amount
|
%
of Total
|
Amount
|
%
of Total
|
||||||||||||||||
|
(Dollars
in millions)
|
(Dollars
in millions)
|
||||||||||||||||||||
|
Net
Pre-tax Impact of Kinder Morgan Energy Partners1
|
$
|
412.0
|
47.8
|
%
|
$
|
255.2
|
47.5
|
%
|
$
|
582.9
|
47.5
|
%
|
|||||||||
|
Segment
Earnings:
|
|||||||||||||||||||||
|
NGPL
|
422.8
|
49.0
|
%
|
267.4
|
49.8
|
%
|
603.5
|
49.2
|
%
|
||||||||||||
|
Power
|
13.4
|
1.5
|
%
|
8.9
|
1.7
|
%
|
23.2
|
1.9
|
%
|
||||||||||||
|
Express
|
14.4
|
1.7
|
%
|
5.4
|
1.0
|
%
|
17.2
|
1.4
|
%
|
||||||||||||
|
Total
|
$
|
862.6
|
100.0
|
%
|
$
|
536.9
|
100.00
|
%
|
$
|
1,226.8
|
100.00
|
%
|
|||||||||
__________
|
1
|
Represents
Knight Inc.’s general partner incentive and earnings from its ownership of
limited partner interests in Kinder Morgan Energy Partners, net of
associated minority interests.
|
During
the seven months ended December 31, 2007 and the five months ended May 31, 2007,
NGPL’s segment earnings of $422.8 million and $267.4 million, respectively,
represented approximately 49.0% and 49.8%, respectively, of total segment
earnings plus net pre-tax impact of Kinder Morgan Energy Partners. On December
10, 2007, we entered into a definitive agreement to sell an 80% ownership
interest in our NGPL business segment to Myria for approximately $5.9 billion,
subject to certain adjustments. The sale closed on February 15, 2008. We will
continue to operate NGPL’s assets pursuant to a 15-year operating agreement.
Myria is comprised of a syndicate of investors led by Babcock & Brown, an
international investment and specialized fund and asset management
group.
Through
NGPL, we own an interest in and operate approximately 9,500 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.
The system is powered by 57 compressor stations in mainline and storage service
having an aggregate of approximately 1.0 million horsepower. NGPL’s system has
837 points of interconnection with 35 interstate pipelines, 36 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’s Amarillo Line originates in the West
Texas and New Mexico producing areas and is comprised of approximately 4,200
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 4,500 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. In addition, NGPL owns a 50% equity interest in and operates Horizon
Pipeline Company, L.L.C., a joint venture with Nicor-Horizon, a subsidiary of
Nicor, Inc. This joint venture owns a natural gas pipeline in northern Illinois
with a capacity of 380 MMcf per day. Also, NGPL operates Kinder Morgan Illinois
Pipeline LLC, an affiliate of NGPL that owns a natural gas pipeline in northern
Illinois with a capacity of 360 MMcf per day.
NGPL
provides transportation and storage services to third-party natural gas
distribution utilities, marketers, producers, industrial end users and other
shippers. Pursuant to transportation agreements and FERC tariff provisions, NGPL
offers its customers firm and interruptible transportation, storage and
no-notice services, and interruptible park and loan services. Under NGPL’s
tariffs, firm transportation customers pay reservation charges each month plus a
commodity charge based on actual volumes transported, including a fuel charge
collected in-kind. Interruptible transportation customers pay a commodity charge
based upon actual volumes transported. Reservation and commodity charges are
both based upon geographical location and time of year. Under firm no-notice
service, customers pay a reservation charge for the right to have up to a
specified volume of natural gas delivered but, unlike with firm transportation
service, are able to meet their peaking requirements without making specific
nominations. NGPL has the authority to discount its rates and to negotiate rates
with customers if it has first offered service to those customers under its
reservation and commodity charge rate structure. NGPL’s revenues have
historically been somewhat higher in the first and fourth quarters of the
calendar year, reflecting higher system utilization during the colder months.
During the winter months, NGPL collects higher transportation commodity revenue,
higher interruptible transportation revenue, winter-only capacity revenue and
higher rates on certain contracts.
NGPL’s
principal delivery market area encompasses the states of Illinois, Indiana and
Iowa and secondary markets in portions of Wisconsin, Nebraska, Kansas, Missouri
and Arkansas. NGPL is the largest transporter of natural gas to the Chicago
market, and we believe that its transportation rates are very competitive in the
region. In 2007, NGPL delivered an average of 1.88 trillion Btus per day of
natural gas to this market. Given its strategic location at the center of the
North American natural gas pipeline grid, we believe that Chicago is likely to
continue to be a major natural gas trading hub for growing markets in the
Midwest and Northeast.
13
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
Substantially
all of NGPL’s pipeline capacity is committed under firm transportation contracts
ranging from one to six years. Approximately 63% of the total transportation
volumes committed under NGPL’s long-term firm transportation contracts in effect
on January 31, 2008 had remaining terms of less than three years. NGPL continues
to actively pursue the renegotiation, extension and/or replacement of expiring
contracts, and was very successful in doing so during 2007 as discussed under
“Recent Developments” elsewhere in this report. Nicor Gas Company, Peoples Gas
Light and Coke Company, and Northern Indiana Public Service Company (NIPSCO) are
NGPL’s three largest customers in terms of operating revenues from tariff
services. During 2007, approximately 50% of NGPL’s operating revenues from
tariff services were attributable to its eight largest customers. Contracts
representing approximately 18.3% of NGPL’s total long-haul, contracted firm
transport capacity as of January 31, 2008 are scheduled to expire during 2008.
In addition to these long-haul transportation agreements, NGPL also transports
significant volumes for redelivery to other pipelines. These deliveries
are primarily in Louisiana and Texas.
NGPL
is one of the nation’s largest natural gas storage operators with approximately
600 Bcf of total natural gas storage capacity, approximately 265 Bcf of working
gas capacity and approximately 4.3 Bcf 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. NGPL provides firm and interruptible gas
storage service pursuant to storage agreements and tariffs. Firm storage
customers pay a monthly demand charge irrespective of actual volumes stored.
Interruptible storage customers pay a monthly charge based upon actual volumes
of gas stored.
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 and,
historically, most of the competition has been from such pipelines with supplies
originating in the United States. NGPL also faces competition from Alliance
Pipeline, which began service during the 2000-2001 heating season carrying
Canadian-produced natural gas into the Chicago market. However, at the same
time, the Vector Pipeline was constructed for the specific purpose of
transporting gas from the Chicago area to other markets, generally further north
and further east. The overall impact of the increased pipeline capacity into the
Chicago area, combined with additional take-away capacity and the increased
demand in the area, has created a situation that remains dynamic with respect to
the ultimate impact on individual transporters such as NGPL.
NGPL
also faces competition with respect to the natural gas storage services it
provides. NGPL has storage facilities in both market and supply areas, allowing
it to offer varied storage services to customers. It faces competition from
independent storage providers as well as storage services offered by other
natural gas pipelines and local natural gas distribution companies.
The
competition faced by NGPL with respect to its natural gas transportation and
storage services is generally price-based, although there is also a significant
component related to the variety, flexibility and reliability of services
offered by others. NGPL’s extensive pipeline system, with access to diverse
supply basins and significant storage assets in both the supply and market
areas, makes it a strong competitor in many situations, but most customers still
have alternative sources to meet their requirements. In addition, due to the
price-based nature of much of the competition faced by NGPL, its proven track
record as a low-cost provider is an important factor in its success in acquiring
and retaining customers. Additional competition for storage services could
result from the utilization of currently underutilized storage facilities or
from conversion of existing storage facilities from one use to another. In
addition, existing competitive storage facilities could, in some instances, be
expanded.
Power’s
earnings for the seven months ended December 31, 2007 and the five months ended
May 31, 2007 represented approximately 1.5% and 1.7%, respectively, of each of
our total segment earnings plus net pre-tax impact of Kinder Morgan Energy
Partners and our income from continuing operations before interest and income
taxes. On November 20, 2007, we entered into a definitive agreement to sell our
interests in three natural gas-fired power plants in Colorado to Bear Stearns.
The sale closed on January 25, 2008, effective January 1, 2008, and we received
net proceeds of $63.1 million. Prior to this sale, we held interests in three
Colorado assets, including ownership interests in two natural gas-fired
electricity generation facilities and a net profits interest in a third. We
continue to have an ownership interest in a natural gas-fired electricity
generation facility in Michigan and an operating agreement with a natural
gas-fired electricity generation facility in Texas. The Michigan facility is
operated under a tolling agreement. Under the tolling agreement, purchasers of
the electrical output take the risks in the marketplace associated with the cost
of fuel and the value of the electric power generated. During 2007,
approximately 68% of Power’s operating revenues represented tolling revenues of
the Michigan facility, 21% was derived from the Colorado facility operated as an
independent power producer under a long-term contract with XCEL Energy’s Public
Service Company of Colorado unit, and the remaining 11% was primarily for
operating the Ft. Lupton, Colorado power facility and a gas-fired power facility
in Snyder, Texas that began operations during the second quarter of 2005
and
14
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Items 1. and 2. Business
and Properties. (continued)
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Knight
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provides
electricity to Kinder Morgan Energy Partners’ SACROC operations. In recent
periods, we have recorded impairment charges associated with our power business
activities; see Item 6 Selected Financial
Data.
Kinder
Morgan Power previously designed, developed and constructed power projects. In
2002, following an assessment of the electric power industry’s business
environment and noting a marked deterioration in the financial condition of
certain power generating and marketing participants, we decided to discontinue
our power development activities.
In
February 2001, Kinder Morgan Power announced an agreement under which Williams
Energy Marketing and Trading agreed to supply natural gas to and market capacity
for 16 years for a 550 megawatt natural gas-fired electric power plant in
Jackson, Michigan. Effective July 1, 2002, construction of this facility was
completed and commercial operations commenced. Concurrently with commencement of
commercial operations, (i) Kinder Morgan Power made a preferred investment in
Triton Power Company LLC (now valued at approximately $15 million); and, (ii)
Triton Power Company LLC, through its wholly owned subsidiary, Triton Power
Michigan LLC, entered into a 40-year lease of the Jackson power facility from
the plant owner, AlphaGen Power, LLC. Bear Energy LP (successor to Williams
Energy Marketing and Trading) supplies all natural gas to and purchases all
power from the power plant under a 16-year tolling agreement with Triton Power
Michigan LLC.
Competition: With respect to
Power’s investment in the Jackson, Michigan facility, the principal impact of
competition is the level of dispatch of the plant and the related (but minor)
effect on profitability.
We
own a one-third interest in the Express Pipeline System. The Express Pipeline
System’s earnings for the seven months ended December 31, 2007 and the five
months ended May 31, 2007 represented approximately 1.7% and 1.0%, respectively,
of each of our total segment earnings plus net pre-tax impact of Kinder Morgan
Energy Partners and our income from continuing operations before interest and
income taxes. The Express Pipeline System is a batch-mode, common-carrier, crude
pipeline system comprised of the Express Pipeline and the Platte Pipeline. The
Express Pipeline System transports a wide variety of crude types produced in
Alberta to markets in Petroleum Administration Defense District IV, comprised of
the states in the Rocky Mountain area of the United States (“PADD IV”) and
Petroleum Administration Defense District II, comprised of the states in the
central area of the United States (“PADD II”). The Express Pipeline System also
transports crude oil produced in PADD IV to downstream delivery points in PADD
IV and to PADD II.
The
Express Pipeline is a 780 mile, 24-inch diameter pipeline that begins at the
crude pipeline hub at Hardisty, Alberta and terminates at the Casper, Wyoming
facilities of the Platte Pipeline, and includes related metering and storage
facilities including tanks and pump stations. At Hardisty, the Express Pipeline
receives crude from certain other pipeline systems and terminals, which
currently provide access to approximately 1.3 million bpd of crude moving
through this delivery hub. The Express Pipeline is the major pipeline
transporting Alberta crude into PADD IV. The Express Pipeline has a design
capacity of 280,000 bpd, after an expansion completed in April 2005. Receipts at
Hardisty averaged 213,477 bpd during the year ended December 31, 2007, compared
with 226,717 bpd during the year ended December 31, 2006.
The
Platte Pipeline is a 926 mile, 20-inch diameter pipeline that runs from the
crude 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
shipped on the Express Pipeline, crude produced in PADD IV and crude received in
PADD II, to downstream delivery points. It is currently the only major crude
pipeline transporting crude oil from PADD IV to PADD II. Various receipt and
delivery points along the Platte Pipeline, with interconnections to other
pipelines, enable crude to be moved to various markets in PADD IV and PADD II.
The Platte Pipeline has a capacity of 150,000 bpd when shipping heavy oil and
averaged 110,757 bpd east of Casper during the year ended December 31, 2007,
versus 151,552 bpd for the year ended December 31, 2006.
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 on a ship-or-pay basis. Uncommitted rates are the rates that
apply to uncommitted services whereby shippers transport oil through the Express
Pipeline System without a long-term commitment between the shipper and the
Express Pipeline System. Committed rates vary according to the destination of
shipments and the length of the term of the transportation services agreement,
with those shippers committing to longer-term agreements receiving lower
rates.
Express
Pipeline received 105,000 bpd of additional firm service commitments to the
pipeline starting April 1, 2005, bringing the total firm commitment on Express
to 235,000 bpd, or 84% of its total capacity. In May 2007, contracts for 4,000
bpd expired, thereby reducing the total firm commitments to 231,000 bpd. The
remaining 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, which can be increased
each year by up to 2%. The capacity in excess of 231,000 bpd is made available
to shippers as uncommitted capacity.
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Uncommitted
rates were established on a cost of service basis and can be changed in
accordance with applicable regulations discussed below. See “Regulation”
elsewhere in this report. The table below
provides a selection of tolls at December 31.
|
Toll
Per Barrel (US$)
|
|||||
|
2007
|
2006
|
||||
|
Hardisty,
Alberta to Casper, Wyoming
|
$
|
1.869
|
$
|
1.612
|
|
|
Hardisty,
Alberta to Casper, Wyoming (committed)
|
$
|
1.340
|
$
|
1.313
|
|
|
Casper,
Wyoming to Wood River, Illinois
|
$
|
1.562
|
$
|
1.497
|
|
Competition: The
Express Pipeline System pipeline 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 overall petroleum
production in Alberta declines or if 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, which
may provide a competitive advantage in new pipeline development. Throughput on
the Express Pipeline System could decline in the event of reduced petroleum
product demand in the U.S. Rocky Mountains.
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.
Pacific
Operations
The
Pacific operations include Kinder Morgan Energy Partners’ SFPP, L.P. operations,
CALNEV Pipeline operations and West Coast Liquid 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.
The
Pacific operations serve seven western states with approximately 3,000 miles of
refined petroleum products pipelines and related terminal facilities that
provide refined products to some of the fastest growing population centers in
the United States, including California; Las Vegas and Reno, Nevada; and the
Phoenix-Tucson, Arizona corridor. For 2007, the three main product types
transported were gasoline (59%), diesel fuel (23%) and jet fuel
(18%).
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, and which also serves Nellis Air Force Base
located in Las Vegas. It also includes approximately 55 miles of pipeline
serving Edwards Air Force Base.
The
Pacific operations include 15 truck-loading terminals (13 on SFPP, L.P. and two
on CALNEV) with an aggregate usable tankage capacity of approximately 13.7
million barrels. The truck terminals provide services including short-term
product storage, truck loading, vapor handling, additive injection, dye
injection and oxygenate blending.
The
Pacific operation’s West Coast Liquid 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 8.3
million barrels of storage for both petroleum products and
chemicals.
Markets. Combined,
the Pacific operations’ pipelines transport approximately 1.3 million barrels
per day of refined petroleum products, providing pipeline service to
approximately 31 customer-owned terminals, 11 commercial airports and 14
military bases. Currently, the Pacific operations’ pipelines serve approximately
100 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 depends on such factors as prevailing economic conditions, vehicular
use patterns and demographic changes in the markets served. If current trends
continue, we expect the majority of the Pacific operations’ markets to maintain
growth rates that will exceed the national average for the foreseeable future.
The volume of products transported is affected by various factors, principally
demographic growth, economic conditions, product pricing, vehicle miles
traveled, population and fleet mileage. Certain product volumes can 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 Pacific operations’ pipeline system
come from the major refining centers around Los Angeles, San Francisco, El Paso
and Puget Sound, as well as from waterborne terminals and connecting pipelines
located near these refining centers.
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Competition. The
two most significant competitors of the Pacific operations’ pipeline system are
proprietary pipelines owned and operated by major oil companies in the area
where the Pacific operations’ pipeline system delivers products and also
refineries with terminals that have trucking arrangements within the Pacific
operations’ market areas. We believe 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 Pacific
operations will be built in the foreseeable future. However, the possibility of
individual pipelines being constructed or expanded to serve specific markets is
a continuing competitive factor.
The
use of trucks for product distribution from either shipper-owned proprietary
terminals or from their refining centers continues to compete for short haul
movements by pipeline. The Pacific 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 (formerly
Arco Terminal Services Company), Wilmington Liquid Bulk Terminals (Vopak),
NuStar and Chevron. We 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,
referred to in this report as Plantation, a 3,100-mile refined petroleum
products pipeline system serving the southeastern United States. An affiliate of
ExxonMobil owns the remaining 49% ownership interest. ExxonMobil is the largest
shipper on the Plantation system both in terms of volumes and revenues. Kinder
Morgan Energy Partners operates the system pursuant to agreements with
Plantation Services LLC and Plantation. Plantation serves as a common carrier of
refined petroleum products to various metropolitan areas, including Birmingham,
Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C.
area.
For
the year 2007, Plantation delivered an average of 535,677 barrels per day of
refined petroleum products. These delivered volumes were comprised of gasoline
(63%), diesel/heating oil (23%) and jet fuel (14%). Average delivery volumes for
2007 were 3.5% lower than the 555,060 barrels per day delivered during 2006. The
decrease was predominantly driven by (i) the full year impact of alternative
pipeline service (initial startup mid-2006) into Southeast markets and (ii)
changes in production patterns from Louisiana refineries related to refiners
directing higher margin products (such as reformulated gasoline blendstock for
oxygenate blending) into markets not directly served by Plantation.
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. Plantation’s top five shippers represent approximately
80% 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). Combined jet fuel shipments to these four major airports increased 3%
in 2007 compared to 2006, with the majority of this growth occurring at Dulles
Airport.
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 2.3 million barrels
per day of refining capacity.
Competition. Plantation
competes primarily with the Colonial pipeline system, which also runs from Gulf
Coast refineries throughout the southeastern United States and extends into the
northeastern states.
Central
Florida Pipeline
The
Central Florida pipeline system consists of a 110-mile, 16-inch diameter
pipeline that transports gasoline and an 85-mile, 10-inch diameter pipeline that
transports diesel fuel and jet fuel from Tampa to Orlando, with an intermediate
delivery point on the 10-inch pipeline at Intercession City, Florida. In
addition to being connected to 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) and is also the sole pipeline supplying jet fuel to the Orlando
International Airport in Orlando, Florida. In 2007, the pipeline system
transported approximately 113,800 barrels per day of refined products, with the
product mix being approximately 69% gasoline, 12% diesel fuel, and 19% jet
fuel.
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, diesel fuel and jet
fuel for further movement into either trucks or
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into
the Central Florida pipeline system. The Tampa terminal also provides storage
and truck rack blending services for ethanol and bio-diesel. The Taft terminal
contains approximately 0.7 million barrels of storage capacity, for gasoline and
diesel fuel for further movement into trucks.
Markets. The
estimated total refined petroleum products demand in the state of Florida is
approximately 800,000 barrels per day. Gasoline is, by far, the largest
component of that demand at approximately 545,000 barrels per day. The total
refined petroleum products demand for the Central Florida region of the state,
which includes the Tampa and Orlando markets, is estimated to be approximately
360,000 barrels per day, or 45% of the consumption of refined products in the
state. Kinder Morgan Energy Partners distributes approximately 150,000 barrels
of refined petroleum products per day, including the Tampa terminal truck
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, with
demand peaks in March and April during spring break and again in the summer
vacation season, and is also heavily influenced by tourism, with Disney World
and other attractions located near Orlando.
Supply. The vast
majority of refined petroleum products consumed in Florida are 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 being supplied by refineries in Alabama and by Texas Gulf
Coast refineries via marine vessels and through pipeline networks that extend to
Bainbridge, Georgia. The supply into Florida is generally transported by
ocean-going vessels to the larger metropolitan ports, such as Tampa, Port
Everglades near Miami, and Jacksonville. Individual markets are then supplied
from terminals at these ports and other smaller ports, predominately by trucks,
except the Central Florida region, which is served by a combination of trucks
and pipelines.
Competition. With
respect to the 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.
We believe 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 the terminal operations at Tampa, the most significant competitors
are proprietary terminals owned and operated by major oil companies, such as
Marathon Petroleum, BP and Citgo, located along the Port of Tampa, and the
Chevron and Motiva terminals in Port Tampa. These terminals generally support
the storage requirements of their parent or affiliated companies’ refining and
marketing operations and provide a mechanism for an oil company to enter into
exchange contracts with third parties to serve its storage needs in markets
where the oil company may not have terminal assets.
Federal
regulation of marine vessels, including the requirement under the Jones Act that
United States-flagged vessels contain double-hulls, is a significant factor
influencing the availability of vessels that transport refined petroleum
products. Marine vessel owners are phasing in the requirement based on the age
of the vessel and some older vessels are being redeployed into use in other
jurisdictions rather than being retrofitted with a double-hull for use in the
United States.
Cochin
Pipeline System
The
Cochin pipeline system consists of an approximate 1,900-mile, 12-inch diameter
multi-product pipeline operating between Fort Saskatchewan, Alberta and Windsor,
Ontario, including 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 2007, the pipeline system transported approximately 40,600 barrels
per day of natural gas liquids.
Markets. The
pipeline traverses three provinces in Canada and seven states in the United
States and has historically transported high vapor pressure ethane, 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 for natural gas
liquids long-haul business from Fort Saskatchewan, Alberta and Windsor, Ontario.
The pipeline’s primary competition in the Chicago natural gas
18
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liquids
market comes from the combination of the Alliance pipeline system, which brings
unprocessed gas into the United States from Canada, and from Aux Sable, which
processes and markets the natural gas liquids in the Chicago
market.
Cypress
Pipeline
Kinder
Morgan Energy Partners’ 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 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.
Markets. The
pipeline was built to service Westlake Petrochemicals Corporation in the Lake
Charles, Louisiana area under a 20-year ship-or-pay agreement that expires in
2011. The contract requires a minimum volume of 30,000 barrels per
day.
Supply. The
Cypress pipeline originates in Mont Belvieu where it is able to receive ethane
and ethane/propane mix from local storage facilities. Mont Belvieu has
facilities to fractionate natural gas liquids received from several pipelines
into ethane and other components. Additionally, pipeline systems that transport
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
Kinder
Morgan Energy Partners’ Southeast terminal operations consist of Kinder Morgan
Southeast Terminals LLC and its consolidated affiliate, Guilford County Terminal
Company, LLC. Kinder Morgan Southeast Terminals LLC, Kinder Morgan Energy
Partners’ wholly owned subsidiary referred to in this report as KMST, was formed
for the purpose of acquiring and operating high-quality liquid petroleum
products terminals located primarily along the Plantation/Colonial pipeline
corridor in the southeastern United States.
The
Southeast terminal operations consist of 24 petroleum products terminals with a
total storage capacity of approximately 8.0 million barrels. These terminals
transferred approximately 361,000 barrels of refined products per day during
2007 and approximately 347,000 barrels of refined products per day during
2006.
Markets. KMST’s
acquisition and marketing activities 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. KMST also offered ethanol blending and storage services in northern
Virginia during 2007. Longer term storage is available at many of the terminals.
KMST has a physical presence in markets representing almost 80% of the
pipeline-supplied demand in the Southeast and offers a competitive alternative
to marketers seeking a relationship with a truly independent truck terminal
service provider.
Supply. Product
supply is predominately from Plantation and/or Colonial pipelines. To the
maximum extent practicable, we endeavor to connect KMST terminals to both
Plantation and Colonial.
Competition. There
are relatively few independent terminal operators in the Southeast. 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 and TransMontaigne Product Services
represent the other significant independent terminal operators in this
region.
Transmix
Operations
Kinder
Morgan Energy Partners’ 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, pipeline transmix is processed and
separated into pipeline-quality gasoline and light distillate products. Kinder
Morgan Energy Partners processes transmix at six separate processing facilities
located in Colton, California; Richmond, Virginia; Dorsey Junction, Maryland;
Indianola, Pennsylvania; Wood River, Illinois; and Greensboro, North Carolina.
Combined, its transmix facilities processed approximately 10.4 million barrels
of transmix in 2007 and approximately 9.1 million barrels in 2006.
In
2007, Kinder Morgan Energy Partners increased the processing capacity of the
recently constructed Greensboro, North Carolina transmix facility to better
serve the needs of Plantation. The facility, which is located within KMST’s
refined
19
|
Items 1. and 2. Business
and Properties. (continued)
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Knight
Form 10-K
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products
tank farm now has the capability to process approximately 8,500 barrels of
transmix per day. In addition to providing additional processing business, the
facility continues to provide Plantation a lower cost alternative compared to
other transmix processing arrangements that recover ultra low sulfur diesel, and
also more fully utilizes current KMST tankage at the Greensboro, North Carolina
tank farm.
Markets. The Gulf
and East Coast refined petroleum products distribution system, particularly the
Mid-Atlantic region, is the target market for Kinder Morgan Energy Partners’
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. Kinder Morgan Energy Partners’ West Coast
transmix processing operations support the markets served by its Pacific
operations in Southern California.
Supply. Transmix
generated by Plantation, Colonial, Explorer, Sun, Teppco and Kinder Morgan
Energy Partners’ Pacific operations provide the vast majority of the supply.
These suppliers are committed to the use of Kinder Morgan Energy Partners’
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
Plantation.
Competition. Placid
Refining is Kinder Morgan Energy Partners’ main competitor for transmix business
in the Gulf Coast area. There are various processors in the Mid-Continent area,
primarily ConocoPhillips, Gladieux Refining and Williams Energy Services, who
compete with Kinder Morgan Energy Partners’ transmix facilities. Motiva
Enterprises’ transmix facility located near Linden, New Jersey is the principal
competition for New York Harbor transmix supply and for the Indianola facility.
A number of smaller organizations operate transmix processing facilities in the
West and Southwest. These operations compete for supply that we envision as the
basis for growth in the West and Southwest. The Colton processing facility also
competes with major oil company refineries in California.
The
Natural Gas Pipelines – KMP segment, which contains both interstate and
intrastate pipelines, consists of natural gas sales, transportation, storage,
gathering, processing and treating. Within this segment, Kinder Morgan Energy
Partners owns approximately 14,700 miles of natural gas pipelines and associated
storage and supply lines that are strategically located within the North
American pipeline grid. The 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
The
group, which operates primarily along the Texas Gulf Coast, consists of the
following four natural gas pipeline systems:
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Kinder
Morgan Texas Pipeline;
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·
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Kinder
Morgan Tejas Pipeline;
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·
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Mier-Monterrey
Mexico Pipeline; and
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·
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Kinder
Morgan North Texas Pipeline.
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The
two largest systems in the group are Kinder Morgan Texas Pipeline and 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
120 billion cubic feet of system natural gas storage capacity. In addition, the
combined system, through owned assets and contractual arrangements with third
parties, has the capability to process 915 million cubic feet per day of natural
gas for liquids extraction and to treat approximately 250 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 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. 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, inclusive of fuel costs.
Included
in the operations of the Kinder Morgan Tejas system is the Kinder Morgan Border
Pipeline system. Kinder Morgan Border owns and operates an approximately
97-mile, 24-inch diameter pipeline that extends from a point of
interconnection
20
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Items 1. and 2. Business
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Knight
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with
the pipeline facilities of Pemex Gas Y Petroquimica Basica at the International
Border between the United States and Mexico, to a point of interconnection with
other intrastate pipeline facilities of Kinder Morgan Tejas located at King
Ranch, Kleburg County, Texas. The 97-mile pipeline, referred to as the
import/export facility, is capable of importing Mexican gas into the United
States, and exporting domestic gas to Mexico. The imported Mexican gas is
received from, and the exported domestic gas is delivered to, Pemex. The
capacity of the import/export facility is approximately 300 million cubic feet
of natural gas per day.
The
Mier-Monterrey Pipeline consists of a 95-mile, 30-inch diameter natural gas
pipeline that stretches from South Texas to Monterrey, Mexico and can transport
up to 375 million cubic feet per day. The pipeline connects to a 1,000-megawatt
power plant complex and to the PEMEX natural gas transportation system. Kinder
Morgan Energy Partners 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 86-mile, 30-inch diameter
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 contract that expires in 2032. In 2006, the existing system was enhanced
to be bi-directional, so that deliveries of additional supply coming out of the
Barnett Shale area can be delivered into NGPL’s pipeline as well as power plants
in the area.
Kinder
Morgan Energy Partners also owns and operates various gathering systems in South
and East Texas. These systems aggregate natural gas supplies into Kinder Morgan
Energy Partners’ main transmission pipelines, and in certain cases, aggregate
natural gas that must be processed or treated at its own or third-party
facilities. Kinder Morgan Energy Partners owns plants that can process up to 115
million cubic feet per day of natural gas for liquids extraction. In addition,
Kinder Morgan Energy Partners has contractual rights to process approximately
800 million cubic feet per day of natural gas at various third-party owned
facilities. Kinder Morgan Energy Partners also owns and operates three natural
gas treating plants that provide carbon dioxide and/or hydrogen sulfide removal.
Kinder Morgan Energy Partners can treat up to 155 million cubic feet per day of
natural gas for carbon dioxide removal at the Fandango Complex in Zapata County,
Texas, 50 million cubic feet per day of natural gas at the Indian Rock Plant in
Upshur County, Texas and approximately 45 million cubic feet per day of natural
gas at the 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 6.3 billion cubic feet of
total capacity, consisting of 4.2 billion cubic feet of working capacity and 2.1
billion cubic feet of cushion gas. Kinder Morgan Energy Partners entered into a
long-term storage capacity and transportation agreement with NRG covering two
billion cubic feet of natural gas working capacity that expires in March 2017.
In June 2006, Kinder Morgan Energy Partners 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 $105 million and $115
million and involves the development of a new underground storage cavern that
will add an estimated 6.5 billion cubic feet of incremental working natural gas
storage capacity. The additional capacity is expected to be available in
mid-2010.
Kinder
Morgan Energy Partners also owns the West Clear Lake natural gas storage
facility located in Harris County, Texas. Under a long term contract that
expires in 2012, Coral Energy Resources, L.P. operates the facility and controls
the 96 billion cubic feet of natural gas working capacity, and Kinder Morgan
Energy Partners provides transportation service into and out of the
facility.
Additionally,
Kinder Morgan Energy Partners leases a salt dome storage facility located near
Markham, Texas, according to the provisions of an operating lease that expires
in March 2013. Kinder Morgan Energy Partners can, at its sole option, extend the
term of this lease for two additional ten-year periods. The facility was
expanded in 2007 and now consists of four salt dome caverns with approximately
17.3 billion cubic feet of working natural gas capacity and up to 1.1 billion
cubic feet per day of peak deliverability. Kinder Morgan Energy Partners also
leases two salt dome caverns, known as the Stratton Ridge Facilities, from BP
America Production Company in Brazoria County, Texas. The Stratton Ridge
Facilities have a combined working natural gas capacity of 1.4 billion cubic
feet and a peak day deliverability of 100 million cubic feet per day. A lease
with Dow Hydrocarbon & Resources, Inc. for a salt dome cavern containing
approximately 5.0 billion cubic feet of working capacity expired during the
third quarter of 2007.
Markets. Texas’ natural gas
consumption is among the highest of any state. The natural gas demand profile in
Kinder Morgan Energy Partners’ Texas intrastate 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, Kinder
Morgan Energy Partners has successfully attached many of these new generation
facilities to its pipeline systems in order to maintain and grow its share of
natural gas supply for power generation.
21
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Knight
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Additionally,
in 2007, Kinder Morgan Energy Partners has increased its capability and
commitment to serve the growing local natural gas distribution market in the
greater Houston metropolitan area.
Kinder
Morgan Energy Partners serves the Mexico market through interconnection with the
facilities of Pemex at the United States-Mexico border near Arguellas, Mexico
and Kinder Morgan Energy Partners’ Meir-Monterrey Mexico pipeline. In 2007,
deliveries through the existing interconnection near Arguellas fluctuated from
zero to approximately 206 million cubic feet per day of natural gas, and there
were several days of exports to the United States that ranged up to 250 million
cubic feet per day. Deliveries to Monterrey also ranged from zero to 312 million
cubic feet per day. Kinder Morgan Energy Partners 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 Kinder Morgan Energy Partners’ activities in Mexico are paid in U.S. dollar
equivalent.
Supply. Kinder
Morgan Energy Partners 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, Kinder Morgan Energy Partners also purchases gas
at interconnects with third-party interstate and intrastate pipelines. While the
intrastate group does not produce gas, it does maintain an active well
connection program in order to offset natural declines in production along its
system and to secure supplies for additional demand in its market area. The
intrastate system has access to both onshore and offshore sources of supply, and
is well positioned to interconnect with liquefied natural gas projects currently
under development by others along the Texas Gulf Coast.
Competition. The Texas
intrastate natural gas market is highly competitive, with many markets connected
to multiple pipeline companies. Kinder Morgan Energy Partners competes with
interstate and intrastate pipelines, and their shippers, for attachments to new
markets and supplies and for transportation, processing and treating
services.
Rocky
Mountain Natural Gas Pipeline Group
The
group, which operates primarily along the Rocky Mountain region of the western
portion of the United States, consists of the following four natural gas
pipeline systems:
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Kinder
Morgan Interstate Gas Transmission
Pipeline;
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Trailblazer
Pipeline;
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Trans-Colorado
Pipeline; and
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51%
ownership interest in the Rockies Express
Pipeline.
|
Kinder
Morgan Interstate Gas Transmission LLC
Kinder
Morgan Interstate Gas Transmission LLC, referred to in this report as KMIGT,
owns approximately 5,100 miles of transmission lines in Wyoming, Colorado,
Kansas, Missouri and Nebraska. The pipeline system is powered by 28 transmission
and storage compressor stations with approximately 160,000 horsepower. KMIGT
also owns the Huntsman natural gas storage facility, located in Cheyenne County,
Nebraska, which has approximately 10 billion cubic feet of firm capacity
commitments and provides for withdrawal of up to 169 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 that
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
KMIGT provide a stable customer base with expansion opportunities due to the
system’s access to growing Rocky Mountain supply sources. Markets served by
KMIGT are comprised mainly of local natural gas distribution companies and
interconnecting interstate pipelines in the Mid-Continent area. End-users of the
local natural gas distribution companies typically include residential,
commercial, industrial and agricultural customers. The pipelines
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Items 1. and 2. Business
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Knight
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interconnecting
with KMIGT in turn deliver gas into multiple markets including some of the
largest population centers in the Midwest. Natural gas demand to power pumps for
crop irrigation during the summer from time-to-time exceeds heating season
demand and provides KMIGT relatively consistent volumes throughout the year. In
addition, KMIGT has seen a significant increase in demand from ethanol
producers, and is actively seeking ways to meet the demands from the ethanol
producing community.
Supply. Approximately
7%, by volume, of KMIGT’s firm contracts expire within one year and 51% expire
within one to five years. Over 99% of the system’s total firm transport capacity
is currently subscribed with 78% of the total contracted capacity held by
KMIGT’s top nine 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.
Trailblazer
Pipeline Company LLC
Trailblazer
Pipeline Company LLC owns a 436-mile 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. NGPL manages, maintains and
operates Trailblazer, for which it is reimbursed at cost.
Trailblazer
provides transportation services to third-party natural gas producers,
marketers, local distribution companies and other shippers. Pursuant to
transportation agreements and FERC tariff provisions, Trailblazer offers its
customers firm and interruptible transportation. Under Trailblazer’s tariffs,
firm transportation customers pay reservation charges each month plus a
commodity charge based on actual volumes transported. Interruptible
transportation customers pay a commodity charge based upon actual volumes
transported.
Markets. Significant
growth in Rocky Mountain natural gas supplies has prompted a need for additional
pipeline transportation service. Trailblazer has a certificated capacity of 846
million cubic feet per day of natural gas.
Supply. As of
December 31, 2007, none of Trailblazer’s firm contracts, by volume, expire
before one year and 54%, by volume, expire within two 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 from the gas supply in the
Rocky Mountain area that either stays in the area or is moved west and therefore
is not transported on Trailblazer’s pipeline. In addition, 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 competes with
Trailblazer for natural gas pipeline transportation demand from the Rocky
Mountain area. Additional competition could come from the Rockies Express
pipeline system or from proposed pipeline projects. No assurance can be given
that additional competing pipelines will not be developed in the
future.
TransColorado
Gas Transmission Company LLC
TransColorado
Gas Transmission Company
LLC 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 pipeline
system is powered by six compressor stations having an aggregate of
approximately 39,000 horsepower. Knight Inc. manages, maintains and operates
TransColorado, for which it is reimbursed at cost.
TransColorado
has the ability to flow gas south or north. TransColorado 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 moves onto the El Paso, Transwestern and Questar Southern Trail
pipeline systems. Gas moving north flows into the Colorado Interstate, Wyoming
Interstate and Questar pipeline systems at the Greasewood Hub and 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. For these services, TransColorado charges rates that include the
retention of fuel and gas lost and unaccounted for in-kind. Under
TransColorado’s tariffs, firm transportation customers pay reservation charges
each month plus a commodity charge based on actual volumes transported.
Interruptible transportation customers pay a commodity charge based upon actual
volumes transported. The underlying reservation and commodity charges are
assessed pursuant to a maximum recourse rate structure, which does not vary
based on the distance gas is
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Items 1. and 2. Business
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Knight
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transported.
TransColorado has the authority to negotiate rates with customers if it has
first offered service to those customers under its reservation and commodity
charge rate structure.
TransColorado’s
approximately $50 million Blanco-Meeker Expansion Project was completed in the
fourth quarter of 2007 and placed into service on January 1, 2008. The project
boosted capacity on the pipeline by approximately 250 million cubic feet per day
of natural gas from the Blanco Hub area in San Juan County, New Mexico through
TransColorado’s existing pipeline for deliveries to the Rockies Express pipeline
system at an existing point of interconnection located at the Meeker Hub in Rio
Blanco County, Colorado. All of the incremental capacity is subscribed under a
long-term contract with ConocoPhillips.
Markets. TransColorado
acts principally as a feeder pipeline system from the developing natural gas
supply basins on the Western Slope of Colorado into the interstate natural gas
pipelines that lead away from the Blanco Hub area of New 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 2007, TransColorado transported an average of approximately 734
million cubic feet per day of natural gas from these supply basins.
Supply. During
2007, 94% of TransColorado’s transport business was with producers or their own
marketing affiliates and 6% was with marketing companies and various gas
marketers. Approximately 64% of TransColorado’s transport business in 2007 was
conducted with its two largest customers. All of TransColorado’s southbound
pipeline capacity is committed under firm transportation contracts that extend
through year-end 2008. TransColorado’s pipeline capacity is 62% subscribed
during 2009 through 2012 and TransColorado is actively pursuing contract
extensions and or replacement contracts to increase firm subscription levels
beyond 2008.
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 to
accommodate greater natural gas volumes. TransColorado’s transport concurrently
ramped up over that period such that TransColorado now enjoys a growing share of
the outlet from the San Juan Basin to the southwestern United States
marketplace.
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 have had the effect of reducing that price differential;
however, given the growth in the Piceance and Paradox basins and the direct
accessibility of the TransColorado system to these basins, we believe
TransColorado’s transport business to be sustainable.
Rockies
Express Pipeline
Kinder
Morgan Energy Partners operates and currently owns 51% of the 1,679-mile Rockies
Express pipeline system, which when fully completed will be one of the largest
natural gas pipelines ever constructed in North America. The approximately $4.9
billion project will have the capability to transport 1.8 billion cubic feet per
day of natural gas, and binding firm commitments have been secured for all of
the pipeline capacity.
Kinder
Morgan Energy Partners’ ownership is through its 51% interest in West2East
Pipeline LLC, the sole owner of Rockies Express Pipeline LLC. Sempra Pipelines
& Storage, a unit of Sempra Energy, and ConocoPhillips hold the remaining
ownership interests in the Rockies Express project. Kinder Morgan Energy
Partners accounts for its investment under the equity method of accounting due
to the fact that its ownership interest will be reduced to 50% when construction
of the entire project is completed. At that time, the capital accounts of
West2East Pipeline LLC will be trued up to reflect Kinder Morgan Energy
Partners’ 50% economic interest in the project. We do not anticipate any
additional changes in the ownership structure of the project.
On
August 9, 2005, the FERC approved Rockies Express Pipeline LLC’s application to
construct 327 miles of pipeline facilities in two phases. Phase I consisted of
the following two pipeline segments: (i) a 136-mile, 36-inch diameter pipeline
that extends from the Meeker Hub in Rio Blanco County, Colorado to the Wamsutter
Hub in Sweetwater County, Wyoming; and (ii) a 191-mile, 42-inch diameter
pipeline that extends from the Wamsutter Hub to the Cheyenne Hub in Weld County,
Colorado. Phase II of the project includes the construction of three compressor
stations referred to as the Meeker, Big Hole and Wamsutter compressor stations.
The Meeker and Wamsutter stations were completed and placed in-service in
January 2008. Construction of the Big Hole compressor station is planned to
commence in the second quarter of 2008, in order to meet an expected in-service
date of June 30, 2009.
24
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Items 1. and 2. Business
and Properties. (continued)
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Knight
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On
April 19, 2007, the FERC issued a final order approving Rockies Express Pipeline
LLC’s application for authorization to construct and operate certain facilities
comprising its proposed Rockies Express-West Project. This project is the first
planned segment extension of the Rockies Express Pipeline LLC’s original
certificated facilities, and is comprised of approximately 713 miles of 42-inch
diameter pipeline extending eastward from the Cheyenne Hub to an interconnection
with Panhandle Eastern Pipe Line located in Audrain County, Missouri. The
segment extension transports approximately 1.5 billion cubic feet per day of
natural gas across the following five states: Wyoming, Colorado, Nebraska,
Kansas and Missouri, and includes certain improvements to pre-existing Rockies
Express facilities located to the west of the Cheyenne Hub. Construction of the
Rockies Express-West Project commenced on May 21, 2007, and interim firm
transportation service with capacity of approximately 1.4 billion cubic feet per
day began January 12, 2008. The entire project (Rockies Express-West pipeline
segment) is expected to become fully operational in mid-April 2008.
On
April 30, 2007, Rockies Express Pipeline LLC filed an application with the FERC
requesting approval to construct and operate the REX-East Project, the third
segment of the Rockies Express pipeline system. The Rockies Express-East Project
will be comprised of approximately 639 miles of 42-inch diameter pipeline
commencing from the terminus of the Rockies Express-West pipeline in Audrain
County, Missouri to a terminus near the town of Clarington in Monroe County,
Ohio. The pipeline segment will be capable of transporting approximately 1.8
billion cubic feet per day of natural gas. The FERC issued a draft environmental
report in late November 2007 for the Rockies Express-East project, and subject
to receipt of regulatory approvals, the Rockies Express-East Project is expected
to begin partial service on December 31, 2008, and to be in full service in June
2009.
In
December 2007, Rockies Express Pipeline LLC completed a non-binding open season
undertaken to solicit market interest for the “Northeast Express Project,” a
375-mile extension and expansion of the Rockies Express pipeline system from
Clarington, Ohio, to Princeton, New Jersey. Significant expressions of interest
were received on the Northeast Express Project and negotiations with prospective
shippers to enter into binding commitments are currently underway. Subject to
receipt of sufficient binding commitments and regulatory approvals, the
Northeast Express Project would go into service in late 2010. When complete, the
Northeast Express Project would provide up to 1.8 billion cubic feet per day of
transportation capacity to northeastern markets from the Lebanon Hub and other
pipeline receipt points between Lebanon, Ohio and Clarington, Ohio.
Markets. The
Rockies Express Pipeline 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. Rockies
Express Pipeline’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, Rockies Express Pipeline can deliver gas to
TransColorado Gas Transmission Company LLC in northwestern Colorado, which can
in turn transport the gas further south for delivery into the San Juan Basin
area. In Zone 1, Rockies Express Pipeline 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. The Rockies Express-West Project has 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 either Rockies Express Pipeline’s Zone 2 facilities or
other pipeline systems.
Rockies
Express Pipeline’s Zone 2 extends from the Cheyenne Hub to an interconnect with
the Panhandle Eastern Pipeline in Audrain County, Missouri. Through the Zone 2
facilities, Rockies Express Pipeline facilitates the delivery of natural gas
into the Mid-Continent 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).
Rockies Express Pipeline’s transportation capacity under interim service is
currently 1.4 billion cubic feet per day, and when this system is placed into
full service it will be capable of delivering 1.5 billion cubic feet per day
through these interconnects to the Mid-Continent market.
Supply. Rockies
Express Pipeline directly accesses major gas supply basins in western Colorado
and western Wyoming. In western Colorado, Rockies Express Pipeline has access to
gas supply from the Uinta and Piceance basins in eastern Utah and western
Colorado. In western Wyoming, Rockies Express Pipeline accesses the Green River
Basin through its facilities that are leased from Overthrust Pipeline Company.
With its connections to numerous other pipeline systems along its route, Rockies
Express Pipeline has access to almost all of the major gas supply basins in
Wyoming, Colorado and eastern Utah.
Competition. Although
there are some competitors to the Rockies Express Pipeline system that provide a
similar service, there are none that can compete with the economy-of-scale that
Rockies Express Pipeline provides to its shippers to transport gas from the
Rocky Mountain region to the Mid-Continent markets. The REX-East Project, noted
above, will put the Rockies Express Pipeline system in a very unique position of
being the only pipeline capable of offering a large volume of transportation
service from Rocky Mountain gas supply directly to customers in
Ohio.
Rockies
Express Pipeline could also experience competition for its Rocky Mountain gas
supply from both existing and proposed systems. Questar Pipeline Company
accesses many of the same basins as Rockies Express Pipeline and
transports
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Items 1. and 2. Business
and Properties. (continued)
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Knight
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gas
to its markets in Utah and to other interconnects, which have access to the
California market. In addition, there are pipelines that are proposed to use
Rocky Mountain gas to supply markets on the West Coast.
Kinder
Morgan Louisiana Pipeline
In
September 2006, Kinder Morgan Energy Partners filed an application with the FERC
requesting approval to construct and operate the Kinder Morgan Louisiana
Pipeline. The natural gas pipeline project is expected to cost approximately
$510 million and will provide 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 project is supported by
fully subscribed capacity and long-term customer
commitments with Chevron and Total.
The
Kinder Morgan Louisiana Pipeline will consist of two segments:
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a
132-mile, 42-inch diameter pipeline with firm capacity of approximately
2.0 billion cubic feet per day of natural gas that will extend from the
Sabine Pass terminal to a point of interconnection with an existing
Columbia Gulf Transmission line in Evangeline Parish, Louisiana (an
offshoot will consist of approximately 2.3 miles of 24-inch diameter
pipeline with firm peak day capacity of approximately 300 million cubic
feet per day extending away from the 42-inch diameter line to the existing
Florida Gas Transmission Company compressor station in Acadia Parish,
Louisiana). This segment is expected to be in service by January 1, 2009;
and
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·
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a
1-mile, 36-inch diameter pipeline with firm capacity of approximately 1.2
billion cubic feet per day that will extend from the Sabine Pass terminal
and connect to NGPL’s natural gas pipeline. This portion of the project is
expected to be in service in the third quarter of
2008.
|
Kinder
Morgan Energy Partners has designed and will construct the Kinder Morgan
Louisiana Pipeline in a manner that will minimize environmental impacts, and
where possible, existing pipeline corridors will be used to minimize impacts to
communities and to the environment. As of December 31, 2007, there were no major
pipeline re-routes as a result of any landowner requests.
Midcontinent
Express Pipeline LLC
On
October 9, 2007, Midcontinent Express Pipeline LLC filed an application with the
FERC requesting a certificate of public convenience and necessity that would
authorize construction and operation of the approximate 500-mile Midcontinent
Express Pipeline natural gas transmission system. Kinder Morgan Energy Partners
currently owns a 50% interest in Midcontinent Express Pipeline LLC and accounts
for its investment under the equity method of accounting. Energy Transfer
Partners, L.P. owns the remaining 50% interest. The Midcontinent Express
Pipeline will create long-haul, firm natural gas transportation takeaway
capacity, either directly or indirectly, from natural gas producing regions
located in Texas, Oklahoma and Arkansas. The total project is expected to cost
approximately $1.3 billion, and will have an initial transportation capacity of
approximately 1.4 billion cubic feet per day of natural gas.
For
additional information regarding the Midcontinent Express Pipeline, see (A)
General Development of
Business—Recent Developments.
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 KMIGT.
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 the Hilight plant (80
million cubic feet per day) owned and operated by Anadarko, the Sage Creek plant
(50 million cubic feet per day) owned and operated by Merit Energy, and the
Rawlins plant (230 million cubic feet per day) owned and operated by El Paso.
Casper and Douglas, however, are the only plants which provide straddle
processing of natural gas flowing into KMIGT.
Red
Cedar Gathering Company
Kinder
Morgan Energy Partners owns a 49% equity interest in the Red Cedar Gathering
Company, 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
26
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
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 four major interstate natural
gas pipeline systems and an intrastate pipeline.
Red
Cedar also owns Coyote Gas Treating, LLC, referred to in this report as Coyote
Gulch. The sole asset owned by Coyote Gulch is a 250 million cubic feet per day
natural gas treating facility located in La Plata County, Colorado. The inlet
gas stream treated by Coyote Gulch contains an average carbon dioxide content of
between 12% and 13%. The plant treats the gas down to a carbon dioxide
concentration of 2% in order to meet interstate natural gas pipeline quality
specifications, and then compresses the natural gas into the TransColorado Gas
Transmission pipeline for transport to the Blanco, New Mexico-San Juan Basin
Hub.
Red
Cedar’s gas gathering system currently consists of over 1,100 miles of gathering
pipeline connecting more than 920 producing wells, 85,000 horsepower of
compression at 24 field compressor stations and two carbon dioxide treating
plants. The capacity and throughput of the Red Cedar system as currently
configured is approximately 750 million cubic feet per day of natural
gas.
Thunder
Creek Gas Services, LLC
Kinder
Morgan Energy Partners owns a 25% equity interest in Thunder Creek Gas Services,
LLC, referred to in this report as Thunder Creek. Devon Energy owns the
remaining 75%. Thunder Creek provides gathering, compression and treating
services to a number of coal seam gas producers in the Powder River Basin of
Wyoming. Throughput volumes include both coal seam and conventional plant
residue gas.
Thunder
Creek’s operations are a combination of mainline and low pressure gathering
assets. The mainline assets include 125 miles of mainline pipeline, 230 miles of
high and low pressure laterals, 26,635 horsepower of mainline compression and
carbon dioxide removal facilities consisting of a 220 million cubic feet per day
carbon dioxide treating plant complete with dehydration. The mainline assets
receive gas from 53 receipt points and can deliver treated gas to seven delivery
points including Colorado Interstate Gas, Wyoming Interstate Gas Company, KMIGT
and three power plants. The low pressure gathering assets include five systems
consisting of 194 miles of gathering pipeline and 35,329 horsepower of field
compression.
The
CO2 –
KMP segment consists of Kinder Morgan CO2 Company,
L.P. and its consolidated affiliates, referred to in this report as KMCO2. Carbon
dioxide is used in enhanced oil recovery projects as a flooding medium for
recovering crude oil from mature oil fields. KMCO2’s 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. Together, the CO2 –KMP
business segment produces, transports and markets carbon dioxide for use in
enhanced oil recovery operations. Kinder Morgan Energy Partners also holds
ownership interests in several oil-producing fields and owns a 450-mile crude
oil pipeline, all located in the Permian Basin region of West
Texas.
Carbon
Dioxide Reserves
Kinder
Morgan Energy Partners owns approximately 45% of, and operates, the McElmo Dome
unit in Colorado, which contains more than nine trillion cubic feet of
recoverable carbon dioxide. Deliverability and compression capacity exceeds one
billion cubic feet per day. Kinder Morgan Energy partners is currently
installing facilities and drilling 8 wells to increase the production capacity
from McElmo Dome by approximately 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 290 million cubic feet per day.
Kinder
Morgan Energy Partners also owns approximately 88% of the Doe Canyon Deep unit
in Colorado, which contains more than 1.5 trillion cubic feet of carbon dioxide.
Kinder Morgan Energy Partners has installed facilities and drilled six wells
that began to produce approximately 100 million cubic feet per day of carbon
dioxide beginning in January 2008.
Markets. Kinder
Morgan Energy Partners’ principal market for carbon dioxide is for injection
into mature oil fields in the Permian Basin, where industry demand is expected
to grow modestly for the next several years. Kinder Morgan Energy Partners is
exploring additional potential markets, including enhanced oil recovery targets
in California, Wyoming, the Gulf Coast, Mexico, and Canada, and coal bed methane
production in the San Juan Basin of New Mexico.
Competition. Kinder
Morgan Energy Partners’ 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 Petro-Source
27
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
Carbon
Company, which gathers waste carbon dioxide from natural gas production in the
Val Verde Basin of West Texas. There is no assurance that new carbon dioxide
sources will not be discovered or developed, which could compete with Kinder
Morgan Energy Partners or that new methodologies for enhanced oil recovery will
not replace carbon dioxide flooding.
Carbon
Dioxide Pipelines
As
a result of its 50% ownership interest in Cortez Pipeline Company, Kinder Morgan
Energy Partners 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 one billion cubic feet
of carbon dioxide per day, including approximately 99% of the carbon dioxide
transported downstream on the Central Basin pipeline and the Centerline
pipeline. The tariffs charged by Cortez Pipeline are not regulated.
Kinder
Morgan Energy Partners’ Central Basin pipeline consists of approximately 143
miles of pipe and 177 miles of lateral supply lines located in the Permian Basin
between Denver City, Texas and McCamey, Texas, with a throughput capacity of 600
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 CO2 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 290 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 KMCO2’s carbon
dioxide pipelines is to customers, including Kinder Morgan Energy Partners,
using carbon dioxide for enhanced recovery operations in mature oil fields in
the Permian Basin, where industry demand is expected to grow modestly 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 and Bravo Dome for transportation of carbon dioxide to the Denver City,
Texas market area.
Oil
Acreage and Wells
KMCO2 also holds
ownership interests in oil-producing fields, including an approximate 97%
working interest in the SACROC unit, an approximate 50% working interest in the
Yates unit, a 21% net profits interest in the H.T. Boyd unit, an approximate 65%
working interest in the Claytonville unit, an approximate 95% working interest
in the Katz CB Long unit, an approximate 64% working interest in the Katz SW
River unit, a 100% working interest in the Katz East River unit, and 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 1.29 billion barrels of oil
since inception. It is estimated that SACROC originally held approximately 2.7
billion barrels of oil. We have 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.
28
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
As
of December 2007, the SACROC unit had 391 producing wells, and the purchased
carbon dioxide injection rate was 211 million cubic feet per day, down from an
average of 247 million cubic feet per day as of December 2006. The average oil
production rate for 2007 was approximately 27,600 barrels of oil per day, down
from an average of approximately 30,800 barrels of oil per day during 2006. The
average natural gas liquids production rate (net of the processing plant share)
for 2007 was approximately 6,300 barrels per day, an increase from an average of
approximately 5,700 barrels per day during 2006.
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 is implementing its plan and as of
December 2007, the Yates unit was producing about 27,600 barrels of oil per day.
As of December 2006, the Yates unit was producing approximately 27,200 barrels
of oil per day. Unlike operations at SACROC, where carbon dioxide and water is
used to drive oil to the producing wells, Kinder Morgan Energy Partners is using
carbon dioxide injection to replace nitrogen injection 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 is currently producing approximately 230 barrels
of oil per day. 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, as of December
2007, was producing approximately 400 barrels of oil equivalent per day. Kinder
Morgan Energy Partners is presently evaluating operating and subsurface
technical data to further assess redevelopment opportunities for the Katz field
including the potential for carbon dioxide flood operations.
The
following table sets forth productive wells, service wells and drilling wells in
the oil and gas fields in which Kinder Morgan Energy Partners owns interests as
of December 31, 2007. When used with respect to acres or wells, gross refers to
the total acres or wells in which Kinder Morgan Energy Partners has a working
interest; net refers to gross acres or wells multiplied, in each case, by the
percentage working interest owned by Kinder Morgan Energy Partners:
|
Productive Wells1
|
Service Wells2
|
Drilling Wells3
|
|||||||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
||||||
|
Crude
Oil
|
2,463
|
1,587
|
1,066
|
789
|
2
|
2
|
|||||
|
Natural
Gas
|
8
|
4
|
-
|
-
|
─
|
─
|
|||||
|
Total
Wells
|
2,471
|
1,591
|
1,066
|
789
|
2
|
2
|
|||||
__________
|
1
|
Includes
active wells and wells temporarily shut-in. As of December 31, 2007,
Kinder Morgan Energy Partners did not operate any productive wells with
multiple completions.
|
|
2
|
Consists
of injection, water supply, disposal wells and service wells temporarily
shut-in. A disposal well is used for disposal of saltwater 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.
|
|
3
|
Consists
of development wells in the process of being drilled as of December 31,
2007. A development well is a well drilled in an already discovered oil
field.
|
The
oil and gas producing fields in which Kinder Morgan Energy Partners owns
interests are located in the Permian Basin area of West Texas. The following
table reflects Kinder Morgan Energy Partners’ net productive and dry wells that
were completed in each of the three years ended December 31, 2007, 2006 and
2005:
|
2007
|
2006
|
2005
|
|||
|
Productive
|
|||||
|
Development
|
31
|
37
|
42
|
||
|
Exploratory
|
-
|
-
|
-
|
||
|
Dry
|
|||||
|
Development
|
-
|
-
|
-
|
||
|
Exploratory
|
-
|
-
|
-
|
||
|
Total
Wells
|
31
|
37
|
42
|
__________
29
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
|
Notes:
|
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 reservoir.
|
The
following table reflects the developed and undeveloped oil and gas acreage that
Kinder Morgan Energy Partners held as of December 31, 2007:
|
Gross
|
Net
|
||
|
Developed
Acres
|
72,435
|
67,731
|
|
|
Undeveloped
Acres
|
8,788
|
8,129
|
|
|
Total
|
81,223
|
75,860
|
Operating
Statistics
Operating
statistics from Kinder Morgan Energy Partners’ oil and gas producing activities
for each of the years 2007, 2006 and 2005 are shown in the following
table:
Results
of Operations for Oil and Gas Producing Activities – Unit Prices and
Costs
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Consolidated
Companies1
|
||||||||||||||||
|
Production
Costs per Barrel of Oil Equivalent2,3,4
|
$
|
17.00
|
$
|
15.15
|
$
|
13.30
|
$
|
10.00
|
||||||||
|
Crude
Oil Production (MBbl/d)
|
34.9
|
36.6
|
37.8
|
37.9
|
||||||||||||
|
Natural
Gas Liquids Production (MBbl/d)4
|
5.4
|
5.6
|
5.0
|
5.3
|
||||||||||||
|
Natural
Gas liquids Production from Gas Plants(MBbl/d)5
|
4.2
|
4.1
|
3.9
|
4.1
|
||||||||||||
|
Total
Natural Gas Liquids Production(MBbl/d)
|
9.6
|
9.7
|
8.9
|
9.4
|
||||||||||||
|
Natural
Gas Production (MMcf/d)4,6
|
0.8
|
0.8
|
1.3
|
3.7
|
||||||||||||
|
Natural
Gas Production from Gas Plants(MMcf/d)5,6
|
0.3
|
0.2
|
0.3
|
3.1
|
||||||||||||
|
Total
Natural Gas Production(MMcf/d)6
|
1.1
|
1.0
|
1.6
|
6.8
|
||||||||||||
|
Average
Sales Prices Including Hedge Gains/Losses:
|
||||||||||||||||
|
Crude
Oil Price per Bbl7
|
$
|
36.80
|
$
|
35.03
|
$
|
31.42
|
$
|
27.36
|
||||||||
|
Natural
Gas Liquids Price per Bbl7
|
$
|
57.78
|
$
|
44.55
|
$
|
43.52
|
$
|
38.79
|
||||||||
|
Natural
Gas Price per Mcf8
|
$
|
5.86
|
$
|
6.41
|
$
|
6.36
|
$
|
5.84
|
||||||||
|
Total
Natural Gas Liquids Price per Bbl5
|
$
|
58.55
|
$
|
45.04
|
$
|
43.90
|
$
|
38.98
|
||||||||
|
Total
Natural Gas Price per Mcf5
|
$
|
5.65
|
$
|
6.27
|
$
|
7.02
|
$
|
5.80
|
||||||||
|
Average
Sales Prices Excluding Hedge Gains/Losses:
|
||||||||||||||||
|
Crude
Oil Price per Bbl7
|
$
|
78.65
|
$
|
57.43
|
$
|
63.27
|
$
|
54.45
|
||||||||
|
Natural
Gas Liquids Price per Bbl7
|
$
|
57.78
|
$
|
44.55
|
$
|
43.52
|
$
|
38.79
|
||||||||
|
Natural
Gas Price per Mcf8
|
$
|
5.86
|
$
|
6.41
|
$
|
6.36
|
$
|
5.84
|
||||||||
____________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
2
|
Computed
using production costs, excluding transportation costs, as defined by the
Securities and Exchange Commisson. Natural gas volumes were converted to
barrels of oil equivalent (BOE) using a conversion factor of six mcf of
natural gas to one barrel of oil.
|
|
3
|
Production
costs include labor, repairs and maintenance, materials, supplies, fuel
and power, property taxes, severance taxes, and general and administrative
expenses directly related to oil and gas producing
activities.
|
|
4
|
Includes
only production attributable to leasehold
ownership.
|
|
5
|
Includes
production attributable to Kinder Morgan Energy Partners’ ownership in
processing plants and third-party processing
agreements.
|
|
6
|
Excludes
natural gas production used as
fuel.
|
|
7
|
Hedge
gains/losses for crude oil and natural gas liquids are included with crude
oil.
|
|
8
|
Natural
gas sales were not hedged.
|
See
Supplemental Information on Oil and Gas Producing Activities (Unaudited) to our
consolidated financial statements included in this report for additional
information with respect to operating statistics and supplemental information on
Kinder Morgan Energy Partners’ oil and gas producing activities.
30
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
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. Kinder
Morgan Energy Partners 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 as of December 2007 was
approximately 15,500 barrels per day, as compared to 15,000 barrels per day as
of December 2006.
Crude
Oil Pipeline
Kinder
Morgan Energy Partners owns the Kinder Morgan Wink Pipeline, 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 Kinder Morgan
Energy Partners 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 119,000 barrels of oil
per day in 2007. 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 the Products Pipelines – KMP segment) and all of Kinder Morgan
Energy Partners’ 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 100 owned
or operated liquids and bulk terminal facilities, and more than 45 rail
transloading and materials handling facilities located throughout the United
States, Canada and the Netherlands. In 2007, the number of customers from whom
the Terminals – KMP segment received more than $0.1 million of revenue was
approximately 650.
Liquids
Terminals
The
liquids terminal 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 terminal facilities
possess liquids storage capacity of approximately 47.5 million barrels, and in
2007, these terminals handled approximately 557 million barrels of petroleum,
chemicals and vegetable oil products.
In
September 2006, Kinder Morgan Energy Partners announced major expansions at its
Pasadena and Galena Park, Texas terminal facilities. The expansions will provide
additional infrastructure to help meet the growing need for refined petroleum
products storage capacity along the Gulf Coast. The investment of approximately
$195 million includes the construction of the following: (i) new storage tanks
at both the Pasadena and Galena Park terminals; (ii) an additional cross-channel
pipeline to increase the connectivity between the two terminals; (iii) a new
ship dock at Galena Park; and (iv) an additional loading bay at the fully
automated truck loading rack located at the Pasadena terminal. The expansions
are supported by long-term customer commitments and will result in approximately
3.4 million barrels of additional tank storage capacity at the two terminals.
Construction began in October 2006, and all of the projects are expected to be
completed by the spring of 2008, with the exception of the Galena Park ship
dock, which is now scheduled to be in-service by the third quarter of
2008.
At
Perth Amboy, New Jersey, Kinder Morgan Energy Partners completed construction
and placed into service nine new storage tanks with a capacity of 1.4 million
barrels for gasoline, diesel and jet fuel. These tanks have been leased on a
long-term basis to two customers. Kinder Morgan Energy Partners’ total
investment in these facilities was approximately $69 million.
In
June 2006, Kinder Morgan Energy Partners announced the construction of a new
crude oil tank farm located in Edmonton, Alberta, Canada, and long-term
contracts with customers for all of the available capacity at the facility.
Situated on approximately 24 acres, the new storage facility will have nine
tanks with a combined storage capacity of approximately 2.2 million barrels for
crude oil. Service is expected to begin in the first quarter of 2008, and when
completed, the tank farm will serve as a premier blending and storage hub for
Canadian crude oil. Originally estimated at $115 million, due primarily to
additional labor costs, total investment in this tank farm is projected to be
$162 million on a constant U.S. dollar basis. The tank farm will have access to
more than 20 incoming pipelines and several major outbound systems, including a
connection with the Trans Mountain pipeline system, which currently transports
up to 260,000 barrels per day of heavy crude oil and
31
|
Items 1. and 2. Business
and Properties. (continued)
|
Knight
Form 10-K
|
refined
products from Edmonton to marketing terminals and refineries located in the
greater Vancouver, British Columbia area and Puget Sound in Washington
state.
Competition. Kinder Morgan
Energy Partners is one of the largest independent operators of liquids terminals
in North America. Its primary competitors are IMTT, Magellan, Morgan Stanley,
NuStar, Oil Tanking, Teppco and Vopak.
Bulk
Terminals
Kinder
Morgan Energy Partners’ bulk terminal operations primarily involve dry-bulk
material handling services; however, Kinder Morgan Energy Partners also provides
conveyor manufacturing and installation, engineering and design services and
in-plant services covering material handling, conveying, maintenance and repair,
railcar switching and miscellaneous marine services. Combined, Kinder Morgan
Energy Partners’ dry-bulk and material transloading facilities handled
approximately 87.1 million tons of coal, petroleum coke, fertilizers, steel,
ores and other dry-bulk materials in 2007. Kinder Morgan Energy Partners owns or
operates approximately 93 dry-bulk terminals in the United States, Canada and
the Netherlands.
In
May 2007, Kinder Morgan Energy Partners purchased certain buildings and
equipment and completed a 40-year agreement to operate Vancouver Wharves, a bulk
marine terminal located at the entrance to the Port of Vancouver, British
Columbia. 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, which allow the terminal to handle over 3.5 million tons of
cargo annually. 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. In addition to the aggregate consideration of approximately $57.2
million ($38.8 million in cash and the assumption of $18.4 million of assumed
liabilities) paid for this facility, Kinder Morgan Energy Partners plans to
invest an additional $46 million at Vancouver Wharves over the next two years to
upgrade and relocate certain rail track and transloading systems, buildings and
a shiploader.
Effective
September 1, 2007, Kinder Morgan Energy Partners purchased the assets of Marine
Terminals, Inc. for an aggregate consideration of approximately $101.5
million. Combined, the
assets handle approximately 13.5 million tons of alloys and steel products
annually from five facilities located in the southeastern United States. These
strategically located terminals provide handling, processing, harboring and
warehousing services primarily to Nucor Corporation, one of the largest steel
and steel products companies in the world, under long-term
contracts.
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, we believe 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 at 45 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 2007, the materials services
operations handled approximately 347,000 railcars.
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.
Kinder
Morgan Energy Partners’ 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 out of
Edmonton ranges from 260,000 barrels per day when heavy crude represents 20% of
the total throughput to 300,000 barrels per day with no heavy crude. The
pipeline system utilizes 21 pump stations controlled by a centralized computer
control system.
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Items 1. and 2. Business
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Knight
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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
2007, deliveries on Trans Mountain averaged 258,540 barrels per day. This was an
increase of 13% from average 2006 deliveries of 229,369 barrels per day. In
April 2007, Kinder Morgan Energy Partners commissioned ten new pump stations
that boosted capacity on Trans Mountain from 225,000 to approximately 260,000
barrels per day. 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 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 oilsands development with projects led by Shell Canada,
Suncor Energy and Syncrude Canada. Further development is expected to continue
into the future with expansions to existing oilsands production facilities as
well as with new projects. In its moderate growth case, the Canadian Association
of Petroleum Producers (“CAPP”) forecasts western Canadian crude oil production
to increase by over 1.6 million barrels per day by 2015. This increasing supply
will likely result in constrained export pipeline capacity from western Canada,
which supports Trans Mountain’s view that both the demand for transportation
services provided by Trans Mountain’s pipeline and the supply of crude oil will
remain strong for the foreseeable future.
Shipments
of refined petroleum represent a significant portion of Trans Mountain’s
throughput. In 2007, shipments of
refined petroleum and iso-octane represented 25% of throughput, as compared with
28% in 2006.
Interstate
Common Carrier Pipeline Rate Regulation – U.S. Operations
Some
of our 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, which 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 17 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.
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Items 1. and 2. Business
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Common
Carrier Pipeline Rate Regulation – Canadian Operations
The
Canadian portion of our crude oil and refined petroleum products pipeline
systems is under the regulatory jurisdiction of Canada’s National Energy Board,
referred to in this report as the NEB. The National Energy Board Act gives the
NEB power to authorize pipeline construction and to establish tolls and
conditions of service.
Trans
Mountain – KMP
In
November 2004, Trans Mountain entered into negotiations with the Canadian
Association of Petroleum Producers and principal shippers for a new incentive
toll settlement to be effective for the period starting January 1, 2006 and
ending December 31, 2010. In January 2006, Trans Mountain reached agreement in
principle, which was reduced to a memorandum of understanding for the 2006 toll
settlement. A final agreement was reached with the Canadian Association of
Petroleum Producers in October 2006 and NEB approval was received in November
2006.
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 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, other than
recalculation or adjustment in certain specified circumstances, remain in effect
for the five-year period. The toll settlement also governs the financial
arrangements for the approximately C$638 million expansions to Trans Mountain
that will add 75,000 barrels per day of incremental capacity to the system by
late 2008. 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 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
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 (“WPSC”), which regulates the tariffs and
terms of service of public utilities that operate in the State of Wyoming. The
WPSC standards applicable to rates are similar to those of the FERC and the
NEB.
Interstate
Natural Gas Transportation and Storage Regulation
Both
the performance of and rates charged by companies performing interstate natural
gas transportation and storage services are regulated by the FERC under the
Natural Gas Act of 1938 and, to a lesser extent, 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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·
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Order
No. 436 (1985) requiring open-access, nondiscriminatory transportation of
natural gas;
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·
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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;
and
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·
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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 whether purchased from the pipeline or from other merchants such
as marketers or producers.
|
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 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) the issuance of blanket sales certificates to interstate pipelines for
unbundled services. Order 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.
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Items 1. and 2. Business
and Properties. (continued)
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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 new Standards of Conduct
were designed to 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. The rule is designed to prevent interstate natural gas
pipelines from giving an undue preference to any of their energy affiliates and
to ensure that transmission is provided on a nondiscriminatory basis. In
addition, unlike the prior regulations, these requirements apply even if the
energy affiliate is not a customer of its affiliated interstate pipeline. Our
interstate natural gas pipelines are in compliance with these Standards of
Conduct.
On
November 17, 2006, the D.C. Circuit vacated Order No. 2004, as applied to
natural gas pipelines, and remanded the Order back to the FERC. On January 9,
2007, the FERC issued an interim rule regarding standards of conduct in Order
No. 690 to be effective immediately. The interim rule repromulgated the
standards of conduct that were not challenged before the court. On January 18,
2007, the FERC issued a notice of proposed rulemaking soliciting comments on
whether or not the interim rule should be made permanent for natural gas
transmission providers. Please refer to Note 16 of the accompanying Notes to
Consolidated Financial Statements for additional information regarding FERC
Order No. 2004 and other Standards of Conduct rulemaking.
On
August 8, 2005, Congress enacted the Energy Policy Act of 2005. The Energy
Policy Act, 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.
California
Public Utilities Commission Rate Regulation
The
intrastate common carrier operations of our Pacific operations’ pipelines in
California are subject to regulation by the California Public Utilities
Commission, referred to in this report as the CPUC, under a “depreciated book
plant” methodology, which is based on an original cost measure of investment.
Intrastate tariffs filed by us with the CPUC have been established on the basis
of revenues, expenses and investments allocated as applicable to the California
intrastate portion of our 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 our FERC
regulated rates could also arise with respect to our intrastate rates. Certain
of our Pacific operations’ pipeline rates have been, and continue to be, subject
to complaints with the CPUC, as is more fully described in Note 17 of the
accompanying Notes to Consolidated Financial Statements.
Texas
Railroad Commission Rate Regulation
The
intrastate common carrier 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. Although the Texas Railroad
Commission has the authority to regulate our rates, the Commission has generally
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, referred to in this report as U.S. DOT, and our intrastate
pipelines and other operations are subject to comparable state regulations with
respect to their design, 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. We believe that we are in
substantial compliance with U.S. DOT and comparable state
regulations.
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. The
U.S. DOT has approved our qualification program. We believe that we are in
substantial compliance with this law’s requirements and have integrated
appropriate aspects of this pipeline safety law into our internal Operator
Qualification Program. A similar integrity management rule for refined petroleum
products pipelines became effective May 29, 2001.
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Items 1. and 2. Business
and Properties. (continued)
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We
are also subject to the requirements of the Federal Occupational Safety and
Health Act and other comparable federal and state statutes. We believe that we
are in substantial compliance with Federal OSHA requirements, including general
industry standards, recordkeeping requirements and monitoring of occupational
exposure to hazardous substances.
In
general, we expect to increase expenditures in the future to comply with higher
industry and regulatory safety standards. Some of these changes, such as U.S.
DOT implementation of additional hydrostatic testing requirements, could
significantly increase the amount of these expenditures. Such increases in our
expenditures cannot be accurately estimated 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, and
safety.
Our
operations are subject to federal, state and local, and some foreign laws and
regulations governing the release of regulated materials into the environment or
otherwise relating to environmental protection or human health or safety. We
believe that our operations are in substantial compliance with applicable
environmental laws and regulations.
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 has identified us as one of the potentially responsible
parties. The involvement of other financially responsible companies at these
multiparty sites could mitigate our actual joint and several liability
exposures. Although no assurance can be given, we believe that the ultimate
resolution of all 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 $102.6 million as of December
31, 2007. Our reserve estimates range in value from approximately $102.6 million
to approximately $159.6 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. In addition, we have recorded a receivable of
$38.0 million for expected cost recoveries that have been deemed probable. For
additional information related to environmental matters, see Note 17 of the
accompanying Notes to Consolidated Financial Statements.
Solid
Waste
We
generate both hazardous and non-hazardous solid 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 United
States Environmental Protection Agency 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 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 disposal requirements than
non-hazardous wastes. Such changes in the regulations may result in additional
capital expenditures or operating expenses for us.
Superfund
The
Comprehensive Environmental Response, Compensation and Liability Act, also known
as the “Superfund” law or “CERCLA,” 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
“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, as amended, and analogous state
statutes. We believe that the operations of our pipelines, storage facilities
and terminals are in substantial compliance with such statutes. The Clean Air
Act, as amended, contains 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
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Items 1. and 2. Business
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Knight
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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.
Due
to the broad scope and complexity of the issues involved and the resultant
complexity and nature of the regulations, full development and implementation of
many Clean Air Act regulations by the U.S. EPA and/or various state and local
regulators have been delayed. Therefore, until such time as the new Clean Air
Act requirements are implemented, we are unable to fully estimate the effect on
earnings or operations or the amount and timing of such required capital
expenditures. At this time, 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 as they pertain 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. We
believe we are in substantial compliance with these laws.
Other
Amounts
we spent during 2007, 2006 and 2005 on research and development activities were
not material. We employed approximately 7,600 full-time people at December 31,
2007, 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 920 full-time hourly
personnel at certain terminals and pipelines are represented by labor unions
under collective bargaining agreements that expire between 2008 and 2012. KMGP
Services Company, Inc., Knight Inc. and Kinder Morgan Canada Inc. each consider
relations with their employees to be good. For more information on our related
party transactions, see Note 1(S) 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
the limited 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 Knight 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
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Items 1. and 2. Business
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Knight
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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, and 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.
(D)
Financial Information about Geographic Areas
Note
15 of the accompanying Notes to Consolidated Financial Statements contains
financial information about the geographic areas in which we do
business.
(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.
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.
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
conjunction with the Going Private transaction, Knight Inc. incurred
approximately $4.8 billion in additional debt. Moody’s Investor Services and
Standard & Poor’s Rating Services downgraded the ratings assigned to Knight
Inc.’s senior unsecured debt to BB- and Ba2, respectively. Upon the recent 80%
ownership interest sale of our NGPL business segment, Standard & Poor’s
Rating Service upgraded Knight Inc.’s senior unsecured debt to BB. Knight Inc.
no longer has access to the commercial paper market and is currently utilizing
its $1.0 billion revolving credit facility for its short-term borrowing
needs.
Our substantially increased debt
could adversely affect our financial health and make us more vulnerable to
adverse economic conditions.
As
a result of the Going Private transaction, we have significantly more debt
outstanding and significantly higher debt service requirements than in the
recent past. As of December 31, 2007, we had outstanding approximately $16.1
billion of consolidated debt (excluding Value of Interest Rate Swaps). Of this
amount, $9.0 billion was debt owed by Knight Inc. and its subsidiaries,
excluding Kinder Morgan Energy Partners and its subsidiaries, and is currently
secured by most of our assets (other than those of Kinder Morgan G.P., Inc.,
Kinder Morgan Energy Partners, Kinder Morgan Management and their respective
subsidiaries).
Our
increased level of debt could have important consequences, such as:
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·
|
limiting
our ability to obtain additional financing to fund our working capital,
capital expenditures, debt service requirements or potential growth or for
other purposes;
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·
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limiting
our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to make
payments on our debt;
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·
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placing
us at a competitive disadvantage compared to competitors with less debt;
and
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·
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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.
38
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
Our
large amount of floating rate debt makes us vulnerable to increases in interest
rates.
As
of December 31, 2007, we had outstanding approximately $16.1 billion of
consolidated debt. Of this amount, excluding debt of Kinder Morgan Energy
Partners that is consolidated with ours, approximately 53% was subject to
floating interest rates, either as short-term or long-term debt of floating rate
credit facilities or as long-term fixed-rate debt converted to floating rates
through the use of interest rate swaps. Should interest rates increase
significantly, the amount of cash required to service our debt would
increase.
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 earnings.
The
tax treatment applied to Kinder Morgan Energy Partners depends on its status as
a partnership for 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 treats it as a corporation or if it becomes subject to
a material amount of entity-level taxation for state tax purposes, it would
substantially reduce the amount of cash available for distribution to its
partners, including us.
The
anticipated after-tax economic benefit of an investment in Kinder Morgan Energy
Partners depends largely on it being treated as a partnership for federal income
tax purposes. In order for it to be treated as a partnership for 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 federal income tax purposes or otherwise subject to
federal income tax. Kinder Morgan Energy Partners has not requested, and does
not plan to request, a ruling from the Internal Revenue Service on this or any
other matter affecting it.
If
Kinder Morgan Energy Partners were to be treated as a corporation for federal
income tax purposes, it would pay federal income tax on its income at the
corporate tax rate, which is currently a maximum of 35%, and would pay state
income taxes at varying rates. Under current law, distributions to its partners
would generally be taxed again as corporate distributions, and no income, gain,
losses or deductions would flow through to its partners. Because a tax would be
imposed on Kinder Morgan Energy Partners as a corporation, its 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, likely causing a
substantial reduction in the value of our interest in Kinder Morgan Energy
Partners.
Current
law or the business of Kinder Morgan Energy Partners may change so as to cause
it to be treated as a corporation for federal income tax purposes or otherwise
subject it to entity-level taxation. Members of Congress are considering
substantive changes to the existing federal income tax laws that affect certain
publicly-traded partnerships. For example, federal income tax legislation has
been proposed that would eliminate partnership tax treatment for certain
publicly-traded partnerships. Although the currently proposed legislation would
not appear to affect Kinder Morgan Energy Partners, L.P.’s tax treatment as a
partnership, we are unable to predict whether any of these changes, or other
proposals, will ultimately be enacted. Any such changes could negatively impact
the value of our interest in Kinder Morgan Energy Partners.
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 a new 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 its total revenue that is apportioned to Texas. Imposition of such a tax
on Kinder Morgan Energy Partners by Texas, or any other state, will reduce its
cash available for distribution to its partners, including us.
The
Kinder Morgan Energy Partners partnership agreement provides that if a law is
enacted that subjects Kinder Morgan Energy Partners to taxation as a corporation
or otherwise subjects it to entity-level taxation for federal income tax
purposes, the minimum quarterly distribution and the target distribution levels
will be adjusted to reflect the impact of that law on Kinder Morgan Energy
Partners.
Kinder Morgan Energy Partners
adopted certain valuation methodologies that may result in a shift of income,
gain, loss and deduction between it and its unitholders. The IRS may challenge
this treatment, which could adversely affect the value of the common
units.
When
Kinder Morgan Energy Partners issues additional units or engages in certain
other transactions, it determines the fair market value of its assets and
allocates any unrealized gain or loss attributable to its assets to the capital
accounts of its
39
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
unitholders
and us. This methodology may be viewed as understating the value of Kinder
Morgan Energy Partners’ assets. In that case, there may be a shift of income,
gain, loss and deduction between certain unitholders and us, which may be
unfavorable to such unitholders. Moreover, under Kinder Morgan Energy Partners’
current valuation methods, subsequent purchasers of common units may have a
greater portion of their Internal Revenue Code Section 743(b) adjustment
allocated to its tangible assets and a lesser portion allocated to its
intangible assets. The IRS may challenge these valuation methods, or Kinder
Morgan Energy Partners’ allocation of the Section 743(b) adjustment attributable
to its tangible and intangible assets, and allocations of income, gain, loss and
deduction between us and certain of its unitholders.
A
successful IRS challenge to these methods or allocations could adversely affect
the amount of taxable income or loss being allocated to Kinder Morgan Energy
Partners’ partners, including us. It also could affect the amount of gain from
Kinder Morgan Energy Partners’ unitholders’ sale of common units and could have
a negative impact on the value of the common units or result in audit
adjustments to its unitholders’ tax returns without the benefit of additional
deductions.
Kinder Morgan Energy Partners’
treatment of a purchaser of common units as having the same tax benefits as the
seller could be challenged, resulting in a reduction in value of the common
units.
Because
Kinder Morgan Energy Partners cannot match transferors and transferees of common
units, it is required to maintain the uniformity of the economic and tax
characteristics of these units in the hands of the purchasers and sellers of
these units. It does so by adopting certain depreciation conventions that do not
conform to all aspects of the United States Treasury regulations. A successful
IRS challenge to these conventions could adversely affect the tax benefits to a
unitholder of ownership of the common units and could have a negative impact on
their value or result in audit adjustments to unitholders’ tax
returns.
Our
senior management’s attention may be diverted from our daily operations because
of significant transactions following the completion of the Going Private
transaction.
The
investors in Knight Holdco LLC include members of our senior management. Prior
to consummation of the Going Private transaction, we had publicly disclosed that
several significant transactions were being considered that, if pursued, would
require substantial management time and attention. As a result, our senior
management’s attention may be diverted from the management of our daily
operations.
Pending Federal Energy Regulatory
Commission and California Public Utilities Commission proceedings seek
substantial refunds and reductions in tariff rates on some of Kinder Morgan
Energy Partners’ pipelines. If the proceedings are determined adversely to
Kinder Morgan Energy Partners, 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 Federal
Energy Regulatory Commission and California Public Utilities Commission 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. We may face challenges, similar to those
described in Note 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 Federal Energy Regulatory Commission or other
regulatory agencies having jurisdiction over our operations could adversely
impact our income and operations.
The
rates (which include reservation, commodity, surcharges, fuel and gas lost and
unaccounted for) we charge shippers on our natural gas pipeline systems are
subject to regulatory approval and oversight. Furthermore, regulators and
shippers on our natural gas pipelines have rights to challenge the rates
shippers are charged under certain circumstances prescribed by applicable
regulations. We can provide no assurance that we will not face challenges to the
rates we receive on our pipeline systems in the future. Any successful challenge
could materially adversely affect our future earnings and cash flows. New laws
or regulations or different interpretations of existing laws or regulations
applicable to our assets could have a material adverse impact on our business,
financial condition and results of operations.
Our business is subject to extensive
regulation that affects our operations and costs.
Our
assets and operations are subject to regulation by federal, state and local
authorities, including regulation by the Federal Energy Regulatory Commission,
referred to as the FERC, and by various authorities under federal, state and
local environmental 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.
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
40
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
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.
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.
Competition could ultimately lead to
lower levels of profits and adversely impact our ability to recontract for
expiring transportation capacity at favorable rates.
For
the seven months ended December 31, 2007, and the five months ended May 31,
2007, NGPL’s segment earnings represented approximately 49.0% and 49.8%,
respectively, of our total segment earnings plus net pre-tax impact of Kinder
Morgan Energy Partners. NGPL is an interstate natural gas pipeline that is a
major supplier to the Chicago, Illinois area. In the past, interstate pipeline
competitors of NGPL have constructed or expanded pipeline capacity into the
Chicago area. To the extent that an excess of supply into this market area is
created and persists, NGPL’s ability to recontract for expiring transportation
capacity at favorable rates could be impaired. Contracts representing
approximately 18.3% of NGPL’s total long-haul, contracted firm transport
capacity as of January 31, 2008 have not been renewed and are scheduled to
expire before the end of 2008.
Trans
Mountain’s pipeline to the West Coast of North America and the Express System,
in which we own an interest, to the U.S. Rocky Mountains and Midwest are two of
several pipeline alternatives for western Canadian petroleum production. These
pipelines, like all our petroleum pipelines, compete against other pipeline
companies who could be in a position to offer different tolling structures,
which may provide them with a competitive advantage in new pipeline development.
Throughput on our pipelines may decline if tolls become uncompetitive compared
to alternatives.
Cost overruns and delays on our
expansion and new build projects could adversely affect our
business.
We
currently have several major expansion and new build projects planned or
underway, including Kinder Morgan Energy Partners’ approximate $4.9 billion
Rockies Express Pipeline and approximate $1.3 billion Midcontinent Express
Pipeline. 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 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:
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demands
on management related to the increase in our size after an acquisition, an
expansion, or a completed construction
project;
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·
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the
diversion of our management’s attention from the management of daily
operations;
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difficulties
in implementing or unanticipated costs of accounting, estimating,
reporting and other systems;
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difficulties
in the assimilation and retention of necessary employees;
and
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·
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potential
adverse effects on operating
results.
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41
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
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 credit markets or
more expensive capital would impair our ability to grow.
Part
of our business strategy includes acquiring additional businesses. We may need
new capital to finance these acquisitions. Limitations on our access to capital
will impair our ability to execute this strategy. We normally fund acquisitions
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.
Environmental
regulation and liabilities could result in increased operating and capital
costs.
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 products
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 level of earnings and cash flow. In addition, emission
controls required under federal, state and provincial environmental laws could
require significant capital expenditures at our facilities. The costs of
environmental regulation are already significant, and additional or more
stringent regulation could increase these costs or could otherwise negatively
affect our business.
We
own 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 such wastes have been taken for disposal. In addition, many of these
properties have been owned and/or operated by third parties whose management,
use and disposal of hydrocarbons or other hazardous substances were not under
our control. These properties and the hazardous substances released and wastes
disposed thereon may be subject to laws in the United States such as the
Comprehensive Environmental Response, Compensation, and Liability Act, also
known as CERCLA or the Superfund law, which impose joint and several liability
without regard to fault or the legality of the original conduct. Under the
regulatory schemes of the various 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 groundwater 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, Kinder Morgan Energy Partners’ oil and gas development and production
activities are subject to certain 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, Kinder Morgan
Energy Partners is 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 hazardous wastes. In addition, legislation has been enacted which
requires well and facility sites to be abandoned and reclaimed to the
satisfaction of state authorities. The costs of environmental regulation are
already significant, and additional or more stringent regulation could increase
these costs or could otherwise negatively affect our business.
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.
42
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
The general uncertainty associated
with the current world economic and political environments in which we exist may
adversely impact our financial performance.
Our
financial performance is impacted by overall marketplace spending and demand. We
are continuing to assess the effect that terrorism would have on our businesses
and in response, we have increased security with respect to our assets. 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 throughout 2008.
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. Department of Transportation 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.
Future
business development of our products pipelines is dependent on the supply of,
and demand for, crude oil and other liquid hydrocarbons, particularly from the
Alberta oilsands.
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 oilsands. 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.
Changes
in the business environment, such as a decline in crude oil prices, an increase
in production costs from higher feedstock prices, supply disruptions, or higher
development costs, could result in a slowing of supply from the Alberta
oilsands. In addition, 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 our ownership of the Express Pipeline System and Kinder Morgan
Energy Partners’ ownership of Trans Mountain, the Vancouver Wharves terminal,
the Cochin pipeline system, and Kinder Morgan Energy Partners’ terminal
expansion projects located in Canada, 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 stockholders’ equity under
applicable accounting rules.
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 Kinder Morgan Energy Partners’ CO2 business
segment will decline. Kinder Morgan Energy Partners may not be able to develop
or acquire additional reserves at an
43
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Item 1A.
Risk
Factors. (continued)
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Knight
Inc. Form 10-K
|
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 will be liable to perform on hedges currently valued at greater than
$1.3 billion in favor of its counter-parties.
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. Furthermore, a successful completion of a well
does not ensure a profitable return on the investment. A variety of geological,
operational, or 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 Kinder Morgan Energy Partners’
CO2
business segment and the carrying value of its oil and natural gas properties
depend to a large degree on prevailing oil and gas prices. Prices for oil and
natural gas are subject to large fluctuations in response to relatively minor
changes in the supply and demand for oil 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 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 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.
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 floating 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.
None.
44
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Knight
Form 10-K
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The
reader is directed to Note 17 of the accompanying Notes to Consolidated
Financial Statements, which is incorporated herein by reference.
Item
4. Submission of Matters to a Vote of
Security Holders.
None.
45
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Knight
Form 10-K
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PART
II
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Prior
to the Going Private transaction, our common stock was listed for trading on the
New York Stock Exchange under the symbol “KMI.” Dividends paid and the high and
low sale prices per share, as reported on the New York Stock Exchange, of our
common stock by quarter for the last two years are provided below.
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Market
Price Per Share
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2007
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2006
|
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Low
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High
|
Low
|
High
|
||||
|
Quarter
Ended:
|
|||||||
|
March
31
|
$104.97
|
$107.02
|
$89.13
|
$103.75
|
|||
|
June
301
|
$105.32
|
$108.14
|
$81.00
|
$103.00
|
|||
|
September
30
|
n/a
|
n/a
|
$99.50
|
$105.00
|
|||
|
December
31
|
n/a
|
n/a
|
$104.00
|
$106.20
|
|||
|
Dividends
Paid Per Share
|
|||
|
2007
|
2006
|
||
|
Quarter
Ended:
|
|||
|
March
31
|
$0.8750
|
$0.8750
|
|
|
June
301
|
$0.8750
|
$0.8750
|
|
|
September
30
|
n/a
|
$0.8750
|
|
|
December
31
|
n/a
|
$0.8750
|
|
__________
|
1
|
As
a result of the Going Private transaction, our common stock ceased trading
on May 30, 2007.
|
There
were no sales of unregistered equity securities during the period covered by
this report, and we repurchased none of our equity securities during the fourth
quarter of 2007.
For
information regarding our equity compensation plans, please refer to Item 12,
included elsewhere herein.
|
Item
6.
|
Five-Year Review1
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||
|
Seven
Months Ended
|
Five
Months
|
|||||||||||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
||||||||||||||||||||||
|
20072
|
May
31, 2007
|
20063,4
|
20054
|
2004
|
2003
|
|||||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||||||
|
Operating
Revenues
|
$
|
6,394.7
|
$
|
4,165.1
|
$
|
10,208.6
|
$
|
1,025.6
|
$
|
877.7
|
$
|
848.8
|
||||||||||||
|
Gas
Purchases and Other Costs of Sales
|
3,656.6
|
2,490.4
|
6,339.4
|
302.6
|
194.2
|
232.1
|
||||||||||||||||||
|
Other
Operating Expenses5,6
|
1,695.3
|
1,469.9
|
2,124.0
|
341.7
|
342.5
|
316.5
|
||||||||||||||||||
|
Operating
Income
|
1,042.8
|
204.8
|
1,745.2
|
381.3
|
341.0
|
300.2
|
||||||||||||||||||
|
Other
Income and (Expenses)
|
(566.9
|
)
|
(302.0
|
)
|
(858.9
|
)
|
470.0
|
365.2
|
281.5
|
|||||||||||||||
|
Income
(Loss) from Continuing Operations
Before
Income Taxes
|
475.9
|
(97.2
|
)
|
886.3
|
851.3
|
706.2
|
581.7
|
|||||||||||||||||
|
Income
Taxes
|
227.4
|
135.5
|
285.9
|
337.1
|
208.0
|
225.1
|
||||||||||||||||||
|
Income
(Loss) from Continuing Operations
|
248.5
|
(232.7
|
)
|
600.4
|
514.2
|
498.2
|
356.6
|
|||||||||||||||||
|
Income
(Loss) from Discontinued Operations, Net of Tax7
|
(1.5
|
)
|
298.6
|
(528.5
|
)
|
40.4
|
23.9
|
25.1
|
||||||||||||||||
|
Net
Income
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
$
|
522.1
|
$
|
381.7
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Capital
Expenditures8
|
$
|
1,287.0
|
$
|
652.8
|
$
|
1,375.6
|
$
|
134.1
|
$
|
103.2
|
$
|
132.0
|
||||||||||||
__________
|
1
|
Includes
significant impacts from acquisitions and dispositions of assets. See
Notes 4 and 5 of the accompanying Notes to Consolidated Financial
Statements for additional
information.
|
46
|
Item 6.
Selected
Financial Data (continued)
|
Knight
Form 10-K
|
|
2
|
Includes
significant impacts resulting from the Going Private transaction. See Note
1(B) of the accompanying Notes to Consolidated Financial Statements for
additional information.
|
|
3
|
Due
to our adoption of EITF No. 04-5, effective January 1, 2006 the accounts,
balances and results of operations of Kinder Morgan Energy Partners are
included in our financial statements and we no longer apply the equity
method of accounting to our investments in Kinder Morgan Energy Partners.
See Note 1(B) of the accompanying Notes to Consolidated Financial
Statements.
|
|
4
|
Includes
the results of Terasen Inc. subsequent to its November 30, 2005
acquisition by us. See Notes 4, 6 and 7 of the accompanying Notes to
Consolidated Financial Statements for information regarding
Terasen.
|
|
5
|
Includes
charges of $1.2 million, $6.5 million, $33.5 million, and $44.5 million in
2006, 2005, 2004 and 2003, respectively, to reduce the carrying value of
certain power assets.
|
|
6
|
Includes
an 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 Knight Inc. on April 30, 2007. See Note 1(I) of the
accompanying Notes to Consolidated Financial
Statements.
|
|
7
|
Includes
a charge of $650.5 million in 2006 to reduce the carrying value of Terasen
Inc.; see Note 6 of the accompanying Notes to Consolidated Financial
Statements.
|
|
8
|
Capital
Expenditures shown are for continuing operations
only.
|
|
As
of December 31,
|
||||||||||||||||||||||||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||||||||
|
20071
|
20062
|
20053
|
2004
|
2003
|
||||||||||||||||||||||||||
|
(In
millions)
|
(In
millions, except percentages)
|
|||||||||||||||||||||||||||||
|
Total
Assets
|
$
|
36,101.0
|
$
|
26,795.6
|
$
|
17,451.6
|
$
|
10,116.9
|
$
|
10,036.7
|
||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
|
Capitalization:
|
||||||||||||||||||||||||||||||
|
Common
Equity4
|
$
|
8,069.2
|
30
|
%
|
$
|
3,657.5
|
20
|
%
|
$
|
4,051.4
|
34
|
%
|
$
|
2,919.5
|
45
|
%
|
$
|
2,691.8
|
39
|
%
|
||||||||||
|
Deferrable
Interest Debentures
|
283.1
|
1
|
%
|
283.6
|
2
|
%
|
283.6
|
2
|
%
|
283.6
|
4
|
%
|
283.6
|
4
|
%
|
|||||||||||||||
|
Capital
Securities
|
-
|
-
|
106.9
|
1
|
%
|
107.2
|
1
|
%
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Minority
Interests
|
3,314.0
|
13
|
%
|
3,095.5
|
17
|
%
|
1,247.3
|
10
|
%
|
1,105.4
|
17
|
%
|
1,010.1
|
15
|
%
|
|||||||||||||||
|
Outstanding
Notes and Debentures5
|
14,814.6
|
56
|
%
|
10,623.9
|
60
|
%
|
6,286.8
|
53
|
%
|
2,258.0
|
34
|
%
|
2,837.5
|
42
|
%
|
|||||||||||||||
|
Total
Capitalization
|
$
|
26,480.9
|
100
|
%
|
$
|
17,767.4
|
100
|
%
|
$
|
11,976.3
|
100
|
%
|
$
|
6,566.5
|
100
|
%
|
$
|
6,823.0
|
100
|
%
|
||||||||||
__________
|
1
|
Includes
significant impacts resulting from the Going Private transaction. See Note
1(B) of the accompanying Notes to Consolidated Financial Statements for
additional information.
|
|
2
|
Due
to our adoption of EITF No. 04-5, effective January 1, 2006 the accounts,
balances and results of operations of Kinder Morgan Energy Partners are
included in our financial statements and we no longer apply the equity
method of accounting to our investments in Kinder Morgan Energy Partners.
See Note 1(B) of the accompanying Notes to Consolidated Financial
Statements.
|
|
3
|
Reflects
the acquisition of Terasen Inc. on November 30, 2005. See Notes 4, 6 and 7
of the accompanying Notes to Consolidated Financial Statements for
information regarding this
acquisition.
|
|
4
|
Excluding
Accumulated Other Comprehensive
Income/Loss.
|
|
5
|
Excluding
the value of interest rate swaps and short-term debt. See Note 10 of the
accompanying Notes to Consolidated Financial
Statements.
|
47
|
Knight
Form 10-K
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and related Notes.
We
are an energy infrastructure provider through our direct ownership and operation
of energy-related assets, and through our ownership interests in and operation
of Kinder Morgan Energy Partners. As described in “Business Strategy” under
Items 1 and 2 “Business and Properties” elsewhere in this report, our strategy
and focus continues to be on ownership of fee-based energy-related assets which
are core to the energy infrastructure of North America and serve growing
markets. These assets tend to have relatively stable cash flows while presenting
us with opportunities to expand our facilities to serve additional customers and
nearby markets. We evaluate the performance of our investment in these assets
using, among other measures, segment earnings before depreciation, depletion and
amortization. In addition, please see “Recent Developments” under Items 1 and 2
“Business and Properties” elsewhere in this report.
On
August 28, 2006, we entered into an agreement and plan of merger whereby
generally each share of our common stock would be converted into the right to
receive $107.50 in cash without interest. We in turn would merge with a wholly
owned subsidiary of Knight Holdco LLC, a privately owned company in which
Richard D. Kinder, our Chairman and Chief Executive Officer, would be a major
investor. Our board of directors, on the unanimous recommendation of a
special committee composed entirely of independent directors, approved the
agreement and recommended that our stockholders approve the merger. Our
stockholders voted to approve the proposed merger agreement at a special meeting
held on December 19, 2006. On May 30, 2007, the merger closed, with
Kinder Morgan, Inc. continuing as the surviving legal entity and subsequently
renamed “Knight Inc.” Additional investors in Knight Holdco LLC include the
following: other senior members of our management, most of whom are also senior
officers of Kinder Morgan G.P., Inc. and of Kinder Morgan Management; our
co-founder William V. Morgan; Kinder Morgan, Inc. board members Fayez Sarofim
and Michael C. Morgan; and affiliates of (i) Goldman Sachs Capital Partners;
(ii) American International Group, Inc.; (iii) The Carlyle Group; and (iv)
Riverstone Holdings LLC. As a result of this transaction, referred to
herein as “the Going Private transaction,” (i) we are now privately owned, (ii)
our stock is no longer traded on the New York Stock Exchange, and (iii) we
have adopted a new basis of accounting for our assets and
liabilities.
As
a result of our adoption of a new basis of accounting, amounts in this
discussion and analysis and in the accompanying consolidated financial
statements for dates and periods prior to the closing of the Going Private
transaction are labeled “Predecessor Company” (and reflect the historical basis
of accounting for our assets and liabilities), while amounts for dates and
periods after the closing are labeled “Successor Company” (and reflect the new
basis of accounting for our assets and liabilities). In addition, solely for the
purpose of providing a basis of comparing 2007 with previous years, we have
provided certain full-year 2007 information that combines amounts reflecting
both the historical and new basis for our assets and liabilities. Additional
information on the Going Private transaction and its effect on our financial
information is contained in Note 1(B) of the accompanying Notes to
Consolidated Financial Statements.
In
this report, unless the context requires otherwise, references to
“we,” “us,” “our,” or the “Company” are intended to mean Knight Inc.
and its consolidated subsidiaries, including Kinder Morgan Energy Partners,
L.P., both before and after the Going Private transaction. Unless the context
requires otherwise, references to “Kinder Morgan Energy Partners” are intended
to mean Kinder Morgan Energy Partners, L.P. and its consolidated subsidiaries, a
publicly traded pipeline master limited partnership in which we own the general
partner interest and significant limited partner interests and whose
transactions and balances are consolidated with ours beginning January 1, 2006
as discussed elsewhere herein.
In
February 2007, we entered into a definitive agreement to sell our Canada-based
retail natural gas distribution operations to Fortis Inc., for
approximately C$3.7 billion including cash and assumed debt, and as a result of
a redetermination of fair value in light of this proposed sale, we recorded an
estimated goodwill impairment charge of approximately $650.5 million in the
fourth quarter of 2006. This sale was completed in May 2007 (see Note 6 of
the accompanying Notes to Consolidated Financial Statements). In prior periods,
we referred to these operations principally as the Terasen Gas business segment.
In March 2007, we entered into an agreement to sell the Corridor Pipeline System
to Inter Pipeline Fund in Canada for approximately C$760 million, including
debt. This sale was completed in June 2007. Inter Pipeline Fund also assumed all
of the debt associated with the expansion taking place on Corridor at the time
of the sale. Also in March 2007, we completed the sale of our U.S. retail
natural gas distribution and related operations to GE Energy Financial Services,
a subsidiary of General Electric Company, and Alinda Investments LLC for $710
million and an adjustment for working capital. In prior periods, we referred to
these operations as the Kinder Morgan Retail business segment. In December 2007,
we entered into a definitive agreement to sell an 80% ownership interest in our
NGPL business segment at a price equivalent to a total enterprise value of
approximately $5.9 billion, subject to certain adjustments (see Note 1(M)) of
the accompanying Notes to Consolidated Financial Statements. In accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for
48
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
the Impairment or Disposal of
Long-Lived Assets, the financial results of the Terasen Gas, Corridor and
Kinder Morgan Retail operations have been reclassified to discontinued
operations for all periods presented, and 80% of the assets and liabilities
associated with the NGPL business segment are included in assets and liabilities
held for sale captions, with the remaining 20% included in the investment
caption in the accompanying Consolidated Balance Sheet at December 31,
2007. Refer to the heading “Discontinued Operations” included elsewhere in
Management’s Discussion and Analysis for additional information regarding
discontinued operations.
On
April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to
Kinder Morgan Energy Partners for approximately $550 million. The transaction
was approved by the independent members of our board of directors and those of
Kinder Morgan Management following the receipt, by each board, of separate
fairness opinions from different investment banks. The Trans Mountain pipeline
system transports crude oil and refined products from Edmonton, Alberta, Canada
to marketing terminals and refineries in British Columbia and the State of
Washington. An impairment of the Trans Mountain pipeline system was recorded in
the first quarter of 2007; see Note 1(I) of the accompanying Notes to
Consolidated Financial Statements.
As
discussed in Note 1(B) of the accompanying Notes to Consolidated Financial
Statements, due to our adoption of EITF No. 04-5, effective as of January 1,
2006, Kinder Morgan Energy Partners and its consolidated subsidiaries are
included as consolidated subsidiaries of Knight Inc. in our consolidated
financial statements. Accordingly, their accounts, balances and results of
operations are included in our consolidated financial statements for periods
beginning on and after January 1, 2006, and we no longer apply the equity method
of accounting to our investment in Kinder Morgan Energy Partners.
Notwithstanding the consolidation of Kinder Morgan Energy Partners and its
subsidiaries into our financial statements pursuant to EITF 04-5, we are not
liable for, and our assets are not available to satisfy, the obligations of
Kinder Morgan Energy Partners and/or its subsidiaries and vice versa.
Responsibility for payments of obligations reflected in our or Kinder Morgan
Energy Partners’ financial statements is a legal determination based on the
entity that incurs the liability. The determination of responsibility for
payment among entities in our consolidated group of subsidiaries was not
impacted by the adoption of EITF 04-5.
Our
adoption of a new basis of accounting for our assets and liabilities as a result
of the Going Private transaction, our adoption of EITF No. 04-5, our acquisition
of Terasen Inc., the reclassification of the financial results of our retail
natural gas distribution and related operations and our Corridor operations, the
impairment of goodwill described above and other acquisitions and divestitures
(including the transfer of certain assets to Kinder Morgan Energy Partners)
discussed in Notes 1(B), 4, 5, 6, 7 and 19 of the accompanying Notes to
Consolidated Financial Statements affect comparisons of our financial position
and results of operations between periods.
On
November 20, 2007, we entered into a definitive agreement to sell our interests
in three natural gas-fired power plants in Colorado to Bear Stearns. The closing
of the sale occurred on January 25, 2008, effective January 1, 2008, and we
received net proceeds of $63.1 million.
To
convert December 31, 2007 and 2006 balances denominated in Canadian dollars to
U.S. dollars, we used the December 31, 2007 and 2006 Bank of Canada closing
exchange rate of 1.012 and 0.8581 U.S. dollars per Canadian dollar,
respectively.
Our
discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements, prepared in accordance with
accounting principles generally accepted in the United States of America and
contained within this report. Certain amounts included in or affecting our
consolidated financial statements and related disclosure must be estimated,
requiring us to make certain assumptions with respect to values or conditions
that cannot be known with certainty at the time the financial statements are
prepared. The reported amounts of our assets and liabilities, revenues and
expenses and associated disclosures with respect to contingent assets and
obligations are necessarily affected by these estimates. We evaluate these
estimates on an ongoing basis, utilizing historical experience, consultation
with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our
estimates. 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, we must
use estimates in determining the economic useful lives of our assets, the
effective income tax rate to apply to our pre-tax income, deferred income tax
assets, deferred income tax liabilities, obligations under our employee benefit
plans, provisions for uncollectible accounts receivable, the fair values used to
allocate purchase price and to determine possible asset impairment charges, cost
and timing of environmental remediation efforts, potential exposure to adverse
outcomes from judgments, environmental claims, litigation settlements or
transportation rate cases, reserves for legal fees, exposures under contractual
indemnifications, unbilled revenues, and various other recorded or disclosed
amounts. Certain of these accounting estimates are of more significance in our
financial statement preparation process than others, which policies are
discussed following. Our policies and estimation
49
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
methodologies
are generally the same in both the predecessor and successor company periods,
except where explicitly discussed.
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.
The
recording of environmental accruals often coincides with the completion of a
feasibility study or the 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 primarily result from quarterly reviews of potential environmental
issues and resulting changes in environmental liability estimates. 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 17 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. 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, 2007, our most significant ongoing litigation proceedings
involve Kinder Morgan Energy Partners’ Pacific operations. Tariffs charged by
Kinder Morgan Energy Partners’ Pacific operations’ pipeline systems are subject
to certain proceedings at the Federal
Energy Regulatory Commission (“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
Kinder Morgan Energy Partners’ Pacific operations’ 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’ Pacific
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 Kinder Morgan Energy Partners’ Pacific operations’ regulatory
proceedings, see Note 17 to our consolidated financial statements included
elsewhere in this report.
Intangible
Assets
Intangible
assets are those assets which provide future economic benefit but have no
physical substance. We account for our intangible assets according to the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141,
Business Combinations
and SFAS No. 142, Goodwill and
Other Intangible Assets. These accounting pronouncements introduced the
concept of indefinite life intangible assets and provided that all identifiable
intangible assets having indefinite useful economic lives, including goodwill,
will not be subject to periodic amortization. Such assets are not to be
amortized unless and 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. For the Predecessor Company, an impairment measurement test date
of January 1 of each year was selected; for the Successor Company, we expect to
use an annual impairment measurement date of May 31.
As
of December 31, 2007, our goodwill was $8,174.0 million. Included in this
goodwill balance is $250.1 million related to the Trans Mountain – KMP business
segment, 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 in the first quarter
of 2007.
Our
remaining intangible assets, excluding goodwill, include customer relationships,
contracts and agreements, technology-based assets and lease value. These
intangible assets have definite lives, are being amortized on a straight-line
basis over their
50
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
estimated
useful lives, and are reported separately as “Other Intangibles, Net” in the
accompanying Consolidated Balance Sheets. As of December 31, 2007 and 2006,
these intangibles totaled $321.1 million and $229.5 million,
respectively.
Estimated
Net Recoverable Quantities of Oil and Gas
We
use the successful efforts method of accounting for Kinder Morgan Energy
Partners’ 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.
Hedging
Activities
We
engage in a hedging program that utilizes derivative contracts to mitigate
(offset in whole or in part) our exposure to fluctuations in energy commodity
prices, fluctuations in currency exchange rates and to balance our exposure to
fixed and floating interest rates, and we believe that these hedges are
generally effective in realizing these objectives. However, the accounting
standards regarding hedge accounting are complex, and even when we engage in
hedging transactions that are effective economically, these transactions may not
be considered effective for accounting purposes.
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. A perfectly effective hedge is one in which changes in the value of the
derivative contract exactly offset changes in the value of the hedged item or
expected cash flow of the future transactions in reporting periods covered by
the derivative contract. The ineffective portion of the gain or loss and any
component excluded from the computation of the effectiveness of the derivative
contract must be reported in earnings immediately; accordingly, our financial
statements may reflect some volatility due to these hedges.
In
addition, it is not always possible for us to engage in a hedging transaction
that completely mitigates our exposure to unfavorable changes in commodity
prices. 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. Even when we cannot enter
into a completely 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 due to the fact that the part of the hedging
transaction 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.
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 12 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 $725,000 ($725,000) and would increase (decrease) our annual
pension expense by $2.6 million ($2.6 million) in comparison to that recorded in
2007. Similarly, a 1% change in the discount rate would increase (decrease) our
accumulated postretirement benefit obligation by $6.9 million ($6.3 million) and
would increase (decrease) our projected pension benefit obligation by $31.5
million ($28.0 million) compared to those balances as of December 31,
2007.
51
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
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.
The
following discussion of consolidated financial results should be read in
conjunction with the accompanying Consolidated Statement of Operations and
related supplemental disclosures. The following discussion is a comparison of
the for the years ended December 31, 2006 and 2005 (predecessor basis) with the
combined consolidated financial results for the year ended December 31, 2007,
which amounts include both predecessor (pre-Going Private) and successor
(post-Going Private) balances. These combined consolidated financial results,
while in our opinion useful for comparing our results between these periods, do
not represent a measure prepared in accordance with generally accepted
accounting principles. As discussed in Note 1(B) of the accompanying Notes to
Consolidated Financial Statements, due to our adoption of EITF No. 04-5,
beginning January 1, 2006, the accounts, balances and results of operations of
Kinder Morgan Energy Partners are included in our consolidated financial
statements and we no longer apply the equity method of accounting to our
investment in Kinder Morgan Energy Partners.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year Ended December 31, 2007
|
Seven
Months Ended December 31, 2007
|
Five
Months Ended May 31, 2007
|
Year
Ended December 31, 2006
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
Equity
in Earnings of Kinder Morgan Energy Partners1,2
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
605.4
|
||||||||||
|
Segment
Earnings before Depreciation, Depletion and Amortization of Excess Cost of
Equity Investments:
|
||||||||||||||||||||
|
NGPL
|
690.2
|
422.8
|
267.4
|
603.5
|
534.8
|
|||||||||||||||
|
Power
|
22.3
|
13.4
|
8.9
|
23.2
|
16.5
|
|||||||||||||||
|
Express
|
19.8
|
14.4
|
5.4
|
17.2
|
2.0
|
|||||||||||||||
|
Products
Pipelines – KMP3
|
386.9
|
162.5
|
224.4
|
467.9
|
-
|
|||||||||||||||
|
Natural
Gas Pipelines – KMP
|
601.8
|
373.3
|
228.5
|
574.8
|
-
|
|||||||||||||||
|
CO2 –
KMP
|
643.0
|
433.0
|
210.0
|
488.2
|
-
|
|||||||||||||||
|
Terminals
– KMP
|
416.0
|
243.7
|
172.3
|
408.1
|
-
|
|||||||||||||||
|
Trans
Mountain – KMP4
|
(293.6
|
)
|
43.8
|
(337.4
|
)
|
76.5
|
-
|
|||||||||||||
|
Segment
Earnings before Depreciation, Depletion and Amortization of Excess Cost of
Equity Investments
|
2,486.4
|
1,706.9
|
779.5
|
2,659.4
|
1,158.7
|
|||||||||||||||
|
Depreciation,
Depletion and Amortization Expense
|
(733.3
|
)
|
(472.3
|
)
|
(261.0
|
)
|
(531.4
|
)
|
(104.6
|
)
|
||||||||||
|
Amortization
of Excess Cost of Equity Investments
|
(5.8
|
)
|
(3.4
|
)
|
(2.4
|
)
|
(5.6
|
)
|
-
|
|||||||||||
|
Other
|
3.2
|
0.3
|
2.9
|
8.2
|
6.5
|
|||||||||||||||
|
Interest
and Other Corporate Expenses, Net5
|
(1,431.4
|
)
|
(799.6
|
)
|
(631.8
|
)
|
(1,273.3
|
)
|
(209.3
|
)
|
||||||||||
|
Income
(Loss) From Continuing Operations Before Income Taxes6
|
319.1
|
431.9
|
(112.8
|
)
|
857.3
|
851.3
|
||||||||||||||
|
Income
Taxes6
|
(303.3
|
)
|
(183.4
|
)
|
(119.9
|
)
|
(256.9
|
)
|
(337.1
|
)
|
||||||||||
|
Income
(Loss) From Continuing Operations
|
15.8
|
248.5
|
(232.7
|
)
|
600.4
|
514.2
|
||||||||||||||
|
Income
(Loss) From Discontinued Operations, Net of Tax7
|
297.1
|
(1.5
|
)
|
298.6
|
(528.5
|
)
|
40.4
|
|||||||||||||
|
Net
Income
|
$
|
312.9
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
||||||||||
__________
|
1
|
Due
to our adoption of EITF No. 04-5, effective January 1, 2006 the accounts,
balances and results of operations of Kinder Morgan Energy Partners are
included in our financial statements and we no longer apply the equity
method of accounting to our investment in Kinder Morgan Energy Partners.
See Note 1(B) of the accompanying Notes to Consolidated Financial
Statements.
|
|
2
|
Equity
in Earnings of Kinder Morgan Energy Partners for 2005 includes a reduction
in pre-tax earnings of approximately $63.3 million ($40.3 million after
tax) resulting principally from the effects of certain regulatory,
environmental, litigation and inventory items on Kinder Morgan Energy
Partners’ earnings.
|
52
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
3
|
2007
includes (i) a $136.8 million increase in expense associated with rate
case and other legal liability adjustments (in the seven months ended
December 31, 2007); (ii) a $15.9 million increase in expense associated
with environmental liability adjustments ($2.2 million in the five months
ended May 31, 2007 and $13.7 million in the seven months ended December
31, 2007); (iii) a $15.0 million expense for a litigation settlement
reached with Contra Costa County, California (in the seven months ended
December 31, 2007); (iv) a $3.2 million increase in expense from the
settlement of certain litigation matters related to the West Coast refined
product terminal operations (in the seven months ended December 31, 2007);
and (v) a $1.8 million increase in income resulting from unrealized
foreign currency gains on long-term debt transactions (in the seven months
ended December 31, 2007). 2006 amount includes a $16.5 million increase in
expense associated with environmental liability adjustments and a $5.7
million increase in income resulting from certain transmix contract
settlements.
|
|
4
|
Trans
Mountain – KMP Segment Earnings before Depreciation, Depletion and
Amortization of Excess Cost of Equity Investments (“Segment Earnings”) for
2007 includes a $377.1 million goodwill impairment charge as discussed
under Intangible
Assets elsewhere in this report. Excluding the impairment charge,
Segment Earnings increased by $7.0 million for the year ended December 31,
2007, over the comparable period in
2006.
|
|
5
|
Interest
and Other Corporate Expenses, Net for 2006 include (i) a reduction in
pre-tax income of $22.3 million ($14.1 million after tax) resulting from
non-cash charges to mark to market certain interest rate swaps and (ii)
miscellaneous other items totaling a net decrease of $0.8 million in
pre-tax income ($0.5 million after
tax).
|
|
6
|
Income
taxes of Kinder Morgan Energy Partners of $59.6 million, $44.0 million,
$15.6 million and $29.0 million for the combined year ended December 31,
2007, the seven months ended December 31, 2007, the five months ended May
31, 2007 and the year ended December 31, 2006, respectively, are included
in segment earnings.
|
|
7
|
2006
includes a $650.5 million goodwill impairment associated with Terasen (see
Note 6 of the accompanying Notes to Consolidated Financial
Statements).
|
The
comparability of certain portions of our results between periods is affected by,
among other things, $4.8 billion in incremental debt and the application of the
purchase method of accounting to the May 30, 2007 Going Private transaction. The
principal effects on comparability resulting from this application of the
purchase method occur within the captions “Segment Earnings
before Depreciation, Depletion and Amortization,” “Depreciation,
Depletion and Amortization Expense” and “Interest and Corporate Expenses, Net”
in the table above. The comparability of Segment Earnings before DD&A
between periods is not significantly affected by the application of the purchase
method of accounting for the Going Private transaction. The impacts of the
purchase method of accounting on Segment Earnings before DD&A relate
primarily to the revaluation of cushion gas in our Natural Gas Pipelines – KMP
segment and the revaluation of the Accumulated Other Comprehensive Income
related to derivatives accounted for as hedges in our CO2 – KMP and
Natural Gas Pipelines – KMP segments. Where there is an impact to Segment
Earnings before DD&A from the Going Private transaction, the impact is
described. The effects on Depreciation, Depletion and Amortization 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 depreciation, depletion and amortization expense in
periods subsequent to May 30, 2007. The purchase accounting effects on Interest
and Corporate Expenses, 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.
Income
from continuing operations decreased from $600.4 million in 2006 to $15.8
million in 2007, a decrease of $584.6 million. Operating results for the year
ended December 31, 2007 were negatively impacted, relative to 2006, by (i)
increased depreciation, depletion and amortization expense in 2007 due
principally to increases in the carrying value of certain assets reflecting
application of the purchase method of accounting to the Going Private
transaction, (ii) increased 2007 interest expense resulting primarily from
increased debt levels, including the additional debt incurred in the Going
Private transaction and, to a lesser extent, from higher interest rates and
(iii) reduced segment earnings in the Trans Mountain – KMP segments, due
principally to a $377.1 million goodwill impairment in 2007. See footnote 4 of
the table above for additional discussion with regard to the change in segment
earnings of Trans Mountain – KMP. Including the effects of discontinued
operations, our net income increased from $71.9 million in 2006 to $312.9
million in 2007.
Our
income from continuing operations increased from $514.2 million in 2005 to
$600.4 million in 2006, an increase of $86.2 million (17%). The increase in
our 2006 income from continuing operations, relative to 2005, principally
resulted from (i) increased earnings from Kinder Morgan Energy Partners, net of
associated minority interests, (ii) increased earnings from our NGPL, Express,
and Trans Mountain – KMP business segments, (iii) reduced general and
administrative expenses, exclusive of the general and administrative expenses
attributable to Kinder Morgan Energy Partners, and (iv) reduced income taxes –
continuing operations. These positive impacts were partially offset by increased
interest costs due, in part, to the effect of higher interest rates on our
floating-rate debt. Please refer to the individual business segment discussions
included elsewhere herein for additional information regarding business segment
results. Refer to the headings “Interest and Corporate Expenses, Net,” “Earnings
from our investment in Kinder Morgan Energy Partners,” “Income Taxes –
Continuing Operations” and “Discontinued Operations” included elsewhere in
management’s discussion and analysis for additional information regarding these
items.
53
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
The
following comparative discussion of our results of operations is by segment for
factors affecting segment earnings, and on a consolidated basis for other
factors.
The
variability of our operating results is attributable to a number of factors
including (i) variability within U.S. and Canadian national and local markets
for energy and related services, including the effects of competition, (ii) the
impact of regulatory proceedings, (iii) the effect of weather on customer energy
and related services usage, as well as our operation and construction
activities, (iv) increases or decreases in interest rates, (v) the degree of our
success in controlling costs and identifying, carrying out profitable expansion
projects and integrating new acquisitions into our operations and (vi) changes
in taxation policy or regulated rates. Certain of these factors are beyond our
direct control, but we operate a structured risk management program to mitigate
certain of the risks associated with changes in the price of natural gas,
interest rates, currency exchange rates and weather (relative to historical
norms). The remaining risks are primarily mitigated through our strategic and
operational planning and monitoring processes. See Item 1A “Risk Factors”
elsewhere in this report.
In
May 2007, we completed the sale of our Canada-based retail natural gas
distribution operations to Fortis Inc. In prior periods, we referred to these
operations principally as the Terasen Gas business segment. In June 2007, we
completed the sale of the Corridor Pipeline System to Inter Pipeline Fund. As a
result of the sale of Corridor and the transfer of Trans Mountain to Kinder
Morgan Energy Partners, the business segment referred to in prior filings as
Kinder Morgan Canada is no longer reported. The results of Trans Mountain are
now reported in the business segment referred to herein as Trans Mountain – KMP.
The results of the Express Pipeline system, which also were reported in the
Kinder Morgan Canada business segment in previous periods, are now reported in
the segment referred to as “Express.” In March 2007, we completed the sale of
our U.S. retail natural gas distribution and related operations to GE Energy
Financial Services, a subsidiary of General Electric Company, and Alinda
Investments LLC. In prior periods, we referred to these operations as the Kinder
Morgan Retail business segment. On October 5, 2007, Kinder Morgan Energy
Partners announced that it had completed the sale of the North System and also
its 50% ownership interest in the Heartland Pipeline Company to ONEOK Partners,
L.P. for approximately $298.6 million in cash. In prior periods, the North
System and the equity investment in the Heartland Pipeline were reported in the
Products Pipelines – KMP business segment. In accordance with SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, the financial results of Terasen Gas,
Corridor, Kinder Morgan Retail, the North System and the equity investment in
the Heartland Pipeline Company have been reclassified to discontinued operations
for all periods presented. Refer to the heading “Discontinued Operations”
included elsewhere in this management’s discussion and analysis for additional
information regarding discontinued operations.
We
manage our various businesses by, among other things, allocating capital and
monitoring operating performance. This management process includes dividing the
company into business segments so that performance can be effectively monitored
and reported for a limited number of discrete businesses.
|
Business
Segment
|
|
Business
Conducted
|
|
Referred to
As:
|
|
|
||||
|
Natural
Gas Pipeline Company of America and certain affiliates
|
The
ownership and operation of a major interstate natural gas pipeline and
storage system
|
Natural
Gas Pipeline Company of America, or NGPL
|
||
|
Power
Generation
|
The
ownership and operation of natural gas-fired electric generation
facilities
|
Power
|
||
|
Express
Pipeline System
|
The
ownership of a one-third interest in the Express Pipeline System, a crude
oil pipeline system, which investment we account for under the equity
method, and certain related entities
|
Express
|
||
|
Petroleum
Products Pipelines (Kinder Morgan Energy Partners)
|
The
ownership and operation of refined petroleum products pipelines that
deliver gasoline, diesel fuel, jet fuel and natural gas liquids to various
markets; plus associated product terminals and petroleum pipeline transmix
processing facilities
|
Products
Pipelines – KMP
|
54
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Natural
Gas Pipelines (Kinder Morgan Energy Partners)
|
The
ownership and operation of major interstate and intrastate natural gas
pipeline and storage systems
|
Natural
Gas Pipelines – KMP
|
||
|
CO2
(Kinder Morgan Energy Partners)
|
The
production, transportation and marketing of carbon dioxide (CO2) to
oil fields that use CO2 to
increase production of oil; plus ownership interests in and/or operation
of oil fields in West Texas; plus the ownership and operation of a crude
oil pipeline system in West Texas
|
CO2
– KMP
|
||
|
Liquids
and Bulk Terminals (Kinder Morgan Energy Partners)
|
The
ownership and/or operation of liquids and bulk terminal facilities and
rail transloading and materials handling facilities that together
transload, store and deliver a wide variety of bulk, petroleum,
petrochemical and other liquids products
|
Terminals
– KMP
|
||
|
Trans
Mountain Pipeline (Kinder Morgan Energy Partners)
|
The
ownership and operation of crude oil and refined petroleum pipelines,
principally located in Canada
|
Trans
Mountain – KMP
|
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 1 of the accompanying Notes to Consolidated Financial Statements, 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 (sometimes referred to in this report
as EBDA) in relation to the level of capital employed. Beginning in 2007, the
segment earnings measure was changed from segment earnings to segment earnings
before DD&A for segments not also segments of Kinder Morgan Energy Partners.
This change was made to conform our disclosure to the internal reporting we use
as a result of the Going Private transaction. This segment measure change has
been reflected in the prior periods shown in this document in order to achieve
comparability. 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.
Following
are operating results by individual business segment (before intersegment
eliminations), including explanations of significant variances between the
periods presented.
55
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions except systems throughput)
|
(In
millions except systems throughput)
|
|||||||||||||||||||
|
Operating
Revenues
|
$
|
1,183.7
|
$
|
757.2
|
$
|
426.5
|
$
|
1,118.0
|
$
|
947.3
|
||||||||||
|
Gas
Purchases and Other Costs of Sales
|
(341.4
|
)
|
(242.1
|
)
|
(99.3
|
)
|
(362.9
|
)
|
(299.2
|
)
|
||||||||||
|
Other
Operating Expenses
|
(153.7
|
)
|
(93.3
|
)
|
(60.4
|
)
|
(154.2
|
)
|
(115.3
|
)
|
||||||||||
|
Equity
in Earnings of Horizon
|
1.6
|
1.0
|
0.6
|
1.8
|
1.8
|
|||||||||||||||
|
Gain
on Asset Sales
|
-
|
-
|
-
|
0.8
|
0.2
|
|||||||||||||||
|
Segment
Earnings Before DD&A
|
$
|
690.2
|
$
|
422.8
|
$
|
267.4
|
$
|
603.5
|
$
|
534.8
|
||||||||||
|
|
||||||||||||||||||||
|
Systems
Throughput (Trillion Btus)
|
1,785.7
|
1,027.2
|
758.5
|
1,696.3
|
1,664.8
|
|||||||||||||||
NGPL’s
segment earnings before DD&A increased from $603.5 million in 2006 to $690.2
million in 2007, an increase of $86.7 million (14%). Segment revenues and
earnings for 2007 were positively impacted, relative to 2006, by (i) increased
transportation and storage revenues in 2007 due principally to re-contracting of
transportation and storage services at higher rates and increased contract
volumes and recent transportation and storage system expansions (as discussed
below) and (ii) increased operational natural gas sales volumes and natural gas
prices. These positive impacts were partially offset by (i) a $3.3 million
increase in expense for a stress corrosion cracking rehabilitation project (as
discussed below) and pipeline integrity management programs and compression
costs. NGPL’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. Total system throughput volumes increased by
89.4 trillion Btus in 2007, relative to 2006 due, in part, to shippers moving
significant volumes of natural gas in the market area. The increase in system
throughput in 2007, relative to 2006, did not have a significant direct impact
on revenues or segment 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.
NGPL’s
segment earnings before DD&A increased from $534.8 million in 2005 to $603.5
million in 2006, an increase of $68.7 million (13%). Segment revenues and
earnings for 2006 were positively impacted, relative to 2005, by (i) increased
transportation and storage revenues in 2006 due principally to successful
re-contracting of transportation and storage services, favorable basis
differentials (see the discussion of basis differentials following) and recent
transportation and storage system expansions (as discussed below) and (ii)
increased operational gas sales prices. These positive impacts were partially
offset by (i) $30.2 million of expense for a stress corrosion cracking
rehabilitation project (as discussed below) and pipeline integrity management
programs and (ii) an increase of $4.6 million in electric compression costs.
Total system throughput volumes increased by 31.5 trillion Btus in 2006,
relative to 2005 due, in part, to shippers moving significant volumes of natural
gas within Texas on NGPL’s Gulf Coast Pipeline. The increase in system
throughput in 2006, relative to 2005, did not have a significant direct impact
on revenues or segment earnings due to the fact that transportation revenues are
derived primarily from “firm” contracts in which shippers pay a “demand” fee, as
discussed above.
On
December 7, 2007, NGPL filed an application with the FERC seeking approval to
expand its Herscher Galesville storage field in Kankakee County, Illinois to add
10 Bcf of incremental firm storage service for five expansion shippers. This $75
million project is fully supported by contracts ranging from five to ten
years.
On
July 22, 2007, we received FERC approval to build facilities to supply service
for The Peoples Gas Light and Coke Co., who has signed a 10-year agreement for
all the capacity. The $13.3 million project, which has a capacity of 360,000 Dth
per day, was placed in service in December 2007.
On
October 10, 2006, in FERC Docket No. CP 07-3, NGPL filed seeking approval to
expand its Louisiana Line by 200,000 dekatherms per day (Dth/day). This $66
million project is supported by five-year agreements that fully subscribe the
additional capacity. On July 2, 2007, the FERC issued an order granting
construction and operation of the requested facilities. NGPL accepted the order
on July 6, 2007. This expansion was placed in service during the first quarter
of 2008.
56
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
In
a letter filed on December 8, 2005, NGPL requested that the Office of the Chief
Accountant of the FERC confirm that NGPL’s proposed accounting treatment to
capitalize the costs incurred in a one-time pipeline rehabilitation project that
will address stress corrosion cracking on portions of NGPL’s pipeline system is
appropriate. The rehabilitation project will be conducted over a five-year
period. On June 5, 2006, in Docket No. AC 06-18, the FERC ruled on NGPL’s
request to capitalize pipeline rehabilitation costs. The ruling states that NGPL
must expense rather than capitalize the majority of the costs. NGPL can continue
to capitalize the costs of pipe replacement and coating but costs to assess the
integrity of pipe must be expensed.
During
the second quarter of 2006, NGPL commenced operation of the following projects:
the $21 million Amarillo cross-haul line expansion, which adds 51,000 Dth/day of
capacity and is fully subscribed under long-term contracts; the $38 million
Sayre storage field expansion in Oklahoma that added 10 billion cubic feet (Bcf)
of capacity, which is contracted for under long-term agreements; and a $4
million, 2 Bcf expansion of no-notice delivered storage service.
In
the first quarter of 2006, NGPL received certificate approval from the FERC for
the $72.3 million expansion at its North Lansing field in East Texas that will
add 10 Bcf of storage service capacity. This expansion was placed into service
in April 2007.
In
2007, NGPL extended long-term firm transportation and storage contracts with
some of its largest shippers, including Northern Illinois Gas Company (Nicor),
MidAmerican Energy, Tenaska Marketing, Laclede Gas, Aquila Networks, Occidental
Petroleum, ONEOK, Inc. and Centerpoint Energy. Combined, the contracts represent
approximately 0.44 million Dth per day of annual firm transportation
service.
Substantially
all of NGPL’s pipeline capacity is committed under firm transportation contracts
ranging from one to six years. Under these contracts, over 90% of the revenues
are derived from a demand charge and, therefore, are collected regardless of the
volume of gas actually transported. The principal impact of the actual level of
gas transported is on fuel recoveries, which are received in-kind as volumes
move on the system. Approximately 63% of the total transportation volumes
committed under NGPL’s long-term firm transportation contracts in effect on
January 31, 2008 had remaining terms of less than three years. Contracts
representing approximately 18% of NGPL’s total long-haul, contracted firm
transport capacity as of January 31, 2008 are scheduled to expire during 2008.
NGPL continues to actively pursue the renegotiation, extension and/or
replacement of expiring contracts.
Our
principal exposure to market variability is related to the variation in natural
gas prices and basis differentials, which can affect gross margins in our NGPL
segment. “Basis differential” is a term that refers to the difference in natural
gas prices between two locations or two points in time. These price differences
can be affected by, among other things, natural gas supply and demand, available
transportation capacity, storage inventories and deliverability, prices of
alternative fuels and weather conditions. In recent periods, additional
competitive pressures have been generated in Midwest natural gas markets due to
the introduction and planned introduction of pipeline capacity to bring
additional supplies of natural gas into the Chicago market area, although
incremental pipeline capacity to take gas out of the area has also been
constructed. We have attempted to reduce our exposure to this form of market
variability by pursuing long-term, fixed-rate type contract agreements to
utilize the capacity on NGPL’s system. In addition, as discussed under “Risk
Management” in Item 7A of this report and in Note 11 of the accompanying Notes
to Consolidated Financial Statements, we utilize a comprehensive risk management
program to mitigate our exposure to changes in the market price of natural gas
and associated transportation.
The
majority of NGPL’s system is subject to rate regulation under the jurisdiction
of the Federal Energy Regulatory Commission. Currently, there are no material
proceedings challenging the rates (which include reservation, commodity,
surcharges, fuel and gas lost and unaccounted for) on any of our pipeline
systems. Nonetheless, shippers on our pipelines do have rights, under certain
circumstances prescribed by applicable regulations, to challenge the rates we
charge. There can be no assurance that we will not face future challenges to the
rates we receive for services on our pipeline systems.
57
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Power
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
Operating
Revenues
|
$
|
60.1
|
$
|
40.2
|
$
|
19.9
|
$
|
60.0
|
$
|
54.2
|
||||||||||
|
Operating
Expenses and Minority Interests
|
(50.9
|
)
|
(34.8
|
)
|
(16.1
|
)
|
(49.6
|
)
|
(42.7
|
)
|
||||||||||
|
Other
Income (Expense)1
|
-
|
-
|
-
|
(1.2
|
)
|
(6.5
|
)
|
|||||||||||||
|
Equity
in Earnings of Thermo Cogeneration Partnership
|
13.1
|
8.0
|
5.1
|
11.3
|
11.5
|
|||||||||||||||
|
Gain
on Asset Sales
|
-
|
-
|
-
|
2.7
|
-
|
|||||||||||||||
|
Segment
Earnings Before DD&A
|
$
|
22.3
|
$
|
13.4
|
$
|
8.9
|
$
|
23.2
|
$
|
16.5
|
||||||||||
__________
|
1
|
To
record the impairment of certain assets, as discussed
below.
|
Power’s
segment earnings before DD&A decreased from $23.2 million in 2006 to $22.3
million in 2007, a decrease of $0.9 million (4%). Segment results were
negatively impacted in 2007, relative to 2006, by (i) the recognition of $2.7
million of gains from surplus equipment sales (see Note 5 of the accompanying
Notes to Consolidated Financial Statements) in 2006 and (ii) increased operating
expenses in 2007. These negative impacts were partially offset by (i) a $1.8
million increase in earnings from Thermo Cogeneration Partnership in 2007 and
(ii) a pre-tax charge of $1.2 million in 2006 to reduce the carrying value of
certain surplus equipment held for sale.
Power’s
segment earnings before DD&A increased from $16.5 million in 2005 to $23.2
million in 2006, an increase of $6.7 million (41%). Segment results were
positively impacted in 2006, relative to 2005, by (i) $2.7 million of gains from
surplus equipment sales in 2006 (see Note 5 of the accompanying Notes to
Consolidated Financial Statements), (ii) a $5.3 million decrease in other
expenses resulting from reduced asset writedowns in 2006 (a pre-tax charge of
$1.2 million to reduce the carrying value of certain surplus equipment held for
sale in 2006 compared to a $6.5 million pre-tax charge to reduce the carrying
value of investments in 2005) and (iii) increased operating revenues in 2006.
These positive impacts were partially offset by increased operating expenses in
2006.
In
February 2001, Kinder Morgan Power announced an agreement under which Williams
Energy Marketing and Trading agreed to supply natural gas to and market capacity
for 16 years for a 550-megawatt natural gas-fired Orion technology electric
power plant in Jackson, Michigan. Effective July 1, 2002, construction of this
facility was completed and commercial operations commenced. Concurrently with
commencement of commercial operations, (i) Kinder Morgan Power made a preferred
investment in Triton Power Company LLC (now valued at approximately $15
million); and (ii) Triton Power Company LLC, through its wholly owned
subsidiary, Triton Power Michigan LLC, entered into a 40-year lease of the
Jackson power facility from the plant owner, AlphaGen Power, LLC. Bear Energy LP
(successor to Williams Energy Marketing and Trading) supplies all natural gas to
and purchases all power from the power plant under a 16-year tolling agreement
with Triton Power Michigan LLC. Our preferred equity interest has no management
or voting rights, but does retain certain protective rights, and is entitled to
a cumulative return, compounded monthly, of 9.0% per annum. No income was
recorded in 2006 or 2007 and no income is expected in 2008 from this preferred
investment due to the fact that the dividend on this preferred investment is not
currently being paid, and uncertainty concerning the date at which such
distributions will be received.
From
1998 until January 2008, we had an investment in a 76 megawatt gas-fired power
generation facility located in Greeley, Colorado. We wrote off the remaining
carrying value of this investment ($6.5 million) in the fourth quarter of 2005.
We sold this investment in January 2008, as discussed following.
On
November 20, 2007, we entered into a definitive agreement to sell our interests
in three natural gas-fired power plants in Colorado to Bear Stearns. The sale
closed on January 25, 2008, effective January 1, 2008, and we received net
proceeds of $63.1 million.
58
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
Segment
Earnings Before DD&A
|
$
|
19.8
|
$
|
14.4
|
$
|
5.4
|
$
|
17.2
|
$
|
2.0
|
||||||||||
Express’
segment earnings before DD&A increased from $17.2 million in 2006 to $19.8
million in 2007, an increase of $2.6 million (15%) due principally to increased
inventory settlement revenue. Increased inventory settlement revenue was offset
partially by lower transportation revenue and by increased operating expenses
that resulted mostly from an oil spill in Montgomery County,
Missouri.
Express’
segment earnings before DD&A increased from $2.0 million in 2005 to $17.2
million in 2006, an increase of $15.2 million due to the inclusion of a full
year of earnings in 2006 from Express, which was acquired November 30,
2005.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions, except
operating
statistics)
|
(In
millions, except operating statistics)
|
|||||||||||||||||||
|
Operating
Revenues
|
$
|
803.3
|
$
|
471.6
|
$
|
331.7
|
$
|
732.5
|
$
|
670.6
|
||||||||||
|
Operating
Expenses1
|
(437.0
|
)
|
(320.7
|
)
|
(116.3
|
)
|
(285.5
|
)
|
(330.8
|
)
|
||||||||||
|
Other
Income (Expense)2
|
0.2
|
0.8
|
(0.6
|
)
|
-
|
-
|
||||||||||||||
|
Earnings
from Equity Investments3
|
23.9
|
11.5
|
12.4
|
14.2
|
26.4
|
|||||||||||||||
|
Interest
Income and Other Income (Expense), Net4
|
9.4
|
4.7
|
4.7
|
11.9
|
6.1
|
|||||||||||||||
|
Income
Taxes5
|
(12.9
|
)
|
(5.4
|
)
|
(7.5
|
)
|
(5.2
|
)
|
(10.3
|
)
|
||||||||||
|
Segment
Earnings Before DD&A
|
$
|
386.9
|
$
|
162.5
|
$
|
224.4
|
$
|
467.9
|
$
|
362.0
|
||||||||||
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
Gasoline
(MMBbl)
|
435.5
|
252.7
|
182.8
|
449.8
|
452.1
|
|||||||||||||||
|
Diesel
Fuel (MMBbl)
|
164.1
|
97.5
|
66.6
|
158.2
|
163.1
|
|||||||||||||||
|
Jet
Fuel (MMBbl)
|
125.1
|
73.8
|
51.3
|
119.5
|
118.1
|
|||||||||||||||
|
Total
Refined Products Volumes (MMBbl)
|
724.7
|
424.0
|
300.7
|
727.5
|
733.3
|
|||||||||||||||
|
Natural
Gas Liquids (MMBbl)
|
30.4
|
16.7
|
13.7
|
34.0
|
33.5
|
|||||||||||||||
|
Total
Delivery Volumes (MMBbl)6
|
755.1
|
440.7
|
314.4
|
761.5
|
766.8
|
|||||||||||||||
__________
|
1
|
2007,
2006 and 2005 amounts include increases in expense of $15.9 million ($2.2
million in the five months ended May 31, 2007 and $13.7 million in the
seven months ended December 31, 2007), $13.5 million and $19.6 million,
respectively, associated with environmental liability adjustments. 2007
amount also includes a $136.7 million increase in expense associated with
rate case and other legal liability adjustments, a $15.0 million expense
for a litigation settlement reached with Contra Costa County, California,
and a $3.2 million increase in expense from the settlement of certain
litigation matters related to our West Coast refined product terminal
operations (all in the seven months ended December 31, 2007). 2005 amount
also includes a $105.0 million increase in expense associated with a rate
case liability adjustment.
|
|
2
|
2007
amount includes a $1.8 million decrease in segment earnings resulting from
valuation adjustments, related to assets sold in June, recorded in the
application of the purchase method of accounting to the Going Private
transaction.
|
|
3
|
2007
amount includes a $0.1 million increase in expense associated with legal
liability adjustments on Plantation Pipe Line Company. 2006 amount
includes a $4.9 million increase in expense associated with environmental
liability adjustments on Plantation Pipe Line
Company.
|
|
4
|
2007
amount includes a $1.8 million increase in income resulting from
unrealized foreign currency gains on long-term debt transactions (in the
seven months ended December 31, 2007). 2006 amount includes a $5.7 million
increase in income resulting from transmix contract
settlements.
|
59
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
5
|
2006
amount includes a $1.9 million decrease in expense associated with the tax
effect on our share of environmental expenses incurred by Plantation Pipe
Line Company and described in footnote
3.
|
|
6
|
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 decreased
earnings before depreciation, depletion and amortization by $160.1 million in
2007 compared to 2006, and increased earnings before depreciation, depletion and
amortization by $113.8 million in 2006 compared to 2005. Following is
information related to the remaining increases and decreases in the segment’s
(i) earnings before depreciation, depletion and amortization
expense (EBDA); and (ii) operating revenues in both 2007 and 2006, in each
case compared to the respective prior year:
|
Year Ended December
31, 2007 versus Year Ended December 31, 2006
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Cochin
Pipeline System
|
$
|
30.0
|
212
|
%
|
$
|
39.2
|
110
|
%
|
|||||
|
West
Coast Terminals
|
12.3
|
34
|
%
|
7.5
|
12
|
%
|
|||||||
|
Plantation
Pipeline
|
8.6
|
27
|
%
|
1.0
|
2
|
%
|
|||||||
|
Transmix
operations
|
8.0
|
36
|
%
|
10.6
|
32
|
%
|
|||||||
|
Pacific
operations
|
5.8
|
2
|
%
|
18.4
|
5
|
%
|
|||||||
|
CALNEV
Pipeline
|
5.1
|
11
|
%
|
3.4
|
5
|
%
|
|||||||
|
Southeast
Terminals
|
5.0
|
13
|
%
|
(12.9
|
)
|
(16
|
)%
|
||||||
|
All
other (including eliminations)
|
4.3
|
11
|
%
|
3.5
|
7
|
%
|
|||||||
|
Total
Products Pipelines
|
$
|
79.1
|
17
|
%
|
$
|
70.7
|
10
|
%
|
|||||
|
Year Ended December
31, 2006 versus Year Ended December 31, 2005
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Cochin
Pipeline System
|
$
|
(5.2
|
)
|
(27
|
)%
|
$
|
(0.5
|
)
|
(1
|
)%
|
|||
|
Southeast
Terminals
|
4.9
|
15
|
%
|
24.5
|
43
|
%
|
|||||||
|
Plantation
Pipeline
|
(4.2
|
)
|
(12
|
)%
|
1.5
|
4
|
%
|
||||||
|
Pacific
operations
|
(5.4
|
)
|
(2
|
)%
|
16.2
|
5
|
%
|
||||||
|
West
Coast Terminals
|
(2.6
|
)
|
(7
|
)%
|
6.5
|
11
|
%
|
||||||
|
Transmix
operations
|
2.6
|
13
|
%
|
3.9
|
13
|
%
|
|||||||
|
All
other (including eliminations)
|
2.0
|
3
|
%
|
9.9
|
9
|
%
|
|||||||
|
Total
Products Pipelines
|
$
|
(7.9
|
)
|
(2
|
)%
|
$
|
62.0
|
9
|
%
|
||||
All
of the assets in the Products Pipelines– KMP business segment produced higher
earnings before depreciation, depletion and amortization expenses in 2007 than
in the previous year. The overall increase in segment earnings before
depreciation, depletion and amortization in 2007 compared to 2006 was driven
largely by incremental earnings from the Cochin pipeline system. The higher
earnings and revenues from Cochin were largely attributable to the January 1,
2007 acquisition of the remaining approximate 50.2% ownership interest that
Kinder Morgan Energy Partners did not already own. Upon closing of the
transaction, Kinder Morgan Energy Partners became the operator of the pipeline.
For more information on this acquisition, see Note 4 of the accompanying Notes
to Consolidated Financial Statements.
The
year-to-year earnings increase from the West Coast terminal operations in 2007
was due to higher operating revenues, lower operating expenses and incremental
gains from asset sales. The increases in terminal revenues were driven by higher
throughput volumes from the combined Carson/Los Angeles Harbor terminal system,
partly due to completed storage expansion projects since the end of 2006, and
from the Linnton and Willbridge terminals located in Portland, Oregon. The
decrease in operating expenses in 2007 versus 2006 was largely related to higher
environmental expenses recognized in 2006, due to adjustments to accrued
environmental liabilities (these incremental environmental expenses were not
associated with the expenses described in footnote (1) to the table
above).
The
increase in earnings in 2007 from Kinder Morgan Energy Partners’ approximate 51%
equity investment in Plantation Pipe Line Company was due to higher overall net
income earned by Plantation, largely resulting from both higher pipeline
revenues and lower period-to-period operating expenses. The increase in revenues
was largely due to higher oil loss allowance percentage in 2007, relative to
last year, and the drop in operating expenses—including fuel, power and
pipeline
60
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
maintenance
expenses, was due to decreases in both refined products delivery volumes and
pipeline integrity expenses in 2007 versus 2006 (pipeline integrity expenses are
discussed more fully below).
The
year-to-year increase in earnings before depreciation, depletion and
amortization from the petroleum pipeline transmix operations was directly
related to higher revenues, reflecting incremental revenues from the Greensboro,
North Carolina facility and higher processing revenues from the Colton,
California facility. In May 2006, Kinder Morgan Energy Partners completed
construction and placed into service the Greensboro facility, and during 2007,
the plant processed greater volumes than in 2006. In 2007, the Greensboro
facility contributed incremental earnings before depreciation, depletion and
amortization of $4.5 million and incremental revenues of $5.4 million in 2007
compared to 2006. The increases in earnings and revenues from the Colton
facility, which processes transmix generated from volumes transported to the
Southern California and Arizona markets by the Pacific operations’ pipelines,
were primarily due to year-to-year increases in average processing contract
rates.
Kinder
Morgan Energy Partners also benefited from higher earnings before depreciation,
depletion and amortization from the Pacific operations and the CALNEV Pipeline
in 2007, when compared to last year. The increase in the Pacific operations’
earnings was largely revenue related, attributable to increases in both
transportation volumes and average tariff rates. Combined mainline delivery and
terminal revenues increased 5% in 2007, compared to 2006, due largely to higher
delivery volumes to Arizona, the completed expansion of the East Line pipeline
during the summer of 2006, and higher deliveries to various West Coast military
bases. The increase from CALNEV was also driven by higher year-over-year
revenues, due to increased military and commercial tariff rates in 2007, and
higher terminal revenue associated with ethanol blending at the Las Vegas
terminal that more than offset a 2% drop in refined products delivery
volumes.
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 $298.6
million, and used the proceeds received to pay down short-term debt borrowings.
The North System business was accounted for as a discontinued operation pursuant
to generally accepted accounting principles, which require that the income
statement be formatted to separate the divested business from continuing
operations.
Combining
all of the segment’s operations, revenues from refined petroleum products
deliveries increased 6.2% in 2007, compared to last year, while total refined
products delivery volumes decreased 0.4%. Compared to last year, gasoline
delivery volumes decreased 3.2% (primarily due to Plantation), while diesel and
jet fuel volumes were up 3.7% and 4.7%, respectively. Excluding Plantation,
which continued to be impacted by a competing pipeline that began service in
mid-2006, total refined products delivery volumes increased by 0.8% in 2007,
when compared to 2006. Volumes on the Pacific operations and the Central Florida
pipelines were up 1% and 2%, respectively, in 2007, and while natural gas
liquids delivery volumes were down in 2007 versus 2006, revenues were up
substantially due to Kinder Morgan Energy Partners’ increased ownership in the
Cochin pipeline system.
The
$7.9 million (2%) decrease in earnings before depreciation, depletion and
amortization expenses in 2006, when compared to 2005, was largely due to a
combined decrease in earnings of $22.4 million in 2006—due to incremental
pipeline maintenance expenses recognized in the last half of the year. Beginning
in the third quarter of 2006, the refined petroleum products pipelines and
associated terminal operations included within the Products Pipelines segment
(including Plantation Pipe Line Company, the 51%-owned equity investee) began
recognizing certain costs incurred as part of its pipeline integrity management
program as maintenance expense in the period incurred, and in addition, recorded
an expense for costs previously capitalized during the first six months of 2006.
Combined, this change reduced the segment’s earnings before depreciation,
depletion and amortization expenses by $22.4 million in 2006—increasing
maintenance expenses by $18.3 million, decreasing earnings from equity
investments by $6.6 million, and decreasing income tax expenses by $2.5
million.
Pipeline
integrity costs encompass those costs incurred as part of an overall pipeline
integrity management program, which is a process for assessing and mitigating
pipeline risks in order to reduce both the likelihood and consequences of
incidents. The pipeline integrity program is designed to provide management with
the information needed to effectively allocate resources for appropriate
prevention, detection and mitigation activities.
The
remaining $14.5 million (3%) increase in earnings before depreciation, depletion
and amortization expenses in 2006 compared with 2005, primarily consisted of the
following items:
|
|
·
|
a
$4.9 million (15%) increase from the Southeast refined products terminal
operations, driven by higher liquids throughput volumes at higher rates,
relative to 2005, and higher margins from ethanol blending and sales
activities;
|
|
|
·
|
a
$4.1 million (1%) increase from the combined Pacific and CALNEV Pipeline
operations, primarily due to a $22.6 million (6%) increase in operating
revenues, which more than offset an $18.3 million (18%) increase in
combined operating expenses. The increase in operating revenues consisted
of a $14.7 million (5%) increase from refined products deliveries and a
$7.9 million (8%) increase from terminal and other fee revenue. The
increase in operating expenses was primarily due to higher fuel and power
expenses; and
|
61
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
|
·
|
a
$3.7 million (12%) increase from the Central Florida Pipeline, mainly due
to higher product delivery revenues in 2006 driven by higher average
tariff and terminal rates.
|
Combining
all of the segment’s operations, total delivery volumes of refined petroleum
products decreased 0.8% in 2006 compared to 2005; however, total delivery
volumes from the Pacific operations were up 1.7% compared to 2005, due in part
to the East Line expansion which was in service for the last seven months of
2006. The expansion project substantially increased pipeline capacity from El
Paso, Texas to Tucson and Phoenix, Arizona. In addition, the CALNEV Pipeline
delivery volumes were up 4.2% in 2006 versus 2005, due primarily to strong
demand from the Southern California and Las Vegas, Nevada markets. The overall
decrease in year-to-year segment deliveries of refined products was largely
related to a 6.8% drop in volumes from the Plantation Pipeline in 2006, as
described above.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions, except
operating
statistics)
|
(In
millions, except operating statistics)
|
|||||||||||||||||||
|
Operating
Revenues
|
$
|
6,466.5
|
$
|
3,825.9
|
$
|
2,640.6
|
$
|
6,577.7
|
$
|
7,718.4
|
||||||||||
|
Operating
Expenses1
|
(5,879.9
|
)
|
(3,461.4
|
)
|
(2,418.5
|
)
|
(6,057.8
|
)
|
(7,255.0
|
)
|
||||||||||
|
Earnings
from Equity Investments2
|
19.2
|
10.3
|
8.9
|
40.5
|
36.8
|
|||||||||||||||
|
Other
Income (Expense)3
|
1.8
|
1.9
|
(0.1
|
)
|
15.1
|
-
|
||||||||||||||
|
Interest
Income and Other Income (Expense), Net
|
0.2
|
-
|
0.2
|
0.7
|
2.7
|
|||||||||||||||
|
Income
taxes
|
(6.0
|
)
|
(3.4
|
)
|
(2.6
|
)
|
(1.4
|
)
|
(2.6
|
)
|
||||||||||
|
Segment
Earnings Before DD&A
|
$
|
601.8
|
$
|
373.3
|
$
|
228.5
|
$
|
574.8
|
$
|
500.3
|
||||||||||
|
|
||||||||||||||||||||
|
Operating
Statistics:
|
||||||||||||||||||||
|
Natural
Gas Transport Volumes (Trillion Btus)4
|
1,577.3
|
931.7
|
645.6
|
1,440.9
|
1,317.9
|
|||||||||||||||
|
Natural
Gas Sales Volumes (Trillion Btus)5
|
865.5
|
519.7
|
345.8
|
909.3
|
924.6
|
|||||||||||||||
__________
|
1
|
Seven
months ended December 31, 2007 amount includes a gain of $7.4 million
resulting from valuation adjustments related to derivative contracts in
place and a settlement of tax reserves, partially offset by a $4.4 million
charge related to the revaluation of cushion gas at the time of the Going
Private transaction and recorded in the application of the purchase method
of accounting. Seven months ended December 31, 2007 and year ended
December 31, 2006 and 2005 amounts include a $0.4 million decrease in
expense, a $1.5 million increase in expense and a $0.1 million decrease in
expense, respectively, associated with environmental liability
adjustments. 2006 amount also includes a $6.3 million reduction in expense
due to the revaluation of a reserve related to a natural gas
purchase/sales contract.
|
|
2
|
Five
months ended May 31, 2007 amount includes an expense of $1.0 million
reflecting Kinder Morgan Energy Partners’ portion of a loss from the early
extinguishment of debt by Red Cedar Gathering
Company.
|
|
3
|
Seven
months ended December 31, 2007 amount includes a $1.4 million charge
resulting from valuation adjustments, related to assets sold in June,
recorded in the application of the purchase method of accounting to the
Going Private transaction. 2006 amount includes a $15.1 million gain from
the combined sale of Kinder Morgan Energy Partners’ Douglas natural gas
gathering system and Painter Unit fractionation
facility.
|
|
4
|
Includes
Rocky Mountain pipeline group and Texas intrastate natural gas pipeline
group pipeline volumes.
|
|
5
|
Represents
Texas intrastate natural gas pipeline
group.
|
The
Natural Gas Pipelines – KMP segment’s primary businesses involve marketing,
transporting, storing, gathering and processing natural gas through both
intrastate and interstate pipeline systems and related facilities. Combined, the
certain items described in the footnotes to the table above decreased earnings
before depreciation, depletion and amortization by $18.9 million in 2007,
relative to 2006, and increased earnings before depreciation, depletion and
amortization by $19.8 million in 2006, relative to 2005. 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) operating revenues in both 2007 and 2006, when compared to the
respective prior year:
62
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Year Ended December
31, 2007 versus Year Ended December 31, 2006
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Texas
Intrastate Natural Gas Pipeline Group
|
$
|
57.0
|
19
|
%
|
$
|
(142.2
|
)
|
(2
|
)%
|
||||
|
Casper
and Douglas gas processing
|
8.6
|
67
|
%
|
5.6
|
6
|
%
|
|||||||
|
Rocky
Mountain Pipeline Group
|
(11.6
|
)
|
(6
|
)%
|
29.0
|
10
|
%
|
||||||
|
Red
Cedar Gathering Company
|
(7.4
|
)
|
(20
|
)%
|
-
|
-
|
|||||||
|
All
others
|
(0.7
|
)
|
(15
|
)%
|
(3.8
|
)
|
(94
|
)%
|
|||||
|
Intrasegment
Eliminations
|
-
|
-
|
0.2
|
11
|
%
|
||||||||
|
Total
Natural Gas Pipelines
|
$
|
45.9
|
8
|
%
|
$
|
(111.2
|
)
|
(2
|
)%
|
||||
|
Year Ended December
31, 2006 versus Year Ended December 31, 2005
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Texas
Intrastate Natural Gas Pipeline Group
|
$
|
34.6
|
13
|
%
|
$
|
(1,165.7
|
)
|
(16
|
)%
|
||||
|
Rocky
Mountain Pipeline Group
|
14.3
|
8
|
%
|
27.9
|
11
|
%
|
|||||||
|
Red
Cedar Gathering Company
|
4.3
|
13
|
%
|
-
|
-
|
||||||||
|
Casper
and Douglas gas processing
|
2.9
|
30
|
%
|
(6.4
|
)
|
(6
|
)%
|
||||||
|
All
others
|
(1.4
|
)
|
(21
|
)%
|
2.5
|
167
|
%
|
||||||
|
Intrasegment
Eliminations
|
-
|
-
|
1.0
|
39
|
%
|
||||||||
|
Total
Natural Gas Pipelines
|
$
|
54.7
|
11
|
%
|
$
|
(1,140.7
|
)
|
(15
|
)%
|
||||
The
segment’s overall increases in earnings before depreciation, depletion and
amortization expenses in both 2007 and 2006 were driven by strong year-over-year
performances from the Texas intrastate natural gas pipeline group, which
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. Collectively, the Texas intrastate group serves the Texas Gulf Coast
region by transporting, buying, selling, processing, treating and storing
natural gas from multiple onshore and offshore supply sources.
The
higher earnings in both 2007 and 2006, when compared to the respective prior
years, were primarily due to higher sales margins on renewal and incremental
contracts, increased transportation revenue from higher volumes and rates,
greater value from natural gas storage activities, and higher natural gas
processing margins. The Texas intrastate natural gas pipeline group also
benefited, in 2007, from higher sales of cushion gas, due to the termination of
a storage facility lease, and from incremental natural gas storage revenues, due
to a long-term contract with one of its largest customers that became effective
April 1, 2007. Although natural gas sales volumes were down almost 5% in 2007
compared to 2006, natural gas transport volumes on the Texas intrastate systems
increased 21% in 2007 and 5% in 2006, resulting in higher year-over-year
transportation revenues. Because the group also buys and sells natural gas, the
variances from period to period in both segment revenues and segment operating
expenses (which include natural gas costs of sales) are due to changes in the
intrastate group’s average prices and volumes for natural gas purchased and
sold.
The
increase in earnings from the Casper and Douglas natural gas processing
operations in 2007, when compared to 2006, was driven by an overall 6% increase
in operating revenues. The increase was primarily attributable to higher natural
gas liquids sales revenues, due to increases in both prices and volume. The 2006
increase in earnings was primarily related to incremental earnings associated
with favorable hedge settlements from natural gas gathering and processing
operations. A benefit was realized from comparative differences in hedge
settlements associated with the rolling-off of older low price crude oil and
propane positions at December 31, 2005.
The
decrease in earnings in 2007 from the Rocky Mountain interstate natural gas
pipeline group, which is comprised of Kinder Morgan Interstate Gas Transmission
LLC, Trailblazer Pipeline Company LLC, TransColorado Gas Transmission Company
LLC, and Kinder Morgan Energy Partners’ current 51% equity investment in Rockies
Express Pipeline LLC, resulted primarily from a $12.6 million decrease in equity
earnings from its investment in Rockies Express. The decrease in earnings from
Rockies Express, which began interim service in February 2006, reflected lower
net income due primarily to incremental depreciation and interest expense
allocable to a segment of the project that was placed in service in February
2007 and, until the completion of the Rockies Express-West project, had limited
natural gas reservation revenues and volumes. Rockies Express-West is a
713-mile, 42-inch diameter natural gas pipeline that extends eastward from the
Cheyenne Hub in Weld County, Colorado to Audrain County, Missouri. It has the
capacity to transport up to 1.5 billion cubic feet of natural gas per day and it
began interim service for up to 1.4 billion cubic feet per day on approximately
500 miles of line on January 12, 2008. Rockies Express-West is expected to
become fully operational in mid-April 2008.
63
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
The
$14.3 million (8%) increase in earnings in 2006, relative to 2005, from the
Rocky Mountain interstate natural gas pipeline group was driven by a $10.2
million (10%) increase in earnings from the Kinder Morgan Interstate Gas
Transmission system and a $3.8 million (10%) increase from TransColorado
Pipeline. The increase from KMIGT was due largely to higher revenues earned in
2006 from both operational sales of natural gas and natural gas park and loan
services. 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. The increase from TransColorado was largely due
to higher natural gas transmission revenues earned in 2006 compared to 2005,
chiefly related to higher natural gas delivery volumes resulting from both
system improvements and the successful negotiation of incremental firm
transportation contracts. The pipeline system improvements were associated with
an expansion, completed since the end of the first quarter of 2005, on the
northern portion of the pipeline.
Both
the drop, in 2007, and the increase, in 2006, in earnings before depreciation,
depletion and amortization from the 49% equity investment in the Red Cedar
Gathering Company were mainly due to higher prices on incremental sales of
excess fuel gas and to higher natural gas gathering revenues in 2006, relative
to both 2007 and 2005.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions, except operating statistics)
|
(In
millions, except operating statistics)
|
|||||||||||||||||||
|
Operating
Revenues1
|
$
|
930.1
|
$
|
605.9
|
$
|
324.2
|
$
|
736.5
|
$
|
657.6
|
||||||||||
|
Operating
Expenses2
|
(304.2
|
)
|
(182.7
|
)
|
(121.5
|
)
|
(268.1
|
)
|
(212.6
|
)
|
||||||||||
|
Earnings
from Equity Investments
|
19.2
|
10.5
|
8.7
|
19.2
|
26.3
|
|||||||||||||||
|
Other
Income (Expense), Net
|
-
|
0.1
|
(0.1
|
)
|
0.8
|
-
|
||||||||||||||
|
Income
Taxes
|
(2.1
|
)
|
(0.8
|
)
|
(1.3
|
)
|
(0.2
|
)
|
(0.4
|
)
|
||||||||||
|
Segment
Earnings Before DD&A
|
$
|
643.0
|
$
|
433.0
|
$
|
210.0
|
$
|
488.2
|
$
|
470.9
|
||||||||||
|
|
||||||||||||||||||||
|
Operating
Statistics:
|
||||||||||||||||||||
|
Carbon
Dioxide Delivery Volumes (Bcf)3
|
637.3
|
365.0
|
272.3
|
669.2
|
649.3
|
|||||||||||||||
|
SACROC
Oil Production (Gross)(MBbl/d)4
|
27.6
|
26.5
|
29.1
|
30.8
|
32.1
|
|||||||||||||||
|
SACROC
Oil Production (Net)(MBbl/d)5
|
23.0
|
22.1
|
24.2
|
25.7
|
26.7
|
|||||||||||||||
|
Yates
Oil Production (Gross)(MBbl/d)4
|
27.0
|
27.4
|
26.4
|
26.1
|
24.2
|
|||||||||||||||
|
Yates
Oil Production (Net)(MBbl/d)5
|
12.0
|
12.2
|
11.7
|
11.6
|
10.8
|
|||||||||||||||
|
Natural
Gas Liquids Sales Volumes (Net)(MBbl/d)5
|
9.6
|
9.5
|
9.7
|
8.9
|
9.4
|
|||||||||||||||
|
Realized
Weighted Average Oil Price per Bbl6,7
|
$
|
36.05
|
$
|
36.80
|
$
|
35.03
|
$
|
31.42
|
$
|
27.36
|
||||||||||
|
Realized
Weighted Average Natural Gas Liquids Price per Bbl7,8
|
$
|
52.91
|
$
|
58.55
|
$
|
45.04
|
$
|
43.90
|
$
|
38.98
|
||||||||||
__________
|
1
|
2007
results include an increase of $106.0 million in segment earnings,
resulting from valuation adjustments related to assets sold in June 2007
and derivative contracts in place at the time of the Going Private
transaction and recorded in the application of the purchase method of
accounting. 2006 amount also includes a $1.8 million loss (from a decrease
in revenues) on derivative contracts used to hedge forecasted crude oil
sales.
|
|
2
|
2007
and 2005 amounts include increases in expense associated with
environmental liability adjustments of $0.2 million (in the seven months
ended December 31, 2007) and $0.3 million,
respectively.
|
|
3
|
Includes
Cortez, Central Basin, Canyon Reef Carriers, Centerline and Pecos pipeline
volumes.
|
|
4
|
Represents
100% of the production from the field. Kinder Morgan Energy Partners owns
an approximate 97% working interest in the SACROC unit and an approximate
50% working interest in the Yates
unit.
|
|
5
|
Net
to Kinder Morgan, after royalties and outside working
interests.
|
|
6
|
Includes
all Kinder Morgan crude oil production
properties.
|
|
7
|
Hedge
gains/losses for crude oil and natural gas liquids are included with crude
oil.
|
|
8
|
Includes
production attributable to leasehold ownership and production attributable
to our ownership in processing plants and third-party processing
agreements.
|
The
CO2 –
KMP segment consists of Kinder Morgan CO2 Company,
L.P. and its consolidated affiliates. The 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.
64
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Due
to the certain items described in the footnotes to the table above, the
segment’s earnings before depreciation, depletion and amortization expenses
increased $107.6 million in 2007 and decreased $1.5 million in 2006, when
compared to the respective prior years. For each of the segment’s two primary
businesses, following is information related to the remaining year-to-year
increases and decreases in the segment’s (i) earnings before depreciation,
depletion and amortization (EBDA); and (ii) operating revenues:
|
Year Ended December
31, 2007 versus Year Ended December 31, 2006
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Sales
and Transportation Activities
|
$
|
(9.3
|
)
|
(5
|
)%
|
$
|
(8.8
|
)
|
(4
|
)%
|
|||
|
Oil
and Gas Producing Activities
|
56.5
|
19
|
%
|
81.6
|
14
|
%
|
|||||||
|
Intrasegment
Eliminations
|
-
|
-
|
13.0
|
21
|
%
|
||||||||
|
Total
CO2
|
$
|
47.2
|
10
|
%
|
$
|
85.8
|
12
|
%
|
|||||
|
Year Ended December
31, 2006 versus Year Ended December 31, 2005
|
|||||||||||||
|
EBDA
increase/(decrease)
|
Revenues
increase/(decrease)
|
||||||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
Sales
and Transportation Activities
|
$
|
24.4
|
15
|
%
|
$
|
35.7
|
22
|
%
|
|||||
|
Oil
and Gas Producing Activities
|
(5.6
|
)
|
(2
|
)%
|
57.1
|
10
|
%
|
||||||
|
Intrasegment
Eliminations
|
-
|
-
|
(12.1
|
)
|
(25
|
)%
|
|||||||
|
Total
CO2
|
$
|
18.8
|
4
|
%
|
$
|
80.7
|
12
|
%
|
|||||
The
overall $47.2 million (10%) increase in segment earnings before depreciation,
depletion and amortization expenses in 2007 versus 2006 was driven by higher
earnings from the segment’s oil and gas producing activities, which include its
ownership interests in oil-producing fields and natural gas processing plants.
The increase was largely due to higher oil production at the Yates oil field
unit, higher realized average oil prices in 2007 relative to 2006, and higher
earnings from natural gas liquids sales—due largely to increased recoveries at
the Snyder, Texas gas plant and to an increase in realized weighted average
price per barrel.
The
year-to-year decrease in earnings before depreciation, depletion and
amortization from the segment’s sales and transportation activities was
primarily due to a decrease in carbon dioxide sales revenues, resulting mainly
from lower average prices for carbon dioxide in 2007, and partly from a 3% drop
in average carbon dioxide delivery volumes. The segment’s average price received
for all carbon dioxide sales decreased 9% in 2007, when compared to 2006. The
decrease was mainly attributable to the expiration of a significantly
high-priced sales contract in December 2006.
The
segment’s $18.8 million (4%) increase in earnings before depreciation, depletion
and amortization in 2006 compared with 2005 was driven by higher earnings from
the segment’s carbon dioxide sales and transportation activities, largely due to
higher revenues—from both carbon dioxide sales and deliveries, and from crude
oil pipeline transportation. The overall increase in segment earnings before
depreciation, depletion and amortization was partly offset by lower earnings
from oil and gas producing activities and by lower equity earnings from the
segment’s 50% ownership interest in Cortez Pipeline Company.
The
decrease in earnings from oil and gas producing activities in 2006 compared with
2005 was primarily due to higher combined operating expenses and to the
previously disclosed drop in crude oil production at the SACROC oil field unit,
discussed below. The higher operating expenses included higher field operating
and maintenance expenses (including well workover expenses), higher property and
severance taxes, and higher fuel and power expenses. The increases in expenses
more than offset higher overall crude oil and natural gas plant product sales
revenues, which increased primarily from higher realized sales prices and partly
from higher crude oil production at the Yates field unit.
The
overall increases in segment revenues in 2007 and 2006, when compared to
respective prior years, were mainly due to higher revenues from the segment’s
oil and gas producing activities’ crude oil sales and natural gas liquids sales.
Combined, crude oil and plant product sales revenues increased $77.9 million
(14%) in 2007 compared to 2006, and $63.9 million (12%) in 2006 compared to
2005.
The
year-over-year increases in revenues from the sales of natural gas liquids were
driven by favorable sales price variances—the realized weighted average price
per barrel increased 21% in 2007 and 13% in 2006, when compared to the
respective prior year. The year-over-year increases in revenues from the sales
of crude oil reflected annual increases in the realized weighted average price
per barrel of 15% in both 2007 and 2006, and although total crude oil sales
volumes were relatively flat in 2006 compared to 2005, sales volumes decreased
6% in 2007 compared to 2006. Average gross oil production for 2007 was
27.0 thousand barrels per day at the Yates unit, up 3% from 2006, and 27.6
thousand barrels per day at SACROC, a decline of 10% versus 2006.
65
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
The
year-to-year decline in crude oil production at the SACROC field unit is
attributable to lower observed recoveries from recent project areas and due to
an intentional slow down in development pace given this reduction in recoveries.
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 the caption titled
“Supplemental Information on Oil and Gas Producing Activities (Unaudited)” in
the Financial Statements and Supplementary Data included in Item 8 elsewhere in
this Form 10-K.
In
addition, because the CO2 – KMP
segment is exposed to commodity price risk related to the price volatility of
crude oil and natural gas liquids, it mitigates 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. All of the
hedge gains and losses for crude oil and natural gas liquids are included in the
realized average price for oil. Had energy derivative contracts not been used to
transfer commodity price risk, crude oil sales prices would have averaged $69.63
per barrel in 2007, $63.27 per barrel in 2006 and $54.45 per barrel in 2005. For
more information on hedging activities, see Note 11 of the accompanying Notes to
Consolidated Financial Statements.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions, except
operating
statistics)
|
(In
millions, except operating statistics)
|
|||||||||||||||||||
|
Operating
Revenues
|
$
|
963.7
|
$
|
599.2
|
$
|
364.5
|
$
|
864.8
|
$
|
699.3
|
||||||||||
|
Operating
Expenses1
|
(536.4
|
)
|
(344.2
|
)
|
(192.2
|
)
|
(461.9
|
)
|
(373.4
|
)
|
||||||||||
|
Other
Income2
|
6.3
|
3.3
|
3.0
|
15.2
|
-
|
|||||||||||||||
|
Earnings
from Equity Investments
|
0.6
|
0.6
|
-
|
0.2
|
0.1
|
|||||||||||||||
|
Interest
Income and Other Income (Expense), Net
|
1.0
|
0.7
|
0.3
|
2.1
|
(0.2
|
)
|
||||||||||||||
|
Income
Taxes3
|
(19.2
|
)
|
(15.9
|
)
|
(3.3
|
)
|
(12.3
|
)
|
(11.2
|
)
|
||||||||||
|
Segment
Earnings Before DD&A
|
$
|
416.0
|
$
|
243.7
|
$
|
172.3
|
$
|
408.1
|
$
|
314.6
|
||||||||||
|
|
||||||||||||||||||||
|
Operating
Statistics:
|
||||||||||||||||||||
|
Bulk
Transload Tonnage (MMtons)4
|
87.1
|
53.4
|
33.7
|
95.1
|
85.5
|
|||||||||||||||
|
Liquids
Leaseable Capacity (MMBbl)
|
47.5
|
47.5
|
43.6
|
43.5
|
42.4
|
|||||||||||||||
|
Liquids
Utilization %
|
95.9
|
%
|
95.9
|
%
|
97.5
|
%
|
96.3
|
%
|
95.4
|
%
|
||||||||||
__________
|
1
|
2007
and 2005 amounts include increases in expense associated with
environmental liability adjustments of $2.0 million (in the seven
months ended December 31, 2007) and $3.5 million, respectively. 2007
amount also includes a $25.0 million increase in expense from the
settlement of certain litigation matters related to the Coral coal
terminal, and a $1.2 million increase in expense associated with legal
liability adjustments (both in the seven months ended December 31, 2007).
2006 amount includes a $2.8 million increase in expense related to
hurricane clean-up and repair
activities.
|
|
2
|
2007
and 2006 amounts include increases in income of $1.8 million (in the five
months ended May 31, 2007) and $15.2 million, respectively, from property
casualty gains associated with the 2005 hurricane
season.
|
|
3
|
2006
amount includes a $1.1 million increase in expense associated with
hurricane expenses and casualty
gain.
|
|
4
|
Volumes
for acquired terminals are included for 2007 and
2006.
|
The
Terminals - KMP segment includes the operations of the petroleum, chemical and
other liquids terminal facilities (other than those included in the Products
Pipelines – KMP segment), and all of the 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 decreased
earnings before depreciation, depletion and amortization by $37.7 million in
2007, relative to 2006, and increased earnings before depreciation, depletion
and amortization by $14.8 million in 2006, relative to 2005. The segment’s
remaining $45.6 million (11%) increase in earnings before depreciation,
depletion and amortization expenses in 2007 compared with 2006, and its
remaining $78.7 million (25%) increase in 2006 compared to 2005, were driven by
a combination of internal expansions and strategic acquisitions completed since
the end of 2005. Kinder Morgan Energy Partners has made and continues to seek
key terminal acquisitions in order to gain access to new markets, to complement
and/or enlarge existing terminal operations, and to benefit from the economies
of scale resulting from increases in storage, handling and throughput
capacity.
In
2007, Kinder Morgan Energy Partners invested approximately $158.9 million to
acquire terminal assets and equity investments, and its significant terminal
acquisitions since the fourth quarter of 2006 included the
following:
66
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
|
·
|
all
of the membership interests of Transload Services, LLC, which provides
material handling and steel processing services at 14 steel-related
terminal facilities located in the Chicago metropolitan area and various
cities in the United States, acquired November 20,
2006;
|
|
|
·
|
all
of the membership interests of Devco USA L.L.C., which includes a
proprietary technology that transforms molten sulfur into solid pellets
that are environmentally friendly and easier to transport, acquired
December 1, 2006;
|
|
|
·
|
the
Vancouver Wharves bulk marine terminal, which includes five deep-sea
vessel berths and terminal assets located on the north shore of the Port
of Vancouver’s main harbor. The assets include significant rail
infrastructure, dry bulk and liquid storage, and material handling
systems, and were acquired May 30, 2007;
and
|
|
|
·
|
the
terminal assets and operations acquired from Marine Terminals, Inc., which
are primarily involved in the handling and storage of steel and alloys and
consist of two separate facilities located in Blytheville, Arkansas, and
individual terminal facilities located in Decatur, Alabama, Hertford,
North Carolina, and Berkley, South Carolina. The assets were acquired
effective September 1, 2007.
|
Combined,
these operations accounted for incremental amounts of earnings before
depreciation, depletion and amortization of $31.2 million, revenues of $83.9
million, operating expenses of $53.2 million and equity earnings of $0.5
million, respectively, in 2007. All of the incremental amounts represent the
earnings, revenues and expenses from the acquired terminals’ operations during
the additional months of ownership in 2007, and do not include increases or
decreases during the same months that the assets were owned in
2006.
In
2006, Kinder Morgan Energy Partners also benefited significantly from the
incremental contributions attributable to the bulk and liquids terminal
businesses it acquired during 2005 and 2006. In addition to the two acquisitions
acquired in the fourth quarter of 2006 and referred to above, these acquisitions
included the following significant businesses:
|
|
·
|
the
Texas Petcoke terminals, located in and around the Ports of Houston and
Beaumont, Texas, acquired effective April 29,
2005;
|
|
|
·
|
three
terminals acquired separately in July 2005: the Kinder Morgan Staten
Island terminal, a dry-bulk terminal located in Hawesville, Kentucky and a
liquids/dry-bulk facility located in Blytheville, Arkansas;
and
|
|
|
·
|
all
of the ownership interests in General Stevedores, L.P., which operates a
break-bulk terminal facility located along the Houston Ship Channel,
acquired effective July 31, 2005.
|
Combined,
these terminal acquisitions accounted for incremental amounts of earnings before
depreciation, depletion and amortization of $33.5 million, revenues of $68.8
million and operating expenses of $35.3 million, respectively, in 2006. A
majority of these increases in earnings, revenues and expenses were attributable
to the inclusion of the Texas petroleum coke terminals, which were acquired from
Trans-Global Solutions, Inc. on April 29, 2005 for an aggregate consideration of
approximately $247.2 million. The primary assets acquired included facilities
and railway equipment located at the Port of Houston, the Port of Beaumont and
the TGS Deepwater terminal located on the Houston Ship Channel.
For
all other terminal operations (those owned during identical periods in both 2007
and 2006), earnings before depreciation, depletion and amortization expenses
increased $14.4 million (4%) in 2007, and $45.2 million (14%) in 2006, when
compared to the respective prior years. The increases in earnings represent net
changes in terminal results at various locations, but the year-over-year
increase in 2007 compared to 2006 was largely due to higher earnings in 2007
from the two large Gulf Coast liquids terminal facilities located along the
Houston Ship Channel in Pasadena and Galena Park, Texas. The two terminals
continued to benefit from both recent expansions that have added new liquids
tank and truck loading rack capacity since 2006, and incremental business from
ethanol and biodiesel storage and transfer activity (for the entire segment,
expansion projects and acquisitions completed since the end of 2006 have
increased the liquids terminals’ leaseable capacity by 9%, more than offsetting
a less than 1% drop in overall utilization percentage). Higher earnings in 2007
also resulted from (i) the combined operations of the Argo and Chicago, Illinois
liquids terminals, due to increased ethanol throughput and incremental liquids
storage and handling business; (ii) the Texas Petcoke terminals, due largely to
higher petroleum coke throughput volumes at the Port of Houston facility; and
(iii) the Pier IX bulk terminal, located in Newport News, Virginia, largely due
to a 19% year-to-year increase in coal transfer volumes and higher rail
incentives.
The
increase in earnings in 2006 compared to 2005 from terminals owned during both
years included higher earnings in 2006 from (i) the Pasadena and Galena Park
Gulf Coast liquids terminals, driven by higher revenues, in 2006, from new and
incremental customer agreements, additional liquids tank capacity from capital
expansions completed at the Pasadena terminal since the end of 2005, higher
truck loading rack service fees, higher ethanol throughput, and incremental
revenues from customer deficiency charges; (ii) the Shipyard River terminal,
located in Charleston, South Carolina, due to higher revenues from liquids
warehousing and coal and cement handling; (iii) the Texas Petcoke terminals,
mainly resulting from an increase in petroleum coke handling volumes; and (iv)
the Lower Mississippi River (Louisiana) terminals, primarily due to
67
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
incremental
earnings from the Amory and DeLisle Mississippi bulk terminals. The Amory
terminal began operations in July 2005. The higher earnings from the DeLisle
terminal, which was negatively impacted by hurricane damage in 2005, was
primarily due to higher bulk transfer revenues in 2006.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
|||||||||||||
|
(In
millions, except
operating
statistics)
|
(In
millions, except operating statistics)
|
|||||||||||||||
|
Operating
Revenues
|
$
|
160.8
|
$
|
98.9
|
$
|
61.9
|
$
|
137.8
|
||||||||
|
Operating
Expenses
|
(65.9
|
)
|
(42.9
|
)
|
(23.0
|
)
|
(53.3
|
)
|
||||||||
|
Other
Income (Expense)1
|
(377.1
|
)
|
-
|
(377.1
|
)
|
0.9
|
||||||||||
|
Interest
Income and Other Income (Expense), Net
|
8.0
|
6.3
|
1.7
|
1.0
|
||||||||||||
|
Income
Tax Benefit (Expense)
|
(19.4
|
)
|
(18.5
|
)
|
(0.9
|
)
|
(9.9
|
)
|
||||||||
|
Segment
Earnings Before DD&A2
|
$
|
(293.6
|
)
|
$
|
43.8
|
$
|
(337.4
|
)
|
$
|
76.5
|
||||||
|
|
||||||||||||||||
|
Operating
Statistics:
|
||||||||||||||||
|
Transport
Volumes (MMBbl)
|
94.4
|
58.0
|
36.4
|
83.7
|
||||||||||||
__________
|
1
|
Amount
for the year ended December 31, 2007 and the five months ended May 31,
2007 represents a goodwill impairment
expense.
|
|
2
|
Amounts
for the year and the seven months ended December 31, 2007 include a $1.3
million decrease in income from an oil loss
allowance.
|
The
Trans Mountain – KMP segment includes the operations of the Trans Mountain
Pipeline, which Kinder Morgan Energy Partners acquired from Knight Inc.
effective April 30, 2007. Trans Mountain transports crude oil and refined
products from Edmonton, Alberta to marketing terminals and refineries in British
Columbia and the state of Washington. An additional 35,000 barrel per day
expansion that will increase capacity on the pipeline to approximately 300,000
barrels per day is currently under construction and is expected to be in service
by late 2008.
In
accordance with generally accepted accounting principles, the information in the
table above reflects the results of operations for both 2007 and 2006 as though
the transfer of Trans Mountain to Kinder Morgan Energy Partners had occurred at
the beginning of the period (January 1, 2006).
For
the year ended December 31, 2007, the Trans Mountain – KMP business segment
reported a $370.1 million decrease in segment earnings before depreciation,
depletion and amortization expenses, over the comparable period in 2006. The
decrease was largely due to the effect of the items described in footnotes 1 and
2 in the table above.
After
taking into effect the certain items described in the footnotes to the table
above, segment earnings before depreciation, depletion and amortization expenses
increased by $7.0 million (9%) for the year ended December 31, 2007, over the
comparable period in 2006. This increase was largely due to a 13% increase in
throughput volumes, in part due to the pump station expansion that came on line
in April 2007.
The
impact on our pre-tax earnings from our investment in Kinder Morgan Energy
Partners during 2005, when we accounted for Kinder Morgan Energy Partners under
the equity method, was as follows:
|
Year
Ended December 31,
|
|||
|
2005
|
|||
|
(In
millions)
|
|||
|
General
Partner Interest, Including Minority Interest in the Operating
Limited Partnerships
|
$
|
484.6
|
|
|
Limited
Partner Units (Kinder Morgan Energy Partners)
|
32.3
|
||
|
Limited
Partner i-units (Kinder Morgan Management)
|
88.5
|
||
|
605.4
|
|||
|
Pre-tax
Minority Interest in Kinder Morgan Management
|
(70.6
|
)
|
|
|
Pre-tax
Earnings from Investment in Kinder Morgan Energy Partners1
|
$
|
534.8
|
|
68
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
__________
|
1
|
Pre-tax
earnings from our investment in Kinder Morgan Energy Partners in 2005,
when we accounted for Kinder Morgan Energy Partners under the equity
method, was negatively impacted by approximately $63.3 million due
principally to the effects of certain regulatory, environmental,
litigation and inventory items on Kinder Morgan Energy Partners’ 2005
earnings.
|
As
discussed in Note 1(B) of the accompanying Notes to Consolidated Financial
Statements, due to our adoption of EITF No. 04-5, beginning January 1,
2006, the accounts, balances and results of operations of Kinder Morgan Energy
Partners are included in our consolidated financial statements and we no longer
apply the equity method of accounting to our investment in Kinder Morgan Energy
Partners. The inclusion of Kinder Morgan Energy Partners as a consolidated
subsidiary affects the reported amounts of our consolidated revenues and
expenses and our reported segment earnings. However, after taking into account
the associated minority interests, the adoption of EITF No. 04-5 has no impact
on our income from continuing operations or our net income. The net impact on
pre-tax earnings of our investment in Kinder Morgan Energy Partners
was $412.0 million, $255.2 million and $582.9 million for the seven months
ended December 31, 2007, the five months ended May 31, 2007 and the year ended
December 31, 2006, respectively.
Our
pre-tax earnings from Kinder Morgan Energy Partners were positively impacted in
2007 and 2006, in part, by the positive impacts of internal growth and
acquisitions on Kinder Morgan Energy Partners’ earnings and cash flows.
Additional information on Kinder Morgan Energy Partners is contained in its
Annual Report on Form 10-K for the year ended December 31, 2007.
|
Combined
Results
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||
|
For
the Year
Ended
December
31,
2007
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
Year
Ended
December
31,
2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
General
and Administrative Expense
|
$
|
(459.2
|
)
|
$
|
(175.6
|
)
|
$
|
(283.6
|
)
|
$
|
(305.1
|
)
|
$
|
(64.1
|
)
|
|||||
|
Interest
Expense, Net
|
(839.7
|
)
|
(587.8
|
)
|
(251.9
|
)
|
(559.0
|
)
|
(147.5
|
)
|
||||||||||
|
Interest
Expense – Deferrable Interest Debentures
|
(21.9
|
)
|
(12.8
|
)
|
(9.1
|
)
|
(21.9
|
)
|
(21.9
|
)
|
||||||||||
|
Minority
Interests
|
(128.3
|
)
|
(37.6
|
)
|
(90.7
|
)
|
(374.2
|
)
|
(50.5
|
)
|
||||||||||
|
Loss
on Mark-to-market Interest Rate Swaps
|
-
|
-
|
-
|
(22.3
|
)
|
-
|
||||||||||||||
|
Gain
on Sale of Kinder Morgan Management Shares
|
-
|
-
|
-
|
-
|
78.5
|
|||||||||||||||
|
Contribution
to Kinder Morgan Foundation
|
-
|
-
|
-
|
-
|
(15.0
|
)
|
||||||||||||||
|
Other,
Net
|
17.7
|
14.2
|
3.5
|
9.2
|
11.2
|
|||||||||||||||
|
$
|
(1,431.4
|
)
|
$
|
(799.6
|
)
|
$
|
(631.8
|
)
|
$
|
(1,273.3
|
)
|
$
|
(209.3
|
)
|
||||||
“Interest
and Corporate Expenses, Net” was an expense of $1,431.4 million for the year
ended December 31, 2007, compared to an expense of $1,273.3 million for the year
ended December 31, 2006. The increase in net expenses was principally due to (i)
general and administrative expense related to the Going Private transaction and
expenses incurred in connection with other asset sales transactions and (ii)
increase in total interest expense resulting primarily from increased debt
levels, including the additional debt incurred in the Going Private transaction
and to a lesser extent, increased interest rates.
“Interest
and Corporate Expenses, Net” was an expense of $1,273.3 million for the year
ended December 31, 2006, compared to an expense of $209.3 million for the year
ended December 31, 2005. The increase in net expenses was principally due to (i)
the inclusion of the accounts, balances and results of operations of Kinder
Morgan Energy Partners in our consolidated financial statements beginning
January 1, 2006 due to our adoption of EITF No. 04-5 (see Note 1(B) of the
accompanying Notes to Consolidated Financial Statements) and (ii) the
acquisition of Terasen on November 30, 2005 (see Note 4 of the accompanying
Notes to Consolidated Financial Statements).
The
$154.1 million increase in general and administrative expense in 2007, relative
to 2006, was due to the combined effect of (i) $119.1 million of general and
administrative expense related to the Going Private transaction and expenses
incurred in connection with other asset sales transactions, substantially all of
which was incurred in the five months ended May 31, 2007, (ii) a $40.3 million
increase in general and administrative expense of Kinder Morgan Energy Partners
and (iii) a $5.3 million decrease in other general and administrative
expense.
The
$241.0 million increase in general and administrative expense in 2006, relative
to 2005, was due to (i) $238.4 million of general and administrative expense of
Kinder Morgan Energy Partners being included in our consolidated financial
statements due to our adoption of EITF No. 04-5 and, (ii) a $2.6 million
increase in other general and administrative expenses.
69
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
The
$280.7 million increase in total interest expense in 2007, relative to 2006, was
due to (i) a $59.8 million increase in interest expense of Kinder Morgan Energy
Partners and (ii) a $220.9 million increase in other interest expense resulting
primarily from increased debt levels, including the additional debt incurred in
the Going Private transaction, which affects the interest expense in the seven
months ended December 31, 2007 and, to a lesser extent, from increased interest
rates.
The
$411.5 million increase in total interest expense in 2006, relative to 2005, was
due to (i) $332.0 million of interest expense of Kinder Morgan Energy Partners
being included in our consolidated financial statements due to our adoption of
EITF No. 04-5, (ii) $63.9 million increase in interest expense resulting from
(1) interest on Terasen’s existing debt, including debt issued in 2006 and (2)
interest on incremental debt issued during the fourth quarter of 2005 to acquire
Terasen and (iii) a $15.6 million increase in other interest expense resulting
from higher effective interest rates, partially offset by lower debt
balances.
The
$245.9 million decrease in minority interests in 2007, relative to 2006, was due
to (i) a $232.0 million decrease in minority interests of Kinder Morgan Energy
Partners, (ii) a $13.0 million decrease in minority interests of Kinder Morgan
Management and (iii) a $0.9 million decrease in other minority interests,
principally Triton Power.
The
$323.7 million increase in minority interests in 2006, relative to 2005, was due
to (i) $300.8 million of minority interests of Kinder Morgan Energy Partners
being included in our consolidated financial statements due to our adoption of
EITF No. 04-5, (ii) a $21.0 million increase in minority interests of Kinder
Morgan Management and (iii) a $1.9 million increase in other minority interests,
principally Triton Power.
During
the first quarter of 2006, we recorded a pre-tax charge of $22.3 million ($14.1
million after tax) related to the financing of the Terasen acquisition. The
charge was necessary because certain hedges put in place related to the debt
financing for the acquisition did not qualify for hedge treatment under
Generally Accepted Accounting Principles, thus requiring that they be
marked-to-market, resulting in a non-cash charge to income. These hedges have
now been effectively terminated (see Note 11 of the accompanying Notes to
Consolidated Financial Statements).
During
2005, we sold a total of 5.7 million Kinder Morgan Management shares that we
owned, receiving net proceeds of $254.8 million. In conjunction with these
sales, we recorded pre-tax gains of $78.5 million (see Note 5 of the
accompanying Notes to Consolidated Financial Statements).
The
income tax provision increased from $285.9 million in 2006 to $362.9 million in
2007, an increase of $77.0 million (27%). Decreases in the income tax provision
of (i) $175.3 million due to a reduction in pre-tax income from continuing
operations of $507.5 million and (ii) $4.7 million related to Kinder Morgan
Management minority interest were more than offset by increases of (i) $128.5
million related to the Trans mountain pretax impairment of $377.1 million, which
is not deductible for tax purposes, (ii) $3.5 million attributable to the net
tax effects of consolidating Kinder Morgan Energy Partners’ United States income
tax provision, (iii) $38.0 million due to the fact that the 2006 provision
included a reduction in the effective tax rate applied to previously recorded
net deferred tax liabilities, (iv) $30.7 million due to the fees incurred in the
Going Private transaction, which are not deductible for tax purposes, (v) $28.5
million due to the reduction of tax benefit associated with the Terasen Inc.
acquisition financing structure, (vi) $13.4 million due to foreign earnings
subject to different tax rates, and (vii) $14.4 million attributable to various
other items.
The
income tax provision decreased from $337.1 million in 2005 to $285.9 million in
2006, a decrease of $51.2 million (15%) due principally to (i) a reduction of
$45.1 million resulting from a favorable financing structure utilized in the
Terasen acquisition, (ii) a reduction of $38.0 million due to the impact of
applying a lower effective tax rate on previously recorded net deferred tax
liabilities, (iii) an increase of $22.7 million due to foreign earnings subject
to different tax rates, (iv) an increase of $12.7 million attributable to the
net tax effects of consolidating Kinder Morgan Energy Partners, L.P.’s income
tax provision, (v) an increase of $6.8 million due to an increase in pre-tax
income from continuing operations of $35.0 million and (vi) an increase of $7.5
million related to Kinder Morgan Management minority interest and (vii) a
decrease of $17.8 million attributable to various other items.
See
Note 9 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 will be 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.
70
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
At
December 31, 2007, we have a capital loss carryforward of $775.1 million, of
which the full amount will be utilized to reduce capital gain associated with
the sale of our 80% ownership interest in our NGPL business segment and other
dispositions, resulting in a tax benefit of approximately $279.5 million. No
valuation has been provided with respect to our capital loss carryforward as we
believe future realization of this deferred tax asset is more likely than
not.
On
October 5, 2007, Kinder Morgan Energy Partners announced that it had completed
the previously announced 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. Due to the fair market revaluation resulting from the
Going Private transaction (see Note 1(B) of the accompanying Notes to
Consolidated Financial Statements), the consideration Kinder Morgan Energy
Partners received from the sale of its North System was equal to our carrying
value, therefore no gain or loss was recorded on this disposal
transaction.
On
June 15, 2007, we completed a transaction to sell Terasen Pipelines (Corridor)
Inc. to Inter Pipeline Fund, a Canada-based company, for approximately $711
million (C$760 million) plus the assumption of all construction debt. The
consideration was equal to Terasen Pipelines (Corridor) Inc.’s carrying value,
therefore no gain or loss was recorded on this disposal transaction. The sale
did not include any other assets of Kinder Morgan Canada (formerly Terasen
Pipelines).
On
May 17, 2007, we completed a transaction to sell Terasen Inc. to Fortis, Inc., a
Canada-based company, for approximately $3.4 billion (C$3.7 billion) including
cash and assumed debt. Terasen Inc.’s principal assets include Terasen Gas Inc.
and Terasen Gas (Vancouver Island) Inc. The sale did not include assets of
Kinder Morgan Canada (formerly Terasen Pipelines). We recorded a gain on this
disposition of $55.7 million in the second quarter of 2007. Based on a revised
estimate of the fair values of this reporting unit derived principally from this
definitive sales agreement, an estimated goodwill impairment charge of
approximately $650.5 million was recorded in the fourth quarter of 2006. (See
Note 6 of the accompanying Notes to Consolidated Financial
Statements.)
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. Incremental losses of approximately $9.1
million were recorded in the third quarter of 2007 to reflect final working
capital adjustments. An incremental tax benefit of $3.3 million related to these
adjustments was recorded as an adjustment to the capital loss carryforward
associated with the Terasen Inc. sale. See Note 9 of the accompanying Notes to
Consolidated Financial Statements for additional information regarding our
income taxes.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the financial results of the
above-mentioned operations have been reclassified to discontinued operations for
all periods presented. Note 7 of the accompanying Notes to Consolidated
Financial Statements contains additional information on these
matters.
Primary
Cash Requirements
Our
primary cash requirements, in addition to normal operating, general and
administrative expenses, are for debt service and capital expenditures. In
addition to these requirements, Kinder Morgan Energy Partners requires cash for
the quarterly distributions to its public common unitholders. Our capital
expenditures (other than sustaining capital expenditures) are discretionary and
for 2008 are currently expected to be approximately $3.3 billion in expansion
capital expenditures (including Kinder Morgan Energy Partners’ share of capital
expenditures for both Rockies Express and Midcontinent Express natural gas
pipeline projects) of which $28.5 million is associated with our NGPL business
segment (see Note 1(M) of the accompanying Notes to Consolidated Financial
Statements). We expect to fund these expenditures with existing cash and cash
flows from operating activities. In addition to utilizing cash generated from
operations, we could meet these cash requirements through borrowings under our
revolving credit facility or by issuing long-term notes. Kinder Morgan Energy
Partners could meet its cash requirements (i) with cash from operations, (ii)
through borrowings under its revolving credit facility or by issuing short-term
commercial paper or long-term notes (except with respect to quarterly cash
distributions) or (iii) by selling additional units for cash.
Invested
Capital
Our
net debt to total capital decreased in 2007 principally the result of (i) a net
increase of approximately $2.7 billion in common equity, excluding accumulated
other comprehensive loss, resulting from the Going Private transaction, (ii) an
approximate $2.8 billion reduction in net debt due to the sales of Terasen Inc.
and Terasen Pipelines (Corridor) Inc. and (iii) approximately $305.0 million of
payments made on senior notes of Knight Inc. These decreases were partially
offset by (i) a
71
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
net
of $4.5 billion of additional borrowings under our new $5.755 billion credit
agreement primarily used to finance the Going Private transaction and (ii)
increased debt by Kinder Morgan Energy Partners. See “Significant Financing
Transactions” following for additional discussion regarding these financing
transactions. Our ratio of net debt to total capital increased in 2006 compared
to 2005 due to our adoption of EITF No. 04-5, which resulted in the inclusion of
the accounts, balances and results of operations of Kinder Morgan Energy
Partners in our consolidated financial statements beginning January 1, 2006.
Although the total debt on our consolidated balance sheet increased as a result
of including Kinder Morgan Energy Partners’ debt balances with ours, Knight Inc.
has not assumed any additional obligations with respect to Kinder Morgan Energy
Partners’ debt. See Note 1(B) of the accompanying Notes to Consolidated
Financial Statements for information regarding EITF No. 04-5.
In
addition to the direct sources of debt and equity financing shown in the
following table, we obtain financing indirectly through our ownership interests
in unconsolidated entities as shown under “Significant Financing Transactions”
following. In addition to our results of operations, these balances are affected
by our financing activities as discussed following.
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
December
31,
|
December
31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Dollars
in millions)
|
(Dollars
in millions)
|
|||||||||||
|
Long-term
Debt:
|
||||||||||||
|
Outstanding
Notes and Debentures
|
$
|
14,714.6
|
$
|
10,623.9
|
$
|
6,286.8
|
||||||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
283.1
|
283.6
|
283.6
|
|||||||||
|
Preferred
Interest in General Partner of KMP
|
100.0
|
|||||||||||
|
Capital
Securities
|
-
|
106.9
|
107.2
|
|||||||||
|
Value
of Interest Rate Swaps1
|
199.7
|
46.4
|
51.8
|
|||||||||
|
15,297.4
|
11,060.8
|
6,729.4
|
||||||||||
|
Minority
Interests
|
3,314.0
|
3,095.5
|
1,247.3
|
|||||||||
|
Common
Equity, Excluding Accumulated
Other
Comprehensive Loss
|
8,069.2
|
3,657.5
|
4,051.4
|
|||||||||
|
26,680.6
|
17,813.8
|
12,028.1
|
||||||||||
|
Value
of Interest Rate Swaps
|
(199.7
|
)
|
(46.4
|
)
|
(51.8
|
)
|
||||||
|
Capitalization
|
26,480.9
|
17,767.4
|
11,976.3
|
|||||||||
|
Short-term
Debt, Less Cash and Cash Equivalents2
|
819.3
|
2,046.7
|
841.4
|
|||||||||
|
Invested
Capital
|
$
|
27,300.2
|
$
|
19,814.1
|
$
|
12,817.7
|
||||||
|
|
||||||||||||
|
Capitalization:
|
||||||||||||
|
Outstanding
Notes and Debentures
|
55.5%
|
59.8%
|
52.5%
|
|||||||||
|
Minority
Interests
|
12.5%
|
17.4%
|
10.4%
|
|||||||||
|
Common
Equity
|
30.5%
|
20.6%
|
33.8%
|
|||||||||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
1.1%
|
1.6%
|
2.4%
|
|||||||||
|
Preferred
Interest in General Partners of KMP
|
0.4%
|
-%
|
-%
|
|||||||||
|
Capital
Securities
|
-%
|
0.6%
|
0.9%
|
|||||||||
|
|
||||||||||||
|
Invested
Capital:
|
||||||||||||
|
Net
Debt3,
4
|
56.9%
|
63.9%
|
55.6%
|
|||||||||
|
Common
Equity, Excluding Accumulated Other Comprehensive Loss and Including
Deferrable Interest Debentures Issued to Subsidiary Trusts, Preferred
Interest in General Partners of KMP, Capital Securities and Minority
Interests
|
43.1%
|
36.1%
|
44.4%
|
|||||||||
__________
|
1
|
See
“Interest Rate Swaps” following.
|
|
2
|
Cash
and cash equivalents netted against short-term debt were $148.6 million,
$129.8 million and $116.6 million at December 31, 2007, 2006 and 2005,
respectively.
|
|
3
|
Outstanding
notes and debentures plus short-term debt, less cash and cash
equivalents.
|
|
4
|
Our
ratio of net debt to invested capital at December 31, 2007 and 2006, not
including the effects of consolidating Kinder Morgan Energy Partners
(effective January 1, 2006), was 45.6% and 56.2%,
respectively.
|
72
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Except
for Kinder Morgan Energy Partners and its subsidiaries, we employ a centralized
cash management program that essentially concentrates the cash assets of our
subsidiaries in joint accounts for the purpose of providing financial
flexibility and lowering the cost of borrowing. Our centralized cash management
program provides that funds in excess of the daily needs of our subsidiaries be
concentrated, consolidated, or otherwise made available for use by other
entities within our consolidated group. We place no restrictions on the ability
to move cash between entities, payment of intercompany balances or the ability
to upstream dividends to parent companies other than restrictions that may be
contained in agreements governing the indebtedness of those entities; provided
that neither we nor our subsidiaries (other than Kinder Morgan Energy Partners
and its subsidiaries) have rights with respect to the cash of Kinder Morgan
Energy Partners or its subsidiaries except as permitted by Kinder Morgan Energy
Partners’ partnership agreement.
In
addition, certain of our operating subsidiaries are subject to FERC-enacted
reporting requirements for oil and natural gas pipeline companies that
participate in cash management programs. FERC-regulated entities subject to
these rules must, among other things, place their cash management agreements in
writing, maintain current copies of the documents authorizing and supporting
their cash management agreements, and file documentation establishing the cash
management program with the FERC.
Short-term
Liquidity
Our
principal sources of short-term liquidity are our revolving bank facilities, the
commercial paper program of Kinder Morgan Energy Partners (which is supported by
its revolving bank facility) and cash provided by operations. The following
represents the revolving credit facilities that were available to Knight Inc.
and its respective subsidiaries, short-term debt outstanding under the credit
facilities or an associated commercial paper program, and available borrowing
capacity under the facilities after applicable letters of credit.
|
At
December 31, 2007
|
At
February 29, 2008
|
||||||||||
|
Short-term
Debt
Outstanding
|
Available
Borrowing
Capacity
|
Short-term
Debt
Outstanding
|
Available
Borrowing
Capacity
|
||||||||
|
(In
millions)
|
|||||||||||
|
Credit
Facilities:
|
|||||||||||
|
Knight Inc.1
|
|||||||||||
|
$1.0
billion, six-year secured revolver, due May 2013
|
$
|
299.0
|
$
|
558.0
|
$
|
-
|
$
|
857.0
|
|||
|
|
|||||||||||
|
Commercial
Paper:
|
|||||||||||
|
Kinder Morgan Energy
Partners2
|
|||||||||||
|
$1.85
billion, five-year unsecured revolver, due August 2010
|
$
|
589.1
|
$
|
723.1
|
$
|
589.6
|
$
|
682.4
|
|||
_________
|
1
|
On
January 5, 2007, after shareholder approval of the Going Private
transaction was announced, Kinder Morgan, Inc.’s secured senior debt
rating was downgraded by Standard & Poor’s Rating Services to BB- due
to the anticipated increase in debt related to the proposed transaction.
On April 11, 2007 and May 30, 2007, Fitch and Moody’s Investor Services
lowered their ratings to BB and Ba2, respectively, also related to the
transaction. Following the sale of an 80% ownership interest in our NGPL
business segment on February 15, 2008 (see Note 1(M) of the accompanying
Notes to Consolidated Financial Statements), Standard & Poor’s Rating
Services upgraded Knight Inc.’s secured senior debt to BB, and Fitch
upgraded its rating to BB+. Because we have a non-investment grade credit
rating, we no longer have access to the commercial paper market. As a
result, we are currently utilizing our $1.0 billion revolving credit
facility for Knight Inc.’s short-term borrowing
needs.
|
|
|
As
discussed following, the loan agreements we had in place prior to the
Going Private transaction were cancelled and replaced with a new loan
agreement. Our indentures related to publicly issued notes do not contain
covenants related to maintenance of credit ratings. Accordingly, no such
covenants were impacted by the downgrade in our credit ratings occasioned
by the Going Private transaction.
|
|
2
|
On
January 5, 2007, after shareholder approval of the Going Private
transaction was announced, Kinder Morgan Energy Partners’ unsecured senior
debt was downgraded to BBB by Standard & Poor’s Rating Services due to
the anticipated increase in our unsecured senior debt related to the
proposed transaction. Kinder Morgan Energy Partners’ debt was downgraded
by Fitch Ratings from BBB+ to BBB on April 11, 2007 and, upon completion
of the Going Private transaction, was downgraded from Baa1 to Baa2 by
Moody’s Investors Service.
|
These
facilities can be used for the respective entity’s general corporate or
partnership purposes. Kinder Morgan Energy Partners’ facility is also used as
backup for its commercial paper program. These facilities include financial
covenants and events of default that are common in such arrangements. The terms
of these credit facilities are discussed in Note 10 of the accompanying Notes to
Consolidated Financial Statements.
Our
current maturities of long-term debt of $79.8 million at December 31, 2007
represent (i) $5.0 million of our 6.50% Series Debentures due September 1, 2013,
(ii) $12.5 million of our floating rate Tranche A term loan facility, (iii)
$41.3 million of
73
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
our
floating rate Tranche B term loan facility, (iv) $9.9 million of a 5.40%
long-term note of Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada
Company due March 31, 2008, (v) $6.2 million of Kinder Morgan Texas Pipeline,
L.P.’s 5.23% Series Notes due January 2, 2014 and (vi) $5.0 million of Central
Florida Pipe Line LLC’s 7.84% Series Notes due on July 23, 2008. On February 15,
2008, the Tranche A and Tranche B term loans were paid off in their entirety.
See Note 19 of the accompanying Notes to Consolidated Financial Statements.
Apart from our restricted deposits, including approximately $3.0 billion
classified as held for sale as of December 31, 2007, and subsequently used to
pay down debt at the close of the sale of an 80% ownership interest in our NGPL
business segment in February 2008 (see Note 5 of the accompanying Notes to
Consolidated Financial Statements), notes payable and current maturities of
long-term debt, our current liabilities, net of our current assets, represent an
additional short-term obligation of $1,386.2 million at December 31, 2007. Given
our expected cash flows from operations, our unused debt capacity as discussed
preceding, including our credit facilities, our proceeds from the sale of assets
and based on our projected cash needs in the near term, we do not expect any
liquidity issues to arise.
Significant
Financing Transactions
In
March 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units at a price of $57.70 per unit, including common
units sold pursuant to the underwriters’ over-allotment option, less commissions
and underwriting expenses. Kinder Morgan Energy Partners received net proceeds
of $324.2 million for the issuance of these common units, and used the proceeds
to reduce the borrowings under its commercial paper program.
On
February 21, 2008, we commenced a cash tender offer to purchase up to $1.6
billion of Knight Inc.’s outstanding debt securities. In March 2008, we paid
$1.6 billion in cash to repurchase $1.67 billion par value of debt securities.
Proceeds from the completed sale of an 80% ownership interest in our NGPL
business segment were used to fund this debt security purchase.
On
February 14, 2008, Kinder Morgan Energy Partners paid a quarterly distribution
of $0.92 per common unit for the quarterly period ended December 31, 2007, of
which $143.4 million was paid to the public holders of Kinder Morgan Energy
Partners’ common units. The distributions were declared on January 16, 2008,
payable to unitholders of record as of January 31, 2008. See Note 1(X) of the
accompanying Notes to Consolidated Financial Statements.
On
February 12, 2008, Kinder Morgan Energy Partners completed a public offering of
senior notes. Kinder Morgan Energy Partners issued a total of $900 million in
principal amount of senior notes, consisting of $600 million of 5.95% notes due
February 15, 2018 and $300 million of 6.95% notes due January 15, 2038. Kinder
Morgan Energy Partners received proceeds from the issuance of the notes, after
underwriting discounts and commissions, of approximately $894.1 million, and
Kinder Morgan Energy Partners used the proceeds to reduce the borrowings under
its commercial paper program.
On
February 12, 2008, Kinder Morgan Energy Partners completed an offering of
1,080,000 of its common units at a price of $55.65 per unit in a privately
negotiated transaction. Kinder Morgan Energy Partners received net proceeds of
$60.1 million for the issuance of these 1,080,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
On
January 16, 2008, Kinder Morgan G.P., Inc.’s board of directors declared a
quarterly cash dividend on its Series A Fixed-to-Floating Rate Term Cumulative
Preferred Stock of $20.825 per share payable on February 18, 2008 to
shareholders of record as of January 31, 2008. On October 17, 2007, Kinder
Morgan G.P., Inc.’s board of directors declared a quarterly cash dividend on its
Cumulative Preferred Stock of approximately $25.684 per share which was paid on
November 18, 2007 to shareholders of record as of October 31, 2007.
On
September 28, 2007, we made quarterly payments of $2.5 million on the Tranche A
and $8.25 million on the Tranche B term loan facilities. Additionally on July
31, 2007, we made a $100 million voluntary prepayment on the Tranche B term loan
facility using the proceeds from the issuance of Kinder Morgan G.P., Inc.’s
preferred shares as discussed following.
On
September 3, 2007, we made a $5.0 million payment on our 6.50% Series
Debentures, Due 2013.
On
August 28, 2007, Kinder Morgan Energy Partners issued $500 million of its 5.85%
senior notes due September 15, 2012. Kinder Morgan Energy Partners used the
$497.8 million net proceeds received after underwriting discounts and
commissions to reduce the borrowings under its commercial paper
program.
On
August 15, 2007, Kinder Morgan Energy Partners repaid $250 million of 5.35%
senior notes that matured on that date.
On
July 27, 2007, Kinder Morgan G.P., Inc. sold 100,000 shares of its $1,000
Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred
Stock due 2057 to a single purchaser. We used the net proceeds of approximately
$98.6 million after the initial purchaser’s discounts and commissions to reduce
debt. 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
74
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
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 or Calnev subsidiaries.
On
June 21, 2007, Kinder Morgan Energy Partners issued $550 million of its 6.95%
senior notes due January 15, 2038. The net proceeds of approximately $543.9
million received after underwriting discounts and commissions were used to
reduce Kinder Morgan Energy Partners’ short-term commercial paper.
As
discussed in Note 7 of the accompany Notes to Consolidated Financial Statements,
On March 5, 2007 we entered into a definitive agreement to sell Terasen
Pipelines (Corridor) Inc. and on February 26, 2007, we entered into a definitive
agreement to sell Terasen Inc., which includes the assets of Terasen Gas Inc.
and Terasen Gas (Vancouver Island) Inc. These transactions closed on June 15,
2007 and May 17, 2007, respectively. Our consolidated debt was reduced by the
debt balances of Terasen Inc. and Terasen Pipelines (Corridor) Inc. of
approximately $2.9 billion, including the Capital Securities, as a result of
these sales transactions. For the period from January 1, 2007 to May 17, 2007,
average borrowings under TGVI’s C$350 million credit facility were $255.1
million at a weighted-average rate of 4.43%. For the period from January 1, 2007
to May 17, 2007, average borrowings under the C$20 million demand facility were
$3.3 million at a weighted-average rate of 5.31%.
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 Knight 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 from the sale of our
U.S.-based and Canada-based retail natural gas distribution operations (see
preceding discussion under “Discontinued Operations”). In connection with the
Going Private transaction, on May 30, 2007, we filed a certificate with the
State of Kansas changing the total number of shares of all classes of stock that
can be authorized for issuance under our restated articles of incorporation, as
amended, to 100 shares of common stock having a par value of $0.01 per share. On
May 30, 2007, we issued 100 shares of our common stock to Knight Midco Inc.
After the Going Private transaction was completed, Kinder Morgan, Inc. changed
its name to Knight Inc. and its shares were delisted from the New York Stock
Exchange. Since we are accounting for the Going Private transaction in
accordance with SFAS No. 141, Business Combinations, we
have adjusted the carrying value of our long-term debt securities to reflect
their fair values at the time of the Going Private transaction and the
adjustments are being amortized over the remaining lives of the debt securities.
The unamortized fair value adjustment balances reflected within the caption
“Long-term Debt” in the accompanying Consolidated Balance Sheet at December 31,
2007 were $93.5 million and $1.2 million, representing a decrease to the
carrying value of our long-term debt and an increase in the value of our
interest rate swaps, respectively.
On
May 30, 2007, we terminated our $800 million five-year credit facility dated
August 5, 2005 and entered into a $5.755 billion credit agreement with a
syndicate of financial institutions and Citibank, N.A., as administrative agent.
The senior secured credit facilities consist of the
following:
|
|
·
|
a
$1.0 billion senior secured Tranche A term loan facility with a term of
six years and six months (subsequently retired, see
below);
|
|
|
·
|
a
$3.3 billion senior secured Tranche B term loan facility, with a term of
seven years (subsequently retired, see
below);
|
|
|
·
|
a
$455 million senior secured Tranche C term loan facility with a term of
three years (subsequently retired, see below)
and
|
|
|
·
|
a
$1.0 billion senior secured revolving credit facility with a term of six
years. This revolving credit facility includes a sublimit of $300 million
for the issuance of letters of credit and a sublimit of $50 million for
swingline loans.
|
The
credit agreement permits one or more incremental increases under the revolving
credit facility or an addition of new term facilities in an aggregate amount of
up to $1.5 billion, provided certain conditions are met. Such additional
capacity is uncommitted. Additionally, the revolving credit facility allows for
one or more swingline loans from Citibank, N.A., in its individual capacity, up
to an aggregate amount of $50.0 million provided certain conditions are
met.
75
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Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Our
obligations under the credit agreement and certain existing notes issued by us
and Kinder Morgan Finance Company, ULC, the sale of which were registered under
the Securities Act of 1933, as amended, are secured, subject to specified
exceptions, by a first-priority lien on all the capital stock of each of our
wholly owned subsidiaries (limited, in the case of foreign subsidiaries, to 65%
of the capital stock of such subsidiaries) and by perfected security interests
in, and mortgages on, substantially all of our and our subsidiaries’ tangible
and intangible assets (including, without limitation, accounts (other than
deposit accounts or other bank or securities accounts), inventory, equipment,
investment property, intellectual property, other general intangibles, material
fee-owned real property (other than pipeline assets and any leasehold property)
and proceeds of the foregoing). None of the assets of Kinder Morgan G.P., Inc.,
Kinder Morgan Management, Kinder Morgan Energy Partners or their respective
subsidiaries are pledged as security as part of this financing.
In
June 2007, we repaid the borrowings outstanding under the Tranche C term
facility. At December 31, 2007, we had approximately $4.2 billion outstanding
under the term loan facilities at a weighted-average interest rate of 6.32%. On
February 15, 2008, the entire outstanding balances of our senior secured credit
facility’s Tranche A and Tranche B term loans and amounts outstanding at the
time under our $1.0 billion revolving credit facility, on a combined basis
totaling approximately $4.6 billion, were paid off with proceeds from the
closing of the sale of an 80% ownership interest in our NGPL business segment.
At February 29, 2008, we had no borrowings outstanding under the term loan
facilities.
Loans
under the revolving credit facility will bear interest, at Knight Inc.’s option,
at:
|
|
·
|
a
rate equal to LIBOR (London Interbank Offered Rate) plus an applicable
margin, or
|
|
|
·
|
a
rate equal to the higher of (a) U.S. prime rate and (b) the federal funds
effective rate plus 0.50%, in each case, plus an applicable
margin.
|
The
swingline loans will bear interest at:
|
|
·
|
a
rate equal to the higher of (a) U.S. prime rate or (b) the federal funds
effective rate plus 0.50%, in each case, plus an applicable
margin.
|
The
applicable margin for the revolving credit facility is subject to decrease
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.
On
November 14, 2007, Kinder Morgan Management made a distribution of 0.017686 of
its shares per outstanding share (1,258,778 total shares) to shareholders of
record as of October 31, 2007, based on the $0.88 per common unit distribution
declared by Kinder Morgan Energy Partners. On February 14, 2008, Kinder Morgan
Management made a distribution of 0.017312 of its shares per outstanding share
(1,253,951 total shares) to shareholders of record as of January 31, 2008, based
on the $0.92 per common unit distribution declared by Kinder Morgan Energy
Partners. These 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 market price 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 4,430,806, 4,383,303 and
3,760,732 shares in the years ended December 31, 2007, 2006 and 2005,
respectively.
On
May 15, 2007, Kinder Morgan Management sold 5.7 million of its listed shares in
a registered offering. None of the shares in the offering were purchased by us.
Kinder Morgan Management used the net proceeds from the sale to purchase 5.7
million i-units from Kinder Morgan Energy Partners. Kinder Morgan Energy
Partners used the net proceeds of approximately $298 million to reduce its
outstanding commercial paper debt. Additional information concerning the
business of, and our obligations to, Kinder Morgan Management is contained in
Kinder Morgan Management’s Annual Report on Form 10-K for the year ended
December 31, 2007.
On
May 7, 2007, we retired our $300 million 6.80% senior notes due March 1, 2008 at
101.39% of the face amount. We recorded a pre-tax loss of $4.2 million in
connection with this early extinguishment of debt.
On
January 30, 2007, Kinder Morgan Energy Partners completed a public offering of
$1.0 billion of senior notes, consisting of $600 million of 6.00% notes due
February 1, 2017 and $400 million of 6.50% notes due February 1, 2037. Kinder
Morgan Energy Partners received proceeds from the issuance of the notes, after
underwriting discounts and commissions, of approximately $992.8 million, and
used the proceeds to reduce the borrowings under its commercial paper
program.
76
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Effective
January 1, 2007, Kinder Morgan Energy Partners acquired the remaining
approximate 50.2% interest in the Cochin pipeline system that Kinder Morgan
Energy Partners did not already own (see Note 4 of the accompanying Notes to
Consolidated Financial Statements). As part of Kinder Morgan Energy Partners’
purchase price, two of its subsidiaries issued a long-term note payable to the
seller having a fair value of $42.3 million. Kinder Morgan Energy Partners
valued the debt equal to the present value of amounts to be paid, determined
using an annual interest rate of 5.40%. The principal amount of the note, along
with interest, is due in five annual installments of $10.0 million beginning
March 31, 2008. The final payment is due March 31, 2012. Kinder Morgan Energy
Partners’ subsidiaries Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada
Company are the obligors on the note and, as of December 31, 2007, the
outstanding balance under the note was $43.9 million.
On
September 1, 2006, we made a $5.0 million payment on our 6.50% Series
Debentures, Due 2013.
Effective
August 28, 2006, Kinder Morgan Energy Partners terminated its $250 million
unsecured nine-month bank credit facility due November 21, 2006, and increased
its existing five-year bank credit facility from $1.60 billion to $1.85 billion
and can now be amended to allow for borrowings up to $2.1 billion. The $1.85
billion credit facility is with a syndicate of financial institutions and
Wachovia Bank, National Association as the administrative agent, and can be used
for general corporate purposes and to support commercial paper issuance. This
credit facility is due August 18, 2010 and includes covenants and requires
payment of facility fees that are common in such arrangements. The $1.85 billion
credit facility permits Kinder Morgan Energy Partners to obtain bids for fixed
rate loans from members of the lending syndicate. Interest on the credit
facility accrues at Kinder Morgan Energy Partners’ option at a floating rate
equal to either the administrative agent’s base rate (but not less than the
Federal Funds Rate, plus 0.5%), or London Interbank Offered Rate (“LIBOR”), plus
a margin, which varies depending upon the credit rating of Kinder Morgan Energy
Partners’ long-term senior unsecured debt. Excluding the relatively
non-restrictive specified negative covenants and events of defaults, the credit
facility does not contain any provisions designed to protect against a situation
where a party to an agreement is unable to find a basis to terminate that
agreement while its counterparty’s impending financial collapse is revealed and
perhaps hastened through the default structure of some other agreement. The
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 Kinder Morgan Energy Partners will pay on the total commitment will vary
based on Kinder Morgan Energy Partners’ senior debt investment rating. None of
Kinder Morgan Energy Partners debt is subject to payment acceleration as a
result of any change to their credit ratings.
In
August 2006, Kinder Morgan Energy Partners issued, in a public offering,
5,750,000 common units, including common units sold pursuant to an underwriters’
over-allotment option, at a price of $44.80 per unit, less commissions and
underwriting expenses. Kinder Morgan Energy Partners received net proceeds of
approximately $248.0 million for the issuance of these 5,750,000 common units,
and used the proceeds to reduce the borrowings under its commercial paper
program.
In
July 2006, we received notification of election from the holders of our 7.35%
Series Debentures due 2026 electing the option, as provided in the indenture
governing the debentures, to require us to redeem the securities on August 1,
2006. The full $125 million of principal was elected to be redeemed and was
paid, along with accrued interest of approximately $4.6 million, on August 1,
2006, utilizing incremental borrowing under our $800 million credit
facility.
On
February 22, 2006, Kinder Morgan Energy Partners entered into a nine-month $250
million credit facility due November 21, 2006 with a syndicate of financial
institutions, and Wachovia Bank, National Association as the administrative
agent. Borrowings under the credit facility can be used for general partnership
purposes and as backup for Kinder Morgan Energy Partners’ commercial paper
program and include financial covenants and events of default that are common in
such arrangements. This agreement was terminated in August 2006, concurrent with
Kinder Morgan Energy Partners’ increase of its 5-year credit facility from $1.6
billion to $1.85 billion.
During
2005, we sold a total of 5.67 million Kinder Morgan Management shares that we
owned for approximately $254.8 million. We recognized pre-tax gains totaling
$78.5 million associated with these sales. These sales allowed us to fully
utilize a capital loss carryforward that was scheduled to expire in
2005.
On
December 9, 2005, Kinder Morgan Finance Company, ULC, a wholly owned subsidiary
of Knight Inc., issued $750 million of 5.35% senior notes due 2011, $850 million
of 5.70% senior notes due 2016 and $550 million of 6.40% senior notes due 2036.
Each series of these notes is fully and unconditionally guaranteed by Knight
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. The proceeds of approximately $2.1 billion, net of underwriting
discounts and commissions, were ultimately distributed to repay in full the
bridge facility incurred to finance the cash portion of the consideration for
Knight Inc.’s acquisition of Terasen. These notes were sold in a private
placement pursuant to Rule 144A under the Securities Act of 1933. In February
2006, Kinder Morgan Finance Company, ULC exchanged these notes for substantially
identical notes that have been registered under the Securities Act.
77
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Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
As
discussed in Note 4 of the accompanying Notes to Consolidated Financial
Statements, on November 30, 2005, we completed the acquisition of Terasen.
Terasen shareholders were able to elect, for each Terasen share held, either (i)
C$35.75 in cash, (ii) 0.3331 shares of Kinder Morgan common stock, or (iii)
C$23.25 in cash plus 0.1165 shares of Kinder Morgan common stock. In the
aggregate, we issued approximately $1.1 billion (12.48 million shares) of Kinder
Morgan common stock and paid approximately C$2.49 billion (US$2.13 billion) in
cash to Terasen securityholders. In addition, our short-term and long-term debt
balances increased by approximately $0.6 billion and $2.1 billion, respectively,
as a result of including the debt of Terasen and its subsidiaries in our
consolidated balances. See Note 10 of the accompanying Notes to Consolidated
Financial Statements for additional information regarding the debt of
Terasen.
On
November 23, 2005, 1197774 Alberta ULC, a wholly owned subsidiary of Knight
Inc., entered into a 364-day credit agreement, with Knight Inc. as guarantor,
which provides for a committed credit facility in the Canadian dollar equivalent
of US$2.25 billion. This credit facility was used to finance the cash portion of
the acquisition of Terasen (see Items 1 and 2 “Business and Properties”). Under
this bank facility, a facility fee was required to be paid based on the total
commitment, whether used or unused, at a rate that varies based on Knight Inc.’s
senior debt rating. On November 30, 2005, 1197774 Alberta ULC borrowed
approximately $2.1 billion under this facility to finance the cash portion of
the acquisition of Terasen. The facility was terminated when the loan was repaid
on December 9, 2005 after permanent financing was obtained as discussed further
in this section. Interest paid during 2005 under this credit facility was $1.9
million.
On
September 13, 2005, we made a $5.0 million payment on our 6.50% Series
Debentures, Due 2013.
On
August 5, 2005, we entered into an $800 million five-year senior unsecured
revolving credit facility. This credit facility replaced an $800 million
five-year senior unsecured revolving credit agreement dated August 18, 2004,
effectively extending the maturity of our credit facility by one year, and
includes covenants and requires payment of facility fees, which are discussed in
Note 10 of the accompanying Notes to Consolidated Financial Statements, that are
similar in nature to the covenants and facility fees required by the revolving
bank facility it replaced. In this credit facility, the definition of
consolidated net worth, which is a component of total capitalization, was
revised to exclude other comprehensive income/loss, and the definition of
consolidated indebtedness was revised to exclude the debt of Kinder Morgan
Energy Partners that is guaranteed by us. On October 6, 2005, we amended our
$800 million five-year senior unsecured revolving credit facility (i) to exclude
the effect of consolidating Kinder Morgan Energy Partners relating to the
requirements of EITF 04-5 discussed previously, (ii) to make administrative
changes and (iii) to change definitions and covenants to reflect the inclusion
of Terasen as a subsidiary of ours.
On
March 15, 2005, we issued $250 million of our 5.15% senior notes due March 1,
2015. The proceeds of $248.5 million, net of underwriting discounts and
commissions, were used to repay short-term commercial paper debt that was
incurred to pay our 6.65% senior notes that matured on March 1,
2005.
On
March 1, 2005, our $500 million of 6.65% senior notes matured, and we paid the
holders of the notes, utilizing a combination of cash on hand and borrowings
under our commercial paper program.
NGPL
PipeCo LLC Debt
On
December 21, 2007, NGPL PipeCo LLC (“PipeCo”), which at that time was an
indirect wholly owned subsidiary of Knight Inc., issued $1,250,000,000 aggregate
principal amount of 6.514% senior notes due December 15, 2012, $1,250,000,000
aggregate principal amount of 7.119% senior notes due December 15, 2017 and
$500,000,000 aggregate principal amount of 7.768% senior notes due December 15,
2037. The notes were sold in a private placement to a syndicate of investment
banks led by Lehman Brothers Inc., Banc of America Securities LLC and Deutsche
Bank Securities Inc., and resold by the initial purchasers to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of
1933. The notes have not been registered under the Securities Act and may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. The notes are the senior unsecured
obligations of PipeCo and rank equally in right of payment with any of PipeCo’s
future unsecured senior debt. The 2012, 2017 and 2037 senior notes are
redeemable in whole or in part, at PipeCo’s option 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. The net proceeds from the notes were
held in escrow pending the closing of the sale by us of an 80% ownership
interest in our NGPL business segment (see Note 1(M) of the accompanying Notes
to Consolidated Financial Statements), at which time the net proceeds were
released to PipeCo, prior to the consummation of the transaction, and were used
to repay debt owed to Knight Inc. Remaining proceeds after repayment of the debt
were distributed to Knight Inc. as a dividend. Following the consummation of the
transaction, PipeCo owns the assets and businesses comprising the NGPL business
segment, and is owned by Myria (80%) and us (20%). Because of the subsequent
sale of an 80% ownership interest in our NGPL business segment, of the $3.0
billion outstanding balance on these senior notes at December 31, 2007, 80% has
been included within the caption “Other Liabilities and Deferred Credits:
Liabilities Held for Sale, Non-current” and 20% as a reduction of the caption
“Investments: Other” in our accompanying Consolidated Balance
Sheet.
78
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Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Rockies
Express Pipeline LLC
Effective
June 30, 2006, West2East Pipeline LLC (and its subsidiary Rockies Express
Pipeline LLC was deconsolidated and subsequently is accounted for under the
equity method of accounting (See Note 4 of the accompanying Notes to
Consolidated Financial Statements). Pursuant to certain guaranty agreements, all
three member owners of West2East Pipeline LLC (which owns all of the member
interests in Rockies Express Pipeline LLC) have agreed to guarantee, severally
in the same proportion as their percentage ownership of the member interests in
West2East Pipeline LLC, borrowings under Rockies Express Pipeline LLC’s (i) $2.0
billion five-year, unsecured revolving credit facility, due April 28, 2011; (ii)
$2.0 billion commercial paper program; and (iii) $600 million in principal
amount of floating rate senior notes due August 20, 2009. The three member
owners and their respective ownership interests consist of the following: Kinder
Morgan Energy Partners’ subsidiary Kinder Morgan W2E Pipeline LLC – 51%, a
subsidiary of Sempra Energy – 25%, and a subsidiary of ConocoPhillips –
24%.
On
September 20, 2007, Rockies Express Pipeline LLC closed an unregistered Rule
144A offering of $600 million in principal amount of senior unsecured floating
rate notes. The notes have a maturity date of August 20, 2009, and interest on
these notes is paid and computed quarterly on an interest rate of three-month
LIBOR plus a spread. Upon issuance of the notes, Rockies Express Pipeline LLC
entered into two floating-to-fixed interest rate swap agreements having a
combined notional principal amount of $600 million and a maturity date of August
20, 2009.
On
April 28, 2006, Rockies Express Pipeline LLC entered into a $2.0 billion
five-year, unsecured revolving credit facility due April 28, 2011. This credit
facility supports a $2.0 billion commercial paper program that was established
in May 2006, and borrowings under the commercial paper program reduce the
borrowings allowed under the credit facility. This facility can be amended to
allow for borrowings up to $2.5 billion. Borrowings under the Rockies Express
Pipeline LLC credit facility and commercial paper program are primarily used to
finance the construction of the Rockies Express interstate natural gas pipeline
and to pay related expenses, and the borrowings do not reduce the borrowings
allowed under our credit facilities described elsewhere in this
report.
In
addition to the $600 million in senior notes, as of December 31, 2007, Rockies
Express Pipeline LLC had $1,625.4 million of commercial paper outstanding with
an average interest rate of approximately 5.50%, and there were no borrowings
under its five-year credit facility. Accordingly, as of December 31, 2007,
Kinder Morgan Energy Partners’ contingent share of Rockies Express Pipeline
LLC’s debt was $1,135.0 million (51% of total borrowings).
Interest
Rate Swaps
As
of December 31, 2007, we and our subsidiary, Kinder Morgan Energy Partners, were
party to interest rate swap agreements with notional principal amounts of $275
million and $2.3 billion, respectively, for a consolidated total of $2.575
billion. The fair value of our interest rate swaps as of December 31, 2007 was
$139.7 million and is included in the accompanying Consolidated Balance Sheet
within the caption “Deferred Charges and Other Assets.” Additionally, on March
7, 2008, we terminated an interest rate swap agreement having a notional value
of $275 million associated with Kinder Morgan Finance Company, ULC’s 6.40%
senior notes due 2036. We paid approximately $2.5 million to exit our position
in this swap agreement, which amount will be amortized to interest expense over
the period that the 6.40% debentures remain outstanding.
All
of our interest rate swap agreements and those of our subsidiary, Kinder Morgan
Energy Partners, have a termination date that corresponds to the maturity date
of one of the associated series of senior notes and, as of December 31, 2007,
the maximum length of time over which we have hedged a portion of our exposure
to the variability in the value of this debt due to interest rate risk is
through January 15, 2038. In addition, certain of our swap agreements contain
mutual cash-out provisions that allow us or our counterparties to settle the
agreement at certain future dates before maturity based on the then-economic
value of the swap agreement.
We
are exposed to credit related losses in the event of nonperformance by
counterparties to our interest rate swap agreements, and while we enter into
derivative contracts primarily with investment grade counterparties and actively
monitor their credit ratings, it is nevertheless possible that from time to time
losses will result from counterparty credit risk. As of December 31, 2007, all
of our interest rate swap agreements were with counterparties with investment
grade credit ratings.
We
have exposure to interest rate risk as a result of the issuance of variable and
fixed rate debt and commercial paper. We enter into interest rate swap
agreements to mitigate our exposure to changes in the fair value of our fixed
rate debt agreements. These hedging relationships are accounted for as fair
value hedges under SFAS No. 133. Prior to the Going Private transaction, all of
our interest rate swaps qualified for the “short-cut” method prescribed in SFAS
No. 133 for qualifying fair value hedges. Accordingly, the carrying value of the
swap was adjusted to its fair value as of the end of each reporting period, and
an offsetting entry was made to adjust the carrying value of the debt securities
whose fair value was being hedged. We recorded interest expense equal to the
floating rate payments, which was accrued monthly and paid
semi-annually.
79
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Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
In
connection with the Going Private transaction, all of our debt was recorded on
our balance sheet at fair value and, except for Terasen Pipelines (Corridor)
Inc.’s outstanding interest rate swap agreements classified as held for sale,
all of our interest rate swaps were re-designated as fair value hedges effective
June 1, 2007. Because these swaps did not have a fair value of zero as of June
1, 2007 they did not meet the requirements for the “short-cut” method of
assessing their effectiveness. Accordingly, subsequent changes in the
carrying value of the swap is adjusted to its fair value as of the end of each
reporting period, and an offsetting entry is made to adjust the carrying value
of the debt securities whose fair value is being hedged. Any hedge
ineffectiveness resulting from the difference between the change in fair value
of the interest rate swap and the change in fair value of the hedged debt
instrument is recorded as interest expense in the current period. During the
seven months ended December 31, 2007, no hedge ineffectiveness related to these
hedges was recognized. Interest expense equal to the floating rate payments is
accrued monthly and paid semi-annually.
As
of December 31, 2006, we, and our subsidiary Kinder Morgan Energy Partners, were
party to interest rate swap agreements with notional principal amounts of $2.325
billion and $2.1 billion, respectively, for a consolidated total of $4.425
billion. In addition, we were a party to interest rate swap agreements in Canada
with notional principal amounts of C$609 million.
During
the five months ended May 31, 2007, our subsidiary Kinder Morgan Energy Partners
entered into additional fixed-to-floating interest rate swap agreements
associated with its $600 million of 5.95% senior notes due February 15, 2008
with a combined notional principal of $500 million. Also during the five months
ended May 31, 2007, we, and our subsidiary Kinder Morgan Energy Partners,
terminated interest rate swaps with a notional value of $900 million and $100
million, respectively. The termination of these swaps resulted in a net gain of
$52 million that was amortized to interest expense over the periods in which the
hedged interest payments were forecasted to occur. In connection with the Going
Private transaction, our portion of the unamortized gain as of May 31, 2007 was
removed from the books in purchase accounting and will not impact our interest
expense subsequent to the closing of the Going Private transaction.
During
the seven months ended December 31, 2007, interest rate swap agreements with a
notional amount of $200 million matured on the same day as the corresponding
hedged debt, the $250 million of 5.35% senior notes, became due at Kinder Morgan
Energy Partners. Also during the seven months ended December 31, 2007, we
terminated interest rate swaps with a notional value of $1.15 billion. The
termination of these swaps resulted in a net gain of $24.5 million that is being
amortized to interest expense over the periods in which the hedged interest
payments were forecasted to occur. The total unamortized net gain on the
termination of interest rate swaps of $30.3, including the portion of gain at
Kinder Morgan Energy Partners that we do not own, is included within the caption
“Long-term Debt: Value of Interest Rate Swaps” in the accompanying Balance Sheet
December 31, 2007. The swaps denominated in Canadian dollars were sold as part
of the respective sales of Terasen Inc. and Terasen Pipelines (Corridor) Inc.
(see Note 7 of the accompanying Notes to Consolidated Financial Statements) in
May and June 2007, respectively.
We
recognized a one time non-cash, after-tax loss of approximately $14 million in
the first quarter of 2006 from changes in the fair value of our
receive-fixed-rate, pay-variable rate U.S. dollar to Canadian dollar
cross-currency interest rate swaps from January 1, 2006 to the termination of
the agreements to reflect the strengthening of the Canadian dollar versus the
U.S. dollar.
Net
Investment Hedges
We
are exposed to foreign currency risk from our investments in businesses owned
and operated outside the United States. To hedge the value of our investment in
Canadian operations, we have entered into various cross-currency interest rate
swap transactions that have been designated as net investment hedges in
accordance with SFAS No. 133. We have recognized no ineffectiveness through the
income statement as a result of these hedging relationships during the seven
months ended December 31, 2007, the five months ended May 31, 2007 or during
2006. The effective portion of the changes in fair value of these swap
transactions are reported as a cumulative translation adjustment under the
caption “Accumulated Other Comprehensive Loss” in the accompanying Consolidated
Balance Sheets at December 31, 2007 and 2006.
In
December 2005 we entered into receive-fixed-rate, pay-fixed-rate U.S. dollar to
Canadian dollar cross-currency interest rate swap agreements having a combined
notional value of C$1,240 million. These derivative instruments were designated
as hedges of our net investment in Canadian operations in accordance with SFAS
No. 133. Also in December 2005, we entered into three receive-fixed-rate,
pay-variable-rate U.S. dollar to Canadian dollar cross-currency interest rate
swap agreements having a combined notional value of C$1,254 million. These
derivative instruments did not qualify for hedge accounting under SFAS No. 133.
In February 2006 we entered into a series of transactions to effectively
terminate the receive-fixed-rate, pay-variable-rate swaps and entered into a
series of receive-fixed-rate, pay-fixed-rate swaps with the same notional value.
The new derivative instruments were designated as hedges of our net investment
in Canadian operations in accordance with SFAS No. 133. We recognized a one time
non-cash, after-tax loss of approximately $14 million in the first quarter of
2006 from changes in the fair value of our receive-fixed-rate, pay-variable rate
U.S. dollar to Canadian dollar cross-currency interest rate swaps from January
1, 2006 to the termination of the agreements to reflect the strengthening of the
Canadian dollar versus the U.S. dollar.
80
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Due
to the divestiture of a significant portion of our Canadian operations (see Note
7 of the accompanying Notes to Consolidated Financial Statements), we terminated
approximately C$250 million and C$1,963 million of our cross-currency interest
rate swaps during the seven months ended December 31, 2007 and the five months
ended May 31, 2007, respectively. We paid a total of approximately US$43.2
million and US$151.3 million, respectively, to terminate these swaps. The
portion of accumulated losses on these hedges relating to the disposed Canadian
operations was included in the corresponding gain or loss on sale calculation
for each asset group divested. The combined notional value of our remaining
cross-currency interest rate swaps at December 31, 2007 is approximately C$281.6
million. The fair value of these swaps as of December 31, 2007 and 2006 is a
liability of US$51.2 million and US$69.7 million, respectively.
Off-Balance
Sheet Arrangements
We
have invested in entities that are not consolidated in our financial statements.
Our obligations with respect to these investments, as well as Kinder Morgan
Energy Partners’ obligation with respect to a letter of credit, are summarized
following.
|
Off-Balance
Sheet Arrangements
At
December 31, 2007
|
||||||||||||||||||||||
|
Entity
|
Investment
Amount
|
Investment
Percent
|
Entity
Assets1
|
Entity
Debt
|
Our
Debt
Responsibility
|
|||||||||||||||||
|
(Millions
of Dollars)
|
||||||||||||||||||||||
|
Ft.
Lupton Power Plant
|
$
|
53.5
|
2
|
49.5
|
%
|
$
|
127.4
|
$
|
38.3
|
3
|
$
|
-
|
||||||||||
|
Express
System
|
402.1
|
33.3
|
%
|
942.6
|
416.7
|
3
|
-
|
|||||||||||||||
|
Horizon
Pipeline Company4
|
14.6
|
50
|
%
|
87.1
|
49.5
|
3
|
-
|
|||||||||||||||
|
Plantation
Pipeline Company
|
351.4
|
51
|
%
|
264.6
|
175.3
|
3
|
-
|
|||||||||||||||
|
Red
Cedar Gathering Company
|
135.6
|
49
|
%
|
261.4
|
100.0
|
3
|
-
|
|||||||||||||||
|
Cortez
Pipeline Company
|
14.2
|
50
|
%
|
79.9
|
157.3
|
78.7
|
5
|
|||||||||||||||
|
West2East
Pipeline LLC7
|
191.9
|
51
|
%
|
2,730.2
|
2,225.4
|
1,135.0
|
6
|
|||||||||||||||
|
Midcontinent
Express Pipeline LLC
|
63.0
|
50.0
|
%
|
136.8
|
-
|
97.7
|
8
|
|||||||||||||||
|
Nassau
County, Florida Ocean Highway and Port Authority
|
N/A
|
N/A
|
N/A
|
N/A
|
22.5
|
9
|
||||||||||||||||
__________
|
1
|
At
recorded value, in each case consisting principally of property, plant and
equipment.
|
|
2
|
Does
not include any portion of the goodwill recognized in conjunction with the
1998 acquisition of the Thermo
Companies.
|
|
3
|
Debtors
have recourse only to the assets of the entity, not to the
owners.
|
|
4
|
Included
in the caption “Assets Held for Sale, Non-current” in the accompanying
Consolidated Balance Sheet.
|
|
5
|
Kinder
Morgan Energy Partners is severally liable for its percentage ownership
share of the Cortez Pipeline Company debt. As of December 31, 2007, Shell
Oil Company shares Kinder Morgan Energy Partners’ several guaranty
obligations jointly and severally for $64.3 million of Cortez’s debt
balance; however, Kinder Morgan Energy Partners is obligated to indemnify
Shell for liabilities it incurs in connection with such guaranty.
Accordingly, as of December 31, 2007 Kinder Morgan Energy Partners has a
letter of credit in the amount of $37.5 million issued by JP Morgan Chase,
in order to secure its indemnification obligations to Shell for 50% of the
Cortez debt balance of $64.3
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.
|
|
6
|
Debt
responsibility of Kinder Morgan Energy
Partners.
|
|
7
|
West2East
Pipeline LLC is a limited liability company and is the sole owner of
Rockies Express Pipeline LLC. As of December 31, 2007, the remaining
limited liability member interests in West2East Pipeline LLC are owned by
ConocoPhillips (24%) and Sempra Energy (25%). Kinder Morgan Energy
Partners owned a 66 2/3% ownership interest in West2East Pipeline LLC from
October 21, 2005 until June 30, 2006, and included its results in its
consolidated financial statements until June 30, 2006. On June 30, 2006,
Kinder Morgan Energy Partners’ ownership interest was reduced to 51%,
West2East Pipeline LLC was deconsolidated, and Kinder Morgan Energy
Partners subsequently accounted for its investment under the equity method
of accounting. Upon completion of the pipeline, Kinder Morgan Energy
Partners’ ownership percentage is expected to be reduced to
50%.
|
|
8
|
Midcontinent
Express Pipeline LLC is a limited liability company. As of December 31,
2007, the remaining limited liability interest in Midcontinent Express
Pipeline LLC is owned by Energy Transfer Partners, L.P. Debt
responsibility represents Kinder Morgan Energy Partners’ guarantee of its
proportionate share of letters of credit outstanding at December 31,
2007.
|
81
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
9
|
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, 2007, the face amount of this letter of
credit outstanding under Kinder Morgan Energy Partners’ credit facility
was $22.5 million. Principal payments on the bonds are made on the first
of December each year and reductions are made to the letter of
credit.
|
|
|
Aggregate
Contractual Obligations
|
|
|
Aggregate
Contractual Obligations
|
At
December 31, 2007
|
Total
|
Less
than
1
year
|
2-3
years
|
4-5
years
|
After
5 years
|
||||||||||
|
(In
millions)
|
||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||
|
Short-term
Borrowings
|
$
|
888.1
|
$
|
888.1
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Long-term
Debt, Including Current Maturities:
|
||||||||||||||
|
Principal
Payments
|
18,284.1
|
79.8
|
633.0
|
4,777.4
|
12,793.9
|
|||||||||
|
Interest
Payments1
|
14,942.1
|
1,195.9
|
2,310.2
|
2,083.7
|
9,352.3
|
|||||||||
|
Lease
Obligations2,3
|
676.2
|
58.1
|
96.2
|
82.0
|
439.9
|
|||||||||
|
Pension
and Postretirement Benefit Plans4
|
62.1
|
4.6
|
9.7
|
10.9
|
36.9
|
|||||||||
|
Total
Contractual Cash Obligations7
|
$
|
34,852.6
|
$
|
2,226.5
|
$
|
3,049.1
|
$
|
6,954.0
|
$
|
22,623.0
|
||||
|
|
||||||||||||||
|
Other
Commercial Commitments:
|
||||||||||||||
|
Standby
Letters of Credit5
|
$
|
815.6
|
$
|
768.5
|
$
|
9.6
|
$
|
-
|
$
|
37.5
|
||||
|
Capital
Expenditures6
|
$
|
259.1
|
$
|
259.1
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
__________
|
1
|
Interest
payments have not been adjusted for any amounts receivable related to our
interest rate swaps outstanding. See Item 7A Quantitative and Qualitative
Disclosures About Market Risk.
|
|
2
|
Represents
commitments for capital leases, including interest, and operating
leases.
|
|
3
|
Approximately
$458.2 million, $20.6 million, $41.2 million, $41.6 million and $354.8
million in each respective column is attributable to the lease obligation
associated with the Jackson, Michigan power generation
facility.
|
|
4
|
In
addition to the amounts shown, we are also required to contribute $0.2
million per year to these plans. We currently do not expect to make any
additional significant contributions to these plans in the next few years,
although we could elect or be required to make such contributions
depending on, among other factors, the return generated by plan assets and
changes in actuarial assumptions.
|
|
5
|
Letters
of credit totaling $815.6 million outstanding at December 31, 2007
consisted of the following: (i) four letters of credit, totaling $323.0
million, supporting our hedging of commodity risk, (ii) a $100 million
letter of credit that supports certain proceedings with the California
Public Utilities commission involving refined products tariff charges on
the intrastate common carrier operations of Kinder Morgan Energy Partners’
Pacific operations’ pipelines in the State of California, (iii) a combined
$58.3 million in ten letters of credit supporting Kinder Morgan Energy
Partners’ Trans Mountain pipeline system operations, (iv) a $52.1 million
letter of credit supporting our Canadian pipeline operations (v) a $37.5
million letter of credit supporting Kinder Morgan Energy Partners’
indemnification obligations on the Series D note borrowings of Cortez
Capital Corporation, (vi) Kinder Morgan Energy Partners’ $30.3 million
guarantee under letters of credit totaling $45.5 million supporting its
International Marine Terminals Partnership Plaquemines, Louisiana Port,
Harbor, and Terminal Revenue Bonds, (vii) a $25.3 million letter of credit
supporting Kinder Morgan Energy Partners’ Kinder Morgan Liquids Terminals
LLC New Jersey Economic Development Revenue Bonds, (viii) a $24.1 million
letter of credit supporting Kinder Morgan Energy Partners’ Kinder Morgan
Operating L.P. “B” tax-exempt bonds, (ix) a $22.5 million letter of credit
supporting Nassau County, Florida Ocean Highway and Port Authority
tax-exempt bonds, (x) four letters of credit, totaling $21.4 million,
required under provisions of our property and casualty, worker’s
compensation and general liability insurance policies, (xi) a $19.9
million letter of credit supporting the construction of Kinder Morgan
Energy Partners’ Kinder Morgan Louisiana Pipeline, (xii) a $15.3 million
letter of credit to fund the Debt Service Reserve Account required under
the Express System’s trust indenture, (xiii) a $15.5 million letter of
credit supporting Kinder
|
82
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
|
Morgan
Energy Partners’ pipeline and terminal operations in Canada, (xiv) two
letters of credit totaling $20.3 million supporting the subordination of
operating fees payable to us for operation of the Jackson, Michigan power
generation facility to payments due under the operating lease of the
facilities and (xv) 14 letters of credit, totaling $34.9 million
supporting various company
functions.
|
|
6
|
Represents
commitments for the purchase of property, plant and equipment at December
31, 2007.
|
|
7
|
As
of December 31, 2007, the liability for uncertain income tax positions,
excluding associated interest and penalties, was $41.5 million pursuant to
FASB Interpretation No. 48. This liability represents an estimate of tax
positions that we have taken in our tax returns which may ultimately not
be sustained upon examination by the tax authorities. Since the ultimate
amount and timing of any future cash settlements cannot be predicted with
reasonable certainty, this estimated liability has been excluded from the
Aggregate Contractual Obligations.
|
We
expect to have sufficient liquidity to satisfy our near-term obligations through
the combination of free cash flow and our credit facilities.
|
Contingent
Liabilities:
|
Contingency
|
Amount
of Contingent Liability
at
December 31, 2007
|
||
|
Guarantor
of the Bushton Gas
Processing
Plant Lease1
|
Default
by ONEOK, Inc.
|
Total
$103.0 million; Averages $23 million per year through 2012
|
||
|
Jackson,
Michigan Power Plant
Incremental
Investment
|
Operational
Performance
|
$3
to $8 million per year for 12 years
|
||
|
Jackson,
Michigan Power Plant
Incremental
Investment
|
Cash
Flow Performance
|
Up
to a total of $25 million beginning in
2018
|
__________
|
1
|
In
conjunction with our sale of the Bushton gas processing facility to ONEOK,
Inc., at December 31, 1999, ONEOK 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.
|
At
December 31, 2007, we owned, directly, and indirectly in the form of i-units
corresponding to the number of shares of Kinder Morgan Management we owned,
approximately 30.0 million limited partner units of Kinder Morgan Energy
Partners. These units, which consist of 14.4 million common units, 5.3 million
Class B units and 10.3 million i-units, represent approximately 12.1% of the
total limited partner interests of Kinder Morgan Energy Partners. In addition,
we are the sole 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 13.9% of Kinder Morgan Energy
Partners’ total equity interests at December 31, 2007. 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.
Prior
to our adoption of EITF No. 04-5, we accounted for our investment in Kinder
Morgan Energy Partners under the equity method of accounting. Due to our
adoption of EITF No. 04-5, beginning January 1, 2006, the accounts, balances and
results of operations of Kinder Morgan Energy Partners are included in our
consolidated financial statements and we no longer apply the equity method of
accounting to our investment in Kinder Morgan Energy Partners. The adoption of
EITF No. 04-5 affects the reported amounts of our consolidated revenues and
expenses and our reported segment earnings. However, after taking into account
the associated minority interests, the adoption of EITF No. 04-5 has no impact
on our income from continuing operations or our net income.
The
following discussion of cash flows should be read in conjunction with the
accompanying Consolidated Statements of Cash Flows and related supplemental
disclosures. The following discussion is a comparison of the cash flows for the
years ended December 31, 2006 and 2005 (predecessor basis) with the combined
cash flows for the year ended December 31, 2007, which amounts include both
predecessor (pre-Going Private) and successor (post-Going Private) balances.
These combined cash flows, while in our opinion useful for comparing our results
between these periods, do not represent a measure prepared in accordance with
generally accepted accounting principles. As discussed in Note 1(B) of the
accompanying Notes to Consolidated Financial Statements, due to our adoption of
EITF No. 04-5, beginning January 1, 2006, the accounts, balances and results of
operations of Kinder Morgan Energy Partners are included in our consolidated
financial statements and we no longer apply the equity method of accounting to
our investment in Kinder Morgan Energy Partners. All highly liquid investments
purchased with an original maturity of three months or less are considered to be
cash equivalents.
83
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
Combined
|
Seven
Months
|
|||||||||||||||||||
|
Year
Ended
|
Ended
|
Five
Months
|
||||||||||||||||||
|
December
31,
|
December
31,
|
Ended
|
Year
Ended December 31,
|
|||||||||||||||||
|
2007
|
2007
|
May
31, 2007
|
2006
|
2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
||||||||||||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||||||||||
|
Net
Income
|
$
|
312.9
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
||||||||||
|
Adjustments
to Reconcile Net Income to Net Cash Flows from Operating
Activities:
|
||||||||||||||||||||
|
Loss
(Income) from Discontinued Operations, Net of Tax
|
(286.4
|
)
|
1.5
|
(287.9
|
)
|
542.8
|
(40.4
|
)
|
||||||||||||
|
Loss
from Impairment of Assets
|
377.1
|
-
|
377.1
|
1.2
|
6.5
|
|||||||||||||||
|
Depreciation
and Amortization
|
741.1
|
476.2
|
264.9
|
540.3
|
104.6
|
|||||||||||||||
|
Deferred
Income Taxes
|
48.9
|
(89.8
|
)
|
138.7
|
10.8
|
92.1
|
||||||||||||||
|
Equity
in Earnings of Kinder Morgan Energy Partners
|
-
|
-
|
-
|
-
|
(605.4
|
)
|
||||||||||||||
|
Distributions
from Kinder Morgan Energy Partners
|
-
|
-
|
-
|
-
|
530.8
|
|||||||||||||||
|
Equity
in Earnings of Other Equity Investments
|
(93.4
|
)
|
(54.3
|
)
|
(39.1
|
)
|
(100.6
|
)
|
(15.3
|
)
|
||||||||||
|
Distributions
from Other Equity Investees
|
134.7
|
86.5
|
48.2
|
74.8
|
8.1
|
|||||||||||||||
|
Minority
Interests in Income of Consolidated Subsidiaries
|
138.7
|
48.0
|
90.7
|
374.2
|
50.5
|
|||||||||||||||
|
Gains
from Property Casualty Indemnifications
|
(1.8
|
)
|
-
|
(1.8
|
)
|
(15.2
|
)
|
-
|
||||||||||||
|
Net
Gains on Sales of Assets
|
(8.9
|
)
|
(6.3
|
)
|
(2.6
|
)
|
(22.0
|
)
|
(76.4
|
)
|
||||||||||
|
Mark-to-Market
Interest Rate Swap Loss
|
-
|
-
|
-
|
22.3
|
-
|
|||||||||||||||
|
Foreign
Currency Loss (Gain)
|
15.5
|
-
|
15.5
|
-
|
(5.0
|
)
|
||||||||||||||
|
Pension
Contribution in Excess of Expense
|
-
|
-
|
-
|
-
|
(23.8
|
)
|
||||||||||||||
|
Changes
in Gas in Underground Storage
|
(32.9
|
)
|
51.3
|
(84.2
|
)
|
(35.3
|
)
|
6.5
|
||||||||||||
|
Changes
in Working Capital Items
|
(98.9
|
)
|
104.0
|
|
(202.9
|
)
|
80.0
|
(13.4
|
)
|
|||||||||||
|
(Payment
for) Proceeds from Termination of Interest Rate Swap
|
49.7
|
(2.2
|
)
|
51.9
|
-
|
(3.5
|
)
|
|||||||||||||
|
Kinder
Morgan Energy Partners’ Rate Reparations, Refunds and Reserve
Adjustments
|
140.0
|
140.0
|
-
|
(19.1
|
)
|
-
|
||||||||||||||
|
Other,
Net
|
104.6
|
45.8
|
58.8
|
(31.4
|
)
|
0.7
|
||||||||||||||
|
Net
Cash Flows Provided by Continuing Operations
|
1,540.9
|
1,047.7
|
493.2
|
1,494.7
|
571.2
|
|||||||||||||||
|
Net
Cash Flows (Used in) Provided by Discontinued Operations
|
106.6
|
(3.2
|
)
|
109.8
|
212.6
|
45.0
|
||||||||||||||
|
Net
Cash Flows Provided by Operating Activities
|
1,647.5
|
1,044.5
|
603.0
|
1,707.3
|
616.2
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||||||||||
|
Purchase
of Predecessor Stock
|
(11,534.3
|
)
|
(11,534.3
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Capital
Expenditures
|
(1,939.8
|
)
|
(1,287.0
|
)
|
(652.8
|
)
|
(1,375.6
|
)
|
(134.1
|
)
|
||||||||||
|
Terasen
Acquisition, Net of $73.7 Cash Acquired
|
-
|
-
|
-
|
(10.6
|
)
|
(2,065.5
|
)
|
|||||||||||||
|
Other
Acquisitions
|
(164.1
|
)
|
(122.0
|
)
|
(42.1
|
)
|
(396.5
|
)
|
-
|
|||||||||||
|
Investment
in Kinder Morgan Energy Partners
|
-
|
-
|
-
|
-
|
(4.5
|
)
|
||||||||||||||
|
Investment
in NGPL PipeCo LLC Restricted Cash
|
(3,030.0
|
)
|
(3,030.0
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Net
(Investments in) Proceeds from Margin Deposits
|
(94.1
|
)
|
(39.3
|
)
|
(54.8
|
)
|
38.6
|
27.5
|
||||||||||||
|
Other
Investments
|
(276.1
|
)
|
(246.4
|
)
|
(29.7
|
)
|
(6.1
|
)
|
(0.4
|
)
|
||||||||||
|
Proceeds
from Sales of Kinder Morgan Management, LLC Shares
|
-
|
-
|
-
|
-
|
254.8
|
|||||||||||||||
|
Change
in Natural Gas Storage and NGL Line Fill Inventory
|
18.4
|
10.0
|
8.4
|
(12.9
|
)
|
-
|
||||||||||||||
|
Property
Casualty Indemnifications
|
8.0
|
-
|
8.0
|
13.1
|
-
|
|||||||||||||||
|
Net
Proceeds (Costs of Removal) from Sales of Assets
|
299.8
|
301.3
|
(1.5
|
)
|
92.2
|
(4.1
|
)
|
|||||||||||||
|
Net
Cash Flows Used in Continuing Investing Activities
|
(16,712.2
|
)
|
(15,947.7
|
)
|
(764.5
|
)
|
(1,657.8
|
)
|
(1,926.3
|
)
|
||||||||||
|
Net
Cash Flows Provided by (Used in) Discontinued Investing
Activities
|
1,684.8
|
196.6
|
1,488.2
|
(138.1
|
)
|
(52.4
|
)
|
|||||||||||||
|
Net
Cash Flows (Used in) Provided by Investing Activities
|
$
|
(15,027.4
|
)
|
$
|
(15,751.1
|
)
|
$
|
723.7
|
$
|
(1,795.9
|
)
|
$
|
(1,978.7
|
)
|
||||||
84
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
Combined
|
Seven
Months
|
|||||||||||||||||||
|
Year
Ended
|
Ended
|
Five
Months
|
||||||||||||||||||
|
December
31,
|
December
31,
|
Ended
|
Year
Ended December 31,
|
|||||||||||||||||
|
2007
|
2007
|
May
31, 2007
|
2006
|
2005
|
||||||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||||||
|
Short-term
Debt, Net
|
$
|
(300.1
|
)
|
$
|
(52.6
|
)
|
$
|
(247.5
|
)
|
$
|
1,009.5
|
$
|
25.0
|
|||||||
|
Bridge
Facility Issued
|
-
|
-
|
-
|
-
|
2,134.7
|
|||||||||||||||
|
Bridge
Facility Retired
|
-
|
-
|
-
|
-
|
(2,129.7
|
)
|
||||||||||||||
|
Long-term
Debt Issued
|
9,805.0
|
8,805.0
|
1,000.0
|
-
|
2,400.0
|
|||||||||||||||
|
Long-term
Debt Retired
|
(1,131.6
|
)
|
(829.2
|
)
|
(302.4
|
)
|
(140.7
|
)
|
(505.0
|
)
|
||||||||||
|
Issuance
of Kinder Morgan, G.P., Inc. Preferred Stock
|
100.0
|
100.0
|
-
|
-
|
-
|
|||||||||||||||
|
Cash
Book Overdraft
|
(28.9
|
)
|
(14.0
|
)
|
(14.9
|
)
|
17.9
|
-
|
||||||||||||
|
Issuance
of Shares by Kinder Morgan Management, LLC
|
297.9
|
-
|
297.9
|
-
|
-
|
|||||||||||||||
|
Other
Common Stock Issued
|
9.9
|
-
|
9.9
|
38.7
|
62.8
|
|||||||||||||||
|
Excess
Tax Benefits from Share-based Payments
|
56.7
|
-
|
56.7
|
18.6
|
-
|
|||||||||||||||
|
Cash
Paid to Share-based Award Holders Due to Going Private
Transaction
|
(181.1
|
)
|
(181.1
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Contributions
from Successor Investors
|
5,112.0
|
5,112.0
|
-
|
-
|
-
|
|||||||||||||||
|
Short-term
Advances from (to) Unconsolidated Affiliates
|
13.2
|
10.9
|
2.3
|
(4.9
|
)
|
(11.7
|
)
|
|||||||||||||
|
Treasury
Stock Acquired
|
-
|
-
|
-
|
(34.3
|
)
|
(317.1
|
)
|
|||||||||||||
|
Cash
Dividends, Common Stock
|
(234.9
|
)
|
-
|
(234.9
|
)
|
(468.5
|
)
|
(355.2
|
)
|
|||||||||||
|
Minority
Interests, Distributions
|
(508.5
|
)
|
(259.6
|
)
|
(248.9
|
)
|
(575.0
|
)
|
(2.4
|
)
|
||||||||||
|
Minority
Interests, Contributions
|
342.9
|
342.9
|
-
|
353.8
|
-
|
|||||||||||||||
|
Debt
Issuance Costs
|
(94.6
|
)
|
(81.5
|
)
|
(13.1
|
)
|
(4.8
|
)
|
(14.3
|
)
|
||||||||||
|
Other,
Net
|
(0.3
|
)
|
4.0
|
(4.3
|
)
|
(3.5
|
)
|
-
|
||||||||||||
|
Net
Cash Flows Provided by Continuing Financing Activities
|
13,257.6
|
12,956.8
|
300.8
|
206.8
|
1,287.1
|
|||||||||||||||
|
Net
Cash Flows Provided by (Used in) Discontinued Financing
Activities
|
140.1
|
-
|
140.1
|
(118.1
|
)
|
15.2
|
||||||||||||||
|
Net
Cash Flows Provided by Financing Activities
|
13,397.7
|
12,956.8
|
440.9
|
88.7
|
1,302.3
|
|||||||||||||||
|
Effect
of Exchange Rate Changes on Cash
|
4.8
|
(2.8
|
)
|
7.6
|
6.6
|
0.3
|
||||||||||||||
|
|
||||||||||||||||||||
|
Effect
of Accounting Change on Cash
|
-
|
-
|
-
|
12.1
|
-
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Cash
Balance Included in Assets Held for Sale
|
(3.8
|
)
|
(1.1
|
)
|
(2.7
|
)
|
(5.6
|
)
|
-
|
|||||||||||
|
|
||||||||||||||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
18.8
|
(1,753.7
|
)
|
1,772.5
|
13.2
|
(59.9
|
)
|
|||||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
129.8
|
1,902.3
|
129.8
|
116.6
|
176.5
|
|||||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$
|
148.6
|
$
|
148.6
|
$
|
1,902.3
|
$
|
129.8
|
$
|
116.6
|
||||||||||
Net
Cash Flows from Operating Activities
“Net
Cash Flows Provided by Operating Activities” decreased from $1,707.3 million for
the year ended December 31, 2006 to $1,647.5 million for the combined year ended
December 31, 2007, a decrease of $59.8 million (3.5%). This negative variance
was principally due to (i) a decrease of $106.0 million in cash inflows in 2007
attributable to discontinued operations (see Note 7 of the accompanying Notes to
Consolidated Financial Statements) and (ii) a $98.9 million use of cash during
2007 versus an $80.0 million source of cash during 2006 relative to net changes
in working capital items. These negative impacts were partially offset by (i) a
$59.9 million increase in 2007 distributions received from equity investments,
of which $32.6 million was received from Red Cedar Gathering Company following a
refinancing of its long-term debt obligations during 2007, (ii) a $50.2 million
increase of payments in 2007 received from Kinder Morgan Energy Partners’
pipeline customers for future service, (iii) $49.7 million of net proceeds
received during 2007 from terminations of interest rate swap agreements (see
Note 11 of the accompanying Notes to Consolidated Financial Statements), (iv) an
increase of $24.8 million of net income in 2007, net of non-cash items,
including depreciation and amortization, deferred income taxes, undistributed
earnings from equity investments, minority interests in income of consolidated
subsidiaries, net gains on sales of assets and property casualty
indemnifications, foreign currency loss, mark-to-market interest rate swap loss,
losses from impairment of assets, loss (income) from discontinued operations,
loss from early extinguishment of debt, Kinder Morgan Energy Partners’ rate
reserve adjustments and expenses related to the Going Private transaction, (v)
the fact that 2006 included $19.1 million of payments made to certain shippers
on Kinder Morgan Energy Partners’ Pacific operations’ pipelines as a result of a
settlement agreement reached in May 2006 regarding delivery tariffs and
gathering enhancement fees at its Watson Station, (vi) the fact that 2006
included $15.4 million of payments made for Kinder Morgan Energy Partners’
natural gas liquids inventory and (vii) a decreased 2007 use of cash of $2.4
million for gas in underground storage. Significant period-to-period variations
in cash used or generated from gas in storage transactions are generally due to
changes in injection and withdrawal volumes as well as fluctuations in natural
gas prices.
85
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
“Net
Cash Flows Provided by Operating Activities” increased from $616.2 million in
2005 to $1,707.3 million in 2006, an increase of $1,091.1 million. This positive
variance was principally due to (i) an increase of $1,359.9 million of net
income, net of non-cash items including depreciation and amortization, deferred
income taxes, undistributed earnings from equity investments, minority interests
in income of consolidated subsidiaries, net gains on sales of assets and
property casualty indemnifications, foreign currency gains, mark-to-market
interest rate swap loss, losses from impairment of power equipment and loss
(income) from discontinued operations ($1,219.6 million of this $1,359.9 million
increase was attributable to Kinder Morgan Energy Partners, primarily due to the
inclusion of its accounts, balances and results of operations in our
consolidated financial statements effective January 1, 2006, and a $21.1 million
decrease was attributable to Terasen continuing operations), (ii) a $93.4
million increase in cash relative to net changes in working capital items, of
which Kinder Morgan Energy Partners and Terasen continuing operations
contributed a decrease of $34.8 million and 0.1 million, respectively, (iii) the
fact that 2005 included a $25.0 million pension payment and (iv) an increase of
$167.6 million in cash attributable to discontinued operations (see Note 7 of
the accompanying Notes to Consolidated Financial Statements). These positive
impacts were partially offset by (i) a $464.1 million decrease in distributions
received from equity investments, of which the inclusion of the accounts,
balances and results of operations of Kinder Morgan Energy Partners in our
consolidated financial statements contributed a decrease of $463.0 million, (ii)
a net increased use of cash of $41.8 million for gas in underground storage, of
which Kinder Morgan Energy Partners contributed $2.3 million, (iii) $15.4
million of payments made for natural gas liquids inventory entirely attributable
to Kinder Morgan Energy Partners, (iv) $19.1 million of payments made to certain
shippers on Kinder Morgan Energy Partners’ Pacific operations’ pipelines as a
result of a settlement agreement reached in May 2006 regarding delivery tariffs
and gathering enhancement fees at its Watson Station (see Note 17 of the
accompanying Notes to Consolidated Financial Statements) and (v) the fact that
2005 included a $3.5 million non-cash debit to income for hedging
ineffectiveness.
In
general, distributions from Kinder Morgan Energy Partners are declared in the
month following the end of the quarter to which they apply and are paid in the
month following the month of declaration to the general partner and unit holders
of record as of the end of the month of declaration. Therefore, the accompanying
Statement of Consolidated Cash Flows for 2005 reflects the receipt of $530.8
million of cash distributions from Kinder Morgan Energy Partners for the fourth
quarter of 2004 and the first nine months of 2005. The cash distributions
attributable to our interest for the three months and twelve months ended
December 31, 2005 total $145.8 million and $552.2 million, respectively.
Summarized financial information for Kinder Morgan Energy Partners is contained
in Note 2 of the accompanying Notes to Consolidated Financial
Statements.
Net
Cash Flows from Investing Activities
“Net
Cash Flows (Used in) Provided by Investing Activities” increased from a use of
$1,795.9 million for the year ended December 31, 2006 to a use of $15,027.4
million for the combined year ended December 31, 2007, a change of $13,231.5
million. This increased use of cash was principally due to (i) $11,534.3 million
of cash used to purchase predecessor stock, (ii) $3,030.0 million of cash from
the issuance of NGPL PipeCo LLC debt used to invest in NGPL PipeCo LLC
restricted deposits, (iii) a $564.2 million increased use of cash in 2007 for
capital expenditures, (iv) the fact that 2006 included $112.9 million of
proceeds received for the sale of Terasen’s discontinued Water and Utility
Services, (v) a $270.0 million increased use of cash from incremental
contributions to equity investments in 2007 versus 2006, largely driven by
incremental investments of $202.7 million and $61.6 million during 2007 for
Kinder Morgan Energy Partners’ share of construction costs of the Rockies
Express and Midcontinent Express pipeline projects, respectively and (vi) $94.1
million net investment in 2007 versus $38.6 million net proceeds in 2006 for
margin deposits associated with hedging activities utilizing energy derivative
instruments. Partially offsetting these negative impacts were (i) $1,229.0
million of proceeds received, net of cash paid to unwind net investment hedges,
from the 2007 sale of our discontinued Terasen operations, (ii) $707.3 million
of proceeds received from the 2007 sale of our discontinued retail operations,
(iii) the fact that 2006 included $407.1 million of cash used to acquire Entrega
Pipeline LLC and various other assets versus $164.1 million of acquisitions
during 2007, primarily $100.3 million paid for Kinder Morgan Energy Partners’
purchase of bulk terminal assets from Marine Terminals, Inc. and $38.8 million
paid for Kinder Morgan Energy Partners’ purchase of the Vancouver Wharves bulk
marine terminal (See Note 4 of the accompanying Notes to Consolidated Financial
Statements), (iv) a $207.6 million increase in proceeds received from sales of
assets in 2007, net of removal costs, primarily driven by $298.6 million of
proceeds from the sale of Kinder Morgan Energy Partners’ North System operations
in 2007 and (v) $18.4 million of proceeds received from the sale of underground
natural gas storage volumes in 2007, versus $12.9 million of cash used for
investments in underground natural gas storage volumes and payments made for
natural gas liquids line-fill in 2006.
“Net
Cash Flows (Used in) Provided by Investing Activities” decreased from $1,978.7
million in 2005 to $1,795.9 million in 2006, a decrease of $182.8 million. This
decreased use of cash was principally due to (i) the fact that 2005 included
$2,065.5 million of cash used to acquire Terasen Inc. (See Note 4 of the
accompanying Notes to Consolidated Financial Statements), (ii) a $96.3 million
increase in proceeds from sales of other assets net of removal costs, of which
$70.8 million is attributable to Kinder Morgan Energy Partners, (iii) $13.1
million of cash received in 2006 for property casualty indemnifications, (iv)
$112.9 million of proceeds received for the sale of Terasen’s discontinued Water
and Utility Services and (v) an $11.1 million increase during 2006 of proceeds
from margin deposits associated with hedging activities utilizing energy
derivative
86
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
instruments,
of which proceeds of $2.3 million is attributable to Kinder Morgan Energy
Partners. These factors were partially offset by (i) $396.5 million of cash used
to acquire Entrega Pipeline LLC and various other assets (See Note 4 of the
accompanying Notes to Consolidated Financial Statements), (ii) an additional
$10.6 million attributable to the acquisition of Terasen (See Note 4 of the
accompanying Notes to Consolidated Financial Statements), (iii) a $1,241.5
million increased use of cash for capital expenditures, of which $1,058.3
million and $119.4 million are attributable to Kinder Morgan Energy Partners and
Terasen’s continuing operations, respectively, (iv) the fact that 2005 included
$254.8 million of proceeds from the sale of Kinder Morgan Management, LLC shares
(see Note 5 of the accompanying Notes to Consolidated Financial Statements), (v)
$12.9 million for investments in underground natural gas storage volumes and
payments made for natural gas liquids line-fill, all of which is attributable to
Kinder Morgan Energy Partners, and (vi) an increase of $198.6 million of cash
used for discontinued investing activities, primarily attributable to Terasen’s
capital expenditures.
Net
Cash Flows from Financing Activities
“Net
Cash Flows Provided by Financing Activities” increased from $88.7 million for
the year ended December 31, 2006 to $13,397.7 million for the combined year
ended December 31, 2007, an increase of $13,309.0 million. This increase was
principally due to (i) $5,112 million of equity contributions from
successor investors, (ii) $4,696.2 million of proceeds, net of issuance costs,
received in 2007 from the issuance of (a) a $1.0 billion senior secured Tranche
A term loan facility, (b) a $3.3 billion senior secured Tranche B term loan
facility and (c) a $455 million senior secured Tranche C term loan facility,
(iii) $2,986.3 million of net proceeds from NGPL PipeCo LLC’s issuance of (a)
$1,250 million of 6.514% senior notes due December 15, 2012, (b) $1,250 million
of 7.119% senior notes due December 15, 2017 and (c) $500 million of 7.768%
senior notes due December 15, 2037, (iv) $2,034.5 million of net proceeds from
Kinder Morgan Energy Partners’ 2007 public offerings of (a) $600 million of
6.00% senior notes due February 1, 2017, (b) $400 million of 6.50% senior notes
due February 1, 2037, (c) $550 million of 6.95% senior notes due January 15,
2038 and (d) $500 million of 5.85% senior notes due September 15, 2012, (v)
$98.6 million of net proceeds from Kinder Morgan G.P., Inc.’s sale of
100,000 shares of its $1,000 Par Value Series A Fixed-to-Floating Rate Term
Cumulative Preferred Stock due 2057, (vi) the fact that 2006 included $125
million of cash used to retire our 7.35% Series debentures which were elected by
the holders to be redeemed on August 1, 2006 as provided in the indenture
governing the debentures (see Note 10 of the accompanying Notes to Consolidated
Financial Statements), (vii) a $140.1 million source of cash during 2007 versus
a $118.1 million use of cash during 2006 related to our discontinued Terasen
financing activities, (viii) $297.9 million of proceeds from the issuance of
Kinder Morgan Management shares during 2007, (ix) a $233.6 million decrease in
cash paid for dividends during 2007 versus 2006, principally due to
the Going Private transaction, (x) a $66.5 million decrease in cash used for
minority interests distributions during 2007, primarily due to the fact that
2006 included a $105.2 million payment from Kinder Morgan Energy Partners’
Rockies Express Pipeline LLC subsidiary to Sempra Energy, (xi) an increase of
$38.1 million received during 2007 versus 2006 from excess tax benefits from
share-based payment arrangements, (xii) the fact that 2006 included $34.3
million in cash paid to repurchase our common shares, and (xiii) a $13.2 million
source of cash during 2007 versus a $4.9 million use of cash for short-term
advances from (to) unconsolidated affiliates. Partially offsetting these factors
were (i) a $300.1 million decrease in short-term debt during 2007 versus
$1,009.5 million of additional short-term borrowings during 2006, (ii) a $455
million use of cash in 2007 for the retirement of our senior secured Tranche C
term loan facility, (iii) a $304.2 million use of cash in 2007 for the early
retirement of our 6.80% senior notes due March 1, 2008 (iv) a $250 million use
of cash during 2007 for repayment of Kinder Morgan Energy Partners’ 5.35% senior
notes due August 15, 2007, (v) a $110.8 million use of cash during 2007 for (a)
quarterly payments of $2.5 million on our Tranche A and $8.3 million on our
Tranche B term loan facilities and (b) a $100 million voluntary payment on our
Tranche B term loan facility (see Note 10 of the accompanying Notes to
Consolidated Financial Statements), (vi) $181.1 million of cash paid to
share-based award holders in 2007 due to the Going Private transaction, (vii)
the fact that 2006 included $353.8 million of contributions from minority
interest owners during 2006, primarily Kinder Morgan Energy Partners’ issuance
of 5.75 million common units receiving net proceeds (after underwriting
discount) of $248.0 million and Sempra Energy’s $104.2 million contribution for
its 33 1/3% share of the purchase price of Entrega Pipeline LLC versus $342.9
million of contributions from minority interest owners during 2007, all of which
is attributable to Kinder Morgan Energy Partners’ issuance of 7.13 million
common units, (viii) a $46.8 million decrease from net changes in cash book
overdrafts—which represent checks issued but not yet presented for payment and
(ix) a decrease of $28.8 million for issuance of our common stock, principally
due to the Going Private transaction.
“Net
Cash Flows Provided by Financing Activities” decreased from $1,302.3 million in
2005 to $88.7 million in 2006, a decrease of $1,213.6 million. This decrease was
principally due to (i) the fact that 2005 includes $2,137.2 million of proceeds,
net of issuance costs, from the issuance of our wholly owned subsidiary, Kinder
Morgan Finance Company’s (a) $750 million of 5.35% senior notes due January 5,
2011, (b) $850 million of 5.70% senior notes due January 5, 2016 and (c) $550
million of 6.40% senior notes due January 5, 2036, (ii) $125 million of cash
used to retire our 7.35% Series debentures which were elected by the
holders to be redeemed on August 1, 2006 as provided in the indenture governing
the debentures (iii) the fact that 2005 included $248.5 million of proceeds, net
of issuance costs, from the issuance of our 5.15% senior notes due March 1,
2015, (iv) $181.7 million of cash used to retire TGVI’s Syndicated Credit
Facility, $86.8 million of cash used to retire Terasen’s 4.85% Series 2 Medium
Term Notes and $104.1 million of cash used to retire Terasen Gas Inc.’s 6.15%
Series 16 Medium Term Notes and 9.75% Series D Medium Term Notes, all of which
were associated with our discontinued operations (see Notes 7 and 10 of the
accompanying Notes to Consolidated Financial Statements), (v) an increase of
$572.6
87
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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Knight
Form 10-K
|
million
of minority interest distributions, principally consisting of Kinder Morgan
Energy Partners’ $465.7 million distribution to common unit owners and $105.2
million paid from Kinder Morgan Energy Partners’ Rockies Express Pipeline LLC
subsidiary to Sempra Energy, (vi) an $113.3 million increase in cash paid for
dividends in 2006, principally due to the increased dividends declared per share
and (vii) a decrease of $24.1 million for issuance of our common stock in 2006,
principally due to a reduction of employee stock option exercises. Partially
offsetting these factors were (i) the fact that 2005 included $500 million of
cash used to retire our $500 million 6.65% senior notes, (ii) $260.0 million of
proceeds received in 2006 from the issuance of TGVI’s Floating Rate Syndicated
Credit Facility and $104.1 million of proceeds, net of issuance costs, received
in 2006 from the issuance of Terasen Gas Inc.’s 5.55% Medium Term Note
Debentures due September 25, 2036, both of which were associated with our
discontinued operations, (see Notes 7 and 10 of the accompanying Notes to
Consolidated Financial Statements), (iii) a $282.8 million decrease in cash paid
during 2006 to repurchase our common shares, (iv) an $861.5 million increase in
short-term debt, of which $944.5 million of additional borrowing was
attributable to Kinder Morgan Energy Partners and a $123.1 million reduction in
short-term debt was attributable to our discontinued Terasen operations, (v)
$353.8 million of contributions from minority interest owners, primarily Kinder
Morgan Energy Partners’ issuance of 5.75 million common units receiving net
proceeds (after underwriting discount) of $248.0 million and Sempra Energy’s
$104.2 million contribution for its 33 1/3% share of the purchase price of
Entrega Pipeline LLC, (vi) a $17.9 million increase from net changes in cash
book overdrafts—which represent checks issued but not yet presented for payment,
and (viii) a $6.8 million decreased use of cash during 2006 for short-term
advances to unconsolidated affiliates, principally Kinder Morgan Energy
Partners, during 2005.
Total
cash payments for dividends were $234.9 million, $468.5 million and $355.2
million for the five months ended May 31, 2007, and the years ended December 31,
2006 and 2005, respectively. The increase from 2005 to 2006 is principally due
to increases in the dividends declared per common share and, to a minor extent,
to increased shares outstanding.
Minority Interests
Distributions to Kinder Morgan Energy Partners’ Common Unit
Holders
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, 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 to establish, maintain and
adjust reserves for future operating expenses, debt service, maintenance capital
expenditures, rate refunds and 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.
Available
cash is initially distributed 98% to Kinder Morgan Energy Partners’ limited
partners with 2% retained by Kinder Morgan G.P., Inc. as Kinder Morgan Energy
Partners’ general partner. These distribution percentages are modified to
provide for incentive distributions to be retained by Kinder Morgan G.P., Inc.
as general partner of Kinder Morgan Energy Partners in the event that quarterly
distributions to unitholders exceed certain specified targets.
Available
cash for each quarter is distributed:
|
|
·
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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;
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|
·
|
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;
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·
|
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
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·
|
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.
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88
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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Knight
Form 10-K
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During
the seven months ended December 31, 2007 and the five months ended May 31,
2007, Kinder Morgan Energy Partners paid distributions of $1.73 and $1.66
per common unit, respectively, of which $257.3 million and $246.6 million,
respectively, was paid to the public holders (represented in minority
interests) of Kinder Morgan Energy Partners’ common units. On January 16,
2008, Kinder Morgan Energy Partners declared a quarterly distribution of
$0.92 per common unit for the quarterly period ended December 31, 2007.
The distribution was paid on February 14, 2008, to unitholders of record
as of January 31, 2008.
|
As
of December 31, 2007, we have recorded a total reserve for environmental claims,
without discounting and without regard to anticipated insurance recoveries, in
the amount of $102.6 million. In addition, we have recorded a receivable of
$38.0 million for expected cost recoveries that have been deemed probable. The
reserve is primarily established to address and clean up soil and ground water
impacts from former releases to the environment at facilities we have acquired
or accidental spills or releases at facilities that we own. Reserves for each
project are generally established by reviewing existing documents, conducting
interviews and performing site inspections to determine the overall size and
impact to the environment. Reviews are made on a quarterly basis to determine
the status of the cleanup and the costs associated with the effort. In assessing
environmental risks in conjunction with proposed acquisitions, we review records
relating to environmental issues, conduct site inspections, interview employees,
and, if appropriate, collect soil and groundwater samples. As of December 31,
2006, our total reserve for environmental claims, without discounting and
without regard to anticipated insurance recoveries, amounted to $77.8
million.
Additionally,
as of December 31, 2007, we have recorded a total reserve for legal fees,
transportation rate cases and other litigation liabilities in the amount of
$249.4 million. The reserve is primarily related to various claims from lawsuits
arising from Kinder Morgan Energy Partners’ Pacific operations, and the recorded
amount is based on both the estimated amount associated with possible outcomes
and probabilities of occurrence associated with such outcomes. We regularly
assess the likelihood of adverse outcomes resulting from these claims in order
to determine the adequacy of our liability provision, and in December 2007,
Kinder Morgan Energy Partners recorded a non-cash increase in operating expense
of $140.0 million related to its litigation matters. As of December 31, 2006,
our total reserve for legal fees, transportation rate cases and other litigation
liabilities amounted to $114.7 million.
Though
no assurance can be given, we believe we have established adequate environmental
and legal reserves such that the resolution of pending environmental matters and
litigation will not have a material adverse impact on our business, cash flows,
financial position or results of operations.
Pursuant
to our continuing commitment to operational excellence and our focus on safe,
reliable operations, we have implemented, and intend to implement in the future,
enhancements to certain of our operational practices in order to strengthen our
environmental and asset integrity performance. These enhancements have resulted
and may result in higher operating costs and sustaining capital expenditures;
however, we believe these enhancements will provide us the greater long term
benefits of improved environmental and asset integrity performance.
Please
refer to Notes 16 and 17 of the accompanying Notes to Consolidated Financial
Statements for additional information regarding pending litigation and
environmental matters, respectively.
The
Pipeline Safety Improvement Act of 2002 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. Pipeline
companies are required to perform the integrity tests within ten years of
December 17, 2002, the date of enactment, and must perform subsequent integrity
tests on a seven year cycle. At least 50% of the highest risk segments must be
tested within five years of the enactment date. The risk ratings are based on
numerous factors, including the population density in the geographic regions
served by a particular pipeline, as well as the age and condition of the
pipeline and its protective coating. Testing will consist of
hydrostatic testing, internal electronic testing, or direct assessment of the
piping. A similar integrity management rule for refined petroleum products
pipelines became effective May 29, 2001. All baseline assessments for products
pipelines must be completed by March 31, 2008 and we expect to meet this
deadline. We have included all incremental expenditures estimated to occur
during 2008 associated with the Pipeline Safety Improvement Act of 2002 and the
integrity management of our products pipelines in our 2008 budget and capital
expenditure plan.
Please
refer to Note 16 of the accompanying Notes to Consolidated Financial Statements
for additional information regarding regulatory matters.
89
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
Refer
to Note 18 of the accompanying Notes to Consolidated Financial Statements for
information regarding recent accounting pronouncements.
Information
Regarding Forward-looking Statements
This
filing includes forward-looking statements. These forward-looking statements are
identified as any statement that does not relate strictly to historical or
current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,”
“projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,”
“expect,” “may,” or the negative of those terms or other variations of them or
comparable terminology. In particular, statements, express or implied,
concerning future actions, conditions or events, future operating results or the
ability to generate sales, income or cash flow or to service debt or to pay
dividends are forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions.
Future actions, conditions or events and future results of operations may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results are beyond our ability to control or
predict. Specific factors that could cause actual results to differ from those
in the forward-looking statements include:
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·
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price
trends and overall demand for natural gas liquids, refined petroleum
products, oil, carbon dioxide, natural gas, electricity, coal and other
bulk materials and chemicals in North
America;
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·
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economic
activity, weather, alternative energy sources, conservation and
technological advances that may affect price trends and
demand;
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·
|
changes
in our tariff rates or those of Kinder Morgan Energy Partners implemented
by the FERC, the NEB or another regulatory agency or, with respect to
Kinder Morgan Energy Partners, the California Public Utilities
Commission;
|
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|
·
|
Kinder
Morgan Energy Partners’ ability and our ability to acquire new businesses
and assets and integrate those operations into existing operations, as
well as the ability to expand our respective
facilities;
|
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|
·
|
difficulties
or delays experienced by railroads, barges, trucks, ships or pipelines in
delivering products to or from Kinder Morgan Energy Partners’ terminals or
pipelines or our terminals or
pipelines;
|
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|
·
|
Kinder
Morgan Energy Partners’ ability and our ability to successfully identify
and close acquisitions and make cost-saving changes in
operations;
|
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|
·
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shut-downs
or cutbacks at major refineries, petrochemical or chemical plants, ports,
utilities, military bases or other businesses that use Kinder Morgan
Energy Partners’ or our services or provide services or products to Kinder
Morgan Energy Partners or us;
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·
|
crude
oil and natural gas production from exploration and production areas that
we serve, such as the Permian Basin area of West Texas, the U.S. Rocky
Mountains and the Alberta oilsands;
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|
·
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changes
in laws or regulations, third-party relations and approvals, decisions of
courts, regulators and governmental bodies that may adversely affect our
business or our ability to compete;
|
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|
·
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changes
in accounting pronouncements that impact the measurement of our results of
operations, the timing of when such measurements are to be made and
recorded, and the disclosures surrounding these
activities;
|
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|
·
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our
ability to offer and sell equity securities and debt securities or obtain
debt financing in sufficient amounts to implement that portion of our
business plan that contemplates growth through acquisitions of operating
businesses and assets and expansions of our
facilities;
|
|
|
·
|
our
indebtedness 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;
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|
·
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our
ability to obtain insurance coverage without significant levels of
self-retention of risk;
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·
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acts
of nature, sabotage, terrorism or other similar acts causing damage
greater than our insurance coverage
limits;
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90
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (continued)
|
Knight
Form 10-K
|
|
|
·
|
capital
markets conditions;
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|
·
|
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;
|
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|
·
|
our
ability to achieve cost savings and revenue
growth;
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|
·
|
inflation;
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|
·
|
interest
rates;
|
|
|
·
|
the
pace of deregulation of retail natural gas and
electricity;
|
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|
·
|
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;
|
|
|
·
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the
ability to complete expansion projects on time and on
budget;
|
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·
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the
timing and success of Kinder Morgan Energy Partners’ and our business
development efforts; and
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|
·
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unfavorable
results of litigation and the fruition of contingencies referred to in the
accompanying Notes to Consolidated Financial
Statements.
|
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 “Risk Factors” above. 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 interest rates or commodity prices. 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
interest rates or commodity prices and the timing of transactions.
For
a full discussion of our risk management activities, see Note 11 of the
accompanying Notes to Consolidated Financial Statements.
Energy
Commodity Market 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 of how much the mark-to-market value of a portfolio could
change during a period of time, within a certain level of statistical
confidence. We utilize a closed form model to evaluate risk on a daily 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
91
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Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk. (continued)
|
Knight
Form 10-K
|
mark-to-market
losses for a single day will not exceed the value-at-risk number presented.
Financial instruments evaluated by the model include commodity futures and
options contracts, fixed price swaps, basis swaps and over-the-counter options.
For the year ended December 31, 2007, value-at-risk reached a high of $2.1
million and a low of $0.7 million. Value-at-risk as of December 31, 2007, was
$1.7 million and, based on quarter-end values, averaged $1.4 million for
2007.
Our
calculated value-at-risk exposure represents an estimate of the reasonably
possible net losses that would be recognized on our portfolio of derivatives
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 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 derivatives
solely for the purpose of mitigating the risks that accompany certain of our
business activities and, therefore, the change in the market value of our
portfolio of derivatives, with the exception of a minor amount of hedging
inefficiency, is offset by changes in the value of the underlying physical
transactions.
Interest
Rate Risk
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.
We
enter into interest rate swap agreements for the purposes of hedging the
interest rate risk associated with our fixed rate debt obligations and
effectively 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. As of December 31, 2007, all of
our interest rate swaps represented receive-fixed-rate, pay-variable-rate
swaps.
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 swaps or other
interest rate hedging agreements. In general, we attempt to maintain an overall
target mix of approximately 50% fixed rate debt and 50% variable rate
debt.
Based
on our variable rate long-term debt outstanding at December 31, 2007, including
long-term debt effectively converted to floating rate debt as a result of
interest rate swaps, the market risk related to a 1% change in interest rates
would result in a $68.6 million annual impact on pre-tax income as of December
31, 2007, of which $23.9 million is associated with floating rate debt of Kinder
Morgan Energy Partners. Due to the retirement of the Tranche A and Tranche B
term loan facilities on February 15, 2008, this annual impact has been
significantly reduced.
See
Note 10 of the accompanying Notes to Consolidated Financial Statements for
additional information related to our debt instruments.
Foreign
Currency Risk
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 several
receive-fixed-rate, pay-fixed-rate U.S. dollar to Canadian dollar cross-currency
interest rate swap agreements that have been designated as a hedge of our net
investment in Canadian operations in accordance with SFAS No. 133. A 1% change
in the U.S. Dollar to Canadian Dollar exchange rate would impact the fair value
of these swap agreements by approximately $3.3 million.
92
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Knight
Form 10-K
|
INDEX
|
Page
|
|
|
|
|
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94-95
|
|
|
96
|
|
|
97
|
|
|
98-99
|
|
|
100-101
|
|
|
102-103
|
|
|
104-202
|
|
|
203
|
|
|
203-207
|
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93
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
To
the Board of Directors
and
Stockholder of Knight Inc.:
In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income, of stockholder’s
equity and of cash flows present fairly, in all material respects, the financial
position of Knight Inc. and its subsidiaries (the “Company”) at December 31,
2007, and the results of their operations and their cash flows for 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, 2007, 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 appearing in Item 9A. Our responsibility is to express
opinions on these financial statements and on the Company’s internal control
over financial reporting based on our integrated audit. We
conducted our audit 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 and whether effective internal
control over financial reporting was maintained in all material respects. Our
audit 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 audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides 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
Vancouver Wharves bulk marine terminal, acquired May 30, 2007;
and
|
|
|
·
|
The
terminal assets and operations acquired from Marine Terminals, Inc.,
effective September 30, 2007,
|
(the
“Acquired Businesses”) from its assessment of internal control over financial
reporting as of December 31, 2007 because these businesses were each acquired by
the Company in a purchase business combination during 2007. We have also
excluded the Acquired Businesses from our audit of internal control over
financial reporting. These Acquired Businesses are wholly-owned subsidiaries
whose total assets and total revenues, in the aggregate, represent 0.5% and
0.8%, respectively, of the related consolidated financial statement amounts as
of and for the seven months ended December 31, 2007.
PricewaterhouseCoopers
LLP
Houston,
Texas
March
28, 2008
94
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Report of Independent
Registered Public Accounting Firm
To
the Board of Directors
and
Stockholder of Knight Inc.:
In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of comprehensive income, of stockholder’s
equity and of cash flows present fairly, in all material respects, the financial
position of Knight Inc. and its subsidiaries (the “Company”) at December 31,
2006, and the results of their operations and their cash flows for the period
from January 1, 2007 to May 31, 2007, and the years ended December 31, 2006 and
2005 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 audits. We conducted our audits 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 audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers
LLP
Houston,
Texas
March
28, 2008
95
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Seven
Months
Ended
|
Five
Months
|
||||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
|||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
||||||||||||||
|
(In
millions)
|
(In
millions)
|
||||||||||||||||
|
Operating
Revenues:
|
|||||||||||||||||
|
Natural
Gas Sales
|
$
|
3,623.1
|
$
|
2,430.6
|
$
|
6,225.6
|
$
|
199.1
|
|||||||||
|
Transportation
and Storage
|
2,012.8
|
1,332.6
|
3,080.3
|
753.0
|
|||||||||||||
|
Oil
and Product Sales
|
621.4
|
325.8
|
740.2
|
3.0
|
|||||||||||||
|
Other
|
137.4
|
76.1
|
162.5
|
70.5
|
|||||||||||||
|
Total
Operating Revenues
|
6,394.7
|
4,165.1
|
10,208.6
|
1,025.6
|
|||||||||||||
|
|
|||||||||||||||||
|
Operating
Costs and Expenses:
|
|||||||||||||||||
|
Purchases
and Other Costs of Sales
|
3,656.6
|
2,490.4
|
6,339.4
|
302.6
|
|||||||||||||
|
Operations
and Maintenance
|
943.3
|
476.1
|
1,155.4
|
135.7
|
|||||||||||||
|
General
and Administrative
|
175.6
|
283.6
|
305.1
|
64.1
|
|||||||||||||
|
Depreciation
and Amortization
|
472.3
|
261.0
|
531.4
|
104.6
|
|||||||||||||
|
Taxes,
Other Than Income Taxes
|
110.1
|
74.4
|
165.0
|
30.8
|
|||||||||||||
|
Other
Expenses (Income)
|
(6.0
|
)
|
(2.3
|
)
|
(34.1
|
)
|
-
|
||||||||||
|
Impairment
of Assets
|
-
|
377.1
|
1.2
|
6.5
|
|||||||||||||
|
Total
Operating Costs and Expenses
|
5,351.9
|
3,960.3
|
8,463.4
|
644.3
|
|||||||||||||
|
Operating
Income
|
1,042.8
|
204.8
|
1,745.2
|
381.3
|
|||||||||||||
|
|
|||||||||||||||||
|
Other
Income and (Expenses):
|
|||||||||||||||||
|
Equity
in Earnings of Kinder Morgan Energy Partners
|
-
|
-
|
-
|
605.4
|
|||||||||||||
|
Equity
in Earnings of Other Equity Investments
|
53.4
|
38.3
|
98.6
|
15.3
|
|||||||||||||
|
Interest
Expense, Net
|
(587.8
|
)
|
(251.9
|
)
|
(559.0
|
)
|
(147.5
|
)
|
|||||||||
|
Interest
Expense – Deferrable Interest Debentures
|
(12.8
|
)
|
(9.1
|
)
|
(21.9
|
)
|
(21.9
|
)
|
|||||||||
|
Minority
Interests
|
(37.6
|
)
|
(90.7
|
)
|
(374.2
|
)
|
(50.5
|
)
|
|||||||||
|
Other,
Net
|
17.9
|
11.4
|
(2.4
|
)
|
69.2
|
||||||||||||
|
Total
Other Income and (Expenses)
|
(566.9
|
)
|
(302.0
|
)
|
(858.9
|
)
|
470.0
|
||||||||||
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
475.9
|
(97.2
|
)
|
886.3
|
851.3
|
||||||||||||
|
Income
Taxes
|
227.4
|
135.5
|
285.9
|
337.1
|
|||||||||||||
|
Income
(Loss) from Continuing Operations
|
248.5
|
(232.7
|
)
|
600.4
|
514.2
|
||||||||||||
|
Income
(Loss) from Discontinued Operations, Net of Tax
|
(1.5
|
)
|
298.6
|
(528.5
|
)
|
40.4
|
|||||||||||
|
Net
Income
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
|||||||||
The
accompanying notes are an integral part of these statements.
96
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||
|
Seven
Months
Ended
|
Five
Months
|
||||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
|||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
||||||||||||||
|
(In
millions)
|
(In
millions)
|
||||||||||||||||
|
Net
Income
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
|||||||||
|
Other
Comprehensive Income (Loss), Net of Tax:
|
|||||||||||||||||
|
Change
in Fair Value of Derivatives Utilized for Hedging Purposes (Net of Tax
Benefit of $140.8 and $19.1, Tax of $26.8 and Tax Benefit of $106.1,
Respectively)
|
(249.6
|
)
|
(21.3
|
)
|
44.6
|
(174.7
|
)
|
||||||||||
|
Reclassification
of Change in Fair Value of Derivatives to Net Income (Net of Tax Benefit
of $0.6, Tax of $12.8, $11.9 and $60.6, Respectively)
|
-
|
10.3
|
21.7
|
102.3
|
|||||||||||||
|
Employee
Benefit Plans:
|
|||||||||||||||||
|
Prior
Service Cost Arising During Period (Net of Tax Benefit of
$1.0)
|
-
|
(1.7
|
)
|
-
|
-
|
||||||||||||
|
Net
Gain Arising During Period (Net of Tax Benefit of $15.3 and Tax of $6.7,
Respectively)
|
(28.4
|
)
|
11.4
|
-
|
-
|
||||||||||||
|
Amortization
of Prior Service Cost Included in Net Periodic Benefit Costs (Net of Tax
Benefit of $0.2)
|
-
|
(0.4
|
)
|
-
|
-
|
||||||||||||
|
Amortization
of Net Loss Included in Net Periodic Benefit Costs (Net of Tax Benefit of
Less than $0.1 and Tax of $0.8, Respectively)
|
(0.2
|
)
|
1.4
|
-
|
-
|
||||||||||||
|
Change
in Foreign Currency Translation Adjustment
|
27.6
|
40.1
|
(31.9
|
)
|
3.4
|
||||||||||||
|
Adjustment
to Recognize Minimum Pension Liability (Net of Tax of $1.7 and Tax Benefit
of $1.6, Respectively)
|
-
|
-
|
3.5
|
(3.3
|
)
|
||||||||||||
|
Total
Other Comprehensive Income (Loss)
|
(250.6
|
)
|
39.8
|
37.9
|
(72.3
|
)
|
|||||||||||
|
|
|||||||||||||||||
|
Comprehensive
Income
|
$
|
(3.6
|
)
|
$
|
105.7
|
$
|
109.8
|
$
|
482.3
|
||||||||
The
accompanying notes are an integral part of these statements.
97
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
ASSETS:
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and Cash Equivalents
|
$
|
148.6
|
$
|
129.8
|
||||
|
Restricted
Deposits
|
67.9
|
-
|
||||||
|
Accounts
Receivable, Net:
|
||||||||
|
Trade
|
970.0
|
1,173.3
|
||||||
|
Related
Parties
|
5.2
|
10.4
|
||||||
|
Inventories
|
37.8
|
275.0
|
||||||
|
Gas
Imbalances
|
26.9
|
14.9
|
||||||
|
Rate
Stabilization
|
-
|
124.3
|
||||||
|
Assets
Held for Sale
|
3,353.3
|
87.9
|
||||||
|
Other
|
73.9
|
204.2
|
||||||
|
|
4,683.6
|
2,019.8
|
||||||
|
|
||||||||
|
Notes
Receivable – Related Parties
|
87.9
|
89.7
|
||||||
|
|
||||||||
|
Investments
|
1,996.2
|
1,084.6
|
||||||
|
|
||||||||
|
Goodwill
|
8,174.0
|
3,043.8
|
||||||
|
|
||||||||
|
Other
Intangibles, Net
|
321.1
|
229.5
|
||||||
|
|
||||||||
|
Property,
Plant and Equipment, Net
|
14,803.9
|
18,839.6
|
||||||
|
|
||||||||
|
Assets
Held for Sale, Non-current
|
5,634.6
|
422.3
|
||||||
|
|
||||||||
|
Deferred
Charges and Other Assets
|
399.7
|
1,066.3
|
||||||
|
|
||||||||
|
Total
Assets
|
$
|
36,101.0
|
$
|
26,795.6
|
||||
98
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
CONSOLIDATED
BALANCE SHEETS (continued)
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
Maturities of Long-term Debt
|
$
|
79.8
|
$
|
511.2
|
||||
|
Notes
Payable
|
888.1
|
1,665.3
|
||||||
|
Cash
Book Overdrafts
|
30.7
|
59.6
|
||||||
|
Accounts
Payable, Net:
|
||||||||
|
Trade
|
943.1
|
1,115.5
|
||||||
|
Related
Parties
|
0.6
|
-
|
||||||
|
Accrued
Interest
|
242.7
|
220.4
|
||||||
|
Accrued
Taxes
|
61.8
|
85.5
|
||||||
|
Gas
Imbalances
|
23.7
|
29.2
|
||||||
|
Rate
Stabilization
|
-
|
11.4
|
||||||
|
Liabilities
Held for Sale
|
168.2
|
78.3
|
||||||
|
Deferred
Income Taxes – Current
|
666.4
|
-
|
||||||
|
Other
|
834.7
|
840.0
|
||||||
|
|
3,939.8
|
4,616.4
|
||||||
|
Other
Liabilities and Deferred Credits:
|
||||||||
|
Deferred
Income Taxes, Non-current
|
1,849.4
|
3,144.0
|
||||||
|
Liabilities
Held for Sale, Non-current
|
2,424.1
|
7.9
|
||||||
|
Other
|
1,454.8
|
1,349.4
|
||||||
|
|
5,728.3
|
4,501.3
|
||||||
|
Long-term
Debt:
|
||||||||
|
Outstanding
Notes and Debentures
|
14,714.6
|
10,623.9
|
||||||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts
|
283.1
|
283.6
|
||||||
|
Preferred
Interest in General Partner of KMP
|
100.0
|
-
|
||||||
|
Capital
Securities
|
-
|
106.9
|
||||||
|
Value
of Interest Rate Swaps
|
199.7
|
46.4
|
||||||
|
|
15,297.4
|
11,060.8
|
||||||
|
Minority Interests in Equity of Subsidiaries
|
3,314.0
|
3,095.5
|
||||||
|
|
||||||||
|
Commitments
and Contingent Liabilities (Notes 14 and 17)
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
Stock-
|
||||||||
|
Authorized
– 100 Shares, Par Value $0.01 Per Share at December 31, 2007 and 300,000
Shares Par Value $5 Per Share at December 31, 2006
|
||||||||
|
Outstanding
– 100 Shares at December 31, 2007 and 149,166,709 Shares at December 31,
2006 Before Deducting 15,022,751 Shares Held in Treasury
|
-
|
745.8
|
||||||
|
Additional
Paid-in Capital
|
7,822.2
|
3,048.9
|
||||||
|
Retained
Earnings
|
247.0
|
778.7
|
||||||
|
Treasury
Stock
|
-
|
(915.9
|
)
|
|||||
|
Accumulated
Other Comprehensive Loss
|
(247.7
|
)
|
(135.9
|
)
|
||||
|
Total
Stockholders’ Equity
|
7,821.5
|
3,521.6
|
||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$
|
36,101.0
|
$
|
26,795.6
|
||||
The
accompanying notes are an integral part of these statements.
99
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Knight
Inc. and Subsidiaries
|
Successor Company
|
|||||||
|
Seven
Months Ended
December
31, 2007
|
|||||||
|
Shares
|
Amount
|
||||||
|
(Dollars
in millions)
|
|||||||
|
Common
Stock:
|
100
|
$
|
-
|
||||
|
|
|||||||
|
Additional
Paid-in Capital:
|
|||||||
|
Beginning
Balance
|
-
|
||||||
|
MBO
Purchase Price
|
7,831.2
|
||||||
|
Revaluation
of Kinder Morgan Energy Partners (KMP) Investment (Note 5)
|
(13.4
|
)
|
|||||
|
A-1
Unit Amortization
|
4.4
|
||||||
|
Ending
Balance
|
7,822.2
|
||||||
|
|
|||||||
|
Retained
Earnings:
|
|||||||
|
Beginning
Balance
|
-
|
||||||
|
Net
Income
|
247.0
|
||||||
|
Ending
Balance
|
247.0
|
||||||
|
Accumulated
Other Comprehensive Loss (Net of Tax):
|
|||||||
|
Derivatives:
|
|||||||
|
Beginning Balance
|
2.9
|
||||||
|
Change
in Fair Value of Derivatives Utilized for Hedging Purposes
|
(249.6
|
)
|
|||||
|
Reclassification
of Change in Fair Value of Derivatives to Net Income
|
-
|
||||||
|
Ending
Balance
|
(246.7
|
)
|
|||||
|
Foreign
Currency Translation:
|
|||||||
|
Beginning
Balance
|
-
|
||||||
|
Currency
Translation Adjustment
|
27.6
|
||||||
|
Ending
Balance
|
27.6
|
||||||
|
Employee
Benefit Plans:
|
|||||||
|
Beginning
Balance
|
-
|
||||||
|
Benefit
Plan Adjustments
|
(28.4
|
)
|
|||||
|
Benefit
Plan Amortization
|
(0.2
|
)
|
|||||
|
Ending
Balance
|
(28.6
|
)
|
|||||
|
Total
Accumulated Other Comprehensive Loss
|
(247.7
|
)
|
|||||
|
|
|||||||
|
Total
Stockholders’ Equity
|
100
|
$
|
7,821.5
|
||||
The
accompanying notes are an integral part of these statements.
100
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Knight
Inc. and Subsidiaries
|
Predecessor
Company
|
||||||||||||||||||||
|
Five
Months Ended May 31,
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||
|
Common
Stock:
|
||||||||||||||||||||
|
Beginning
Balance
|
149,166,709
|
$
|
745.8
|
148,479,863
|
$
|
742.4
|
134,198,905
|
$
|
671.0
|
|||||||||||
|
Acquisition
of Terasen
|
-
|
-
|
-
|
-
|
12,476,974
|
62.4
|
||||||||||||||
|
Employee
Benefit Plans
|
149,894
|
0.8
|
686,846
|
3.4
|
1,803,984
|
9.0
|
||||||||||||||
|
Ending
Balance
|
149,316,603
|
746.6
|
149,166,709
|
745.8
|
148,479,863
|
742.4
|
||||||||||||||
|
Additional
Paid-in Capital:
|
||||||||||||||||||||
|
Beginning
Balance
|
3,048.9
|
3,056.3
|
1,863.2
|
|||||||||||||||||
|
Acquisition
of Terasen
|
-
|
-
|
1,084.4
|
|||||||||||||||||
|
Revaluation
of Kinder Morgan Energy Partners (KMP) Investment
(Note 5)
|
3.4
|
(40.3
|
)
|
7.8
|
||||||||||||||||
|
Employee
Benefit Plans
|
7.7
|
33.2
|
78.9
|
|||||||||||||||||
|
Tax
Benefits from Employee Benefit Plans
|
56.7
|
18.6
|
22.0
|
|||||||||||||||||
|
Implementation
of SFAS No. 123(R) Deferred Compensation Balance
|
-
|
(36.9
|
)
|
-
|
||||||||||||||||
|
Deferred
Compensation (Note 13)
|
21.9
|
18.0
|
-
|
|||||||||||||||||
|
Ending
Balance
|
3,138.6
|
3,048.9
|
3,056.3
|
|||||||||||||||||
|
Retained
Earnings:
|
||||||||||||||||||||
|
Beginning
Balance
|
778.7
|
1,175.3
|
975.9
|
|||||||||||||||||
|
Net
Income
|
65.9
|
71.9
|
554.6
|
|||||||||||||||||
|
Cash
Dividends, Common Stock
|
(234.9
|
)
|
(468.5
|
)
|
(355.2
|
)
|
||||||||||||||
|
Implementation
of FIN 48 (Note 18)
|
(4.8
|
)
|
-
|
-
|
||||||||||||||||
|
Ending
Balance
|
604.9
|
778.7
|
1,175.3
|
|||||||||||||||||
|
Treasury
Stock at Cost:
|
||||||||||||||||||||
|
Beginning
Balance
|
(15,022,751
|
)
|
(915.9
|
)
|
(14,712,901
|
)
|
(885.7
|
)
|
(10,666,801
|
)
|
(558.9
|
)
|
||||||||
|
Treasury
Stock Acquired
|
-
|
-
|
(339,800
|
)
|
(31.5
|
)
|
(3,865,800
|
)
|
(314.1
|
)
|
||||||||||
|
Employee
Benefit Plans
|
(7,384
|
)
|
(0.5
|
)
|
29,950
|
1.3
|
(180,300
|
)
|
(12.7
|
)
|
||||||||||
|
Ending
Balance
|
(15,030,135
|
)
|
(916.4
|
)
|
(15,022,751
|
)
|
(915.9
|
)
|
(14,712,901
|
)
|
(885.7
|
)
|
||||||||
|
Deferred
Compensation Plans:
|
||||||||||||||||||||
|
Beginning
Balance
|
-
|
(36.9
|
)
|
(31.7
|
)
|
|||||||||||||||
|
Current
Year Activity (Note 13)
|
-
|
-
|
(5.2
|
)
|
||||||||||||||||
|
Implementation
of SFAS No. 123(R) Balance Transfer to Additional Paid-in
Capital
|
-
|
36.9
|
-
|
|||||||||||||||||
|
Ending
Balance
|
-
|
-
|
(36.9
|
)
|
||||||||||||||||
|
Accumulated
Other Comprehensive Loss (Net of Tax):
|
||||||||||||||||||||
|
Derivatives:
|
||||||||||||||||||||
|
Beginning Balance
|
(60.8
|
)
|
(127.1
|
)
|
(54.7
|
)
|
||||||||||||||
|
Change
in Fair Value of Derivatives Utilized for Hedging Purposes
|
(21.3
|
)
|
44.6
|
(174.7
|
)
|
|||||||||||||||
|
Reclassification
of Change in Fair Value of Derivatives to Net Income
|
10.3
|
21.7
|
102.3
|
|||||||||||||||||
|
Ending
Balance
|
(71.8
|
)
|
(60.8
|
)
|
(127.1
|
)
|
||||||||||||||
|
Foreign
Currency Translation:
|
||||||||||||||||||||
|
Beginning
Balance
|
(24.5
|
)
|
7.4
|
-
|
||||||||||||||||
|
Terasen
Acquisition
|
-
|
-
|
4.0
|
|||||||||||||||||
|
Currency
Translation Adjustment
|
40.1
|
(31.9
|
)
|
3.4
|
||||||||||||||||
|
Ending
Balance
|
15.6
|
(24.5
|
)
|
7.4
|
||||||||||||||||
|
Minimum
Pension Liability:
|
||||||||||||||||||||
|
Beginning
Balance
|
-
|
(7.3
|
)
|
-
|
||||||||||||||||
|
Terasen
Acquisition
|
-
|
-
|
(4.0
|
)
|
||||||||||||||||
|
Minimum
Pension Liability Adjustments
|
-
|
7.3
|
(3.3
|
)
|
||||||||||||||||
|
Ending
Balance
|
-
|
-
|
(7.3
|
)
|
||||||||||||||||
|
Employee
Retirement Benefits:
|
||||||||||||||||||||
|
Beginning
Balance
|
(50.6
|
)
|
-
|
-
|
||||||||||||||||
|
Adjustment
to Initially Apply SFAS No. 158
|
-
|
(50.6
|
)
|
-
|
||||||||||||||||
|
SFAS
No. 158 Amortization/Adjustments
|
10.7
|
-
|
-
|
|||||||||||||||||
|
Ending
Balance
|
(39.9
|
)
|
(50.6
|
)
|
-
|
|||||||||||||||
|
Total
Accumulated Other Comprehensive Loss
|
(96.1
|
)
|
(135.9
|
)
|
(127.0
|
)
|
||||||||||||||
|
|
||||||||||||||||||||
|
Total
Stockholders’ Equity
|
134,286,468
|
$
|
3,477.6
|
134,143,958
|
$
|
3,521.6
|
133,766,962
|
$
|
3,924.4
|
|||||||||||
The
accompanying notes are an integral part of these statements.
101
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
|
||||||||||||||||
|
Ended
|
Five
Months
|
|||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
||||||||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||||||
|
Net
Income
|
$
|
247.0
|
$
|
65.9
|
$
|
71.9
|
$
|
554.6
|
||||||||
|
Adjustments
to Reconcile Net Income to Net Cash Flows from Operating
Activities:
|
||||||||||||||||
|
Loss
(Income) from Discontinued Operations, Net of Tax
|
1.5
|
(287.9
|
)
|
542.8
|
(40.4
|
)
|
||||||||||
|
Loss
from Impairment of Assets
|
-
|
377.1
|
1.2
|
6.5
|
||||||||||||
|
Depreciation
and Amortization
|
476.2
|
264.9
|
540.3
|
104.6
|
||||||||||||
|
Deferred
Income Taxes
|
(89.8
|
)
|
138.7
|
10.8
|
92.1
|
|||||||||||
|
Equity
in Earnings of Kinder Morgan Energy Partners
|
-
|
-
|
-
|
(605.4
|
)
|
|||||||||||
|
Distributions
from Kinder Morgan Energy Partners
|
-
|
-
|
-
|
530.8
|
||||||||||||
|
Equity
in Earnings of Other Equity Investments
|
(54.3
|
)
|
(39.1
|
)
|
(100.6
|
)
|
(15.3
|
)
|
||||||||
|
Distributions
from Other Equity Investees
|
86.5
|
48.2
|
74.8
|
8.1
|
||||||||||||
|
Minority
Interests in Income of Consolidated Subsidiaries
|
48.0
|
90.7
|
374.2
|
50.5
|
||||||||||||
|
Gains
from Property Casualty Indemnifications
|
-
|
(1.8
|
)
|
(15.2
|
)
|
-
|
||||||||||
|
Net
Gains on Sales of Assets
|
(6.3
|
)
|
(2.6
|
)
|
(22.0
|
)
|
(76.4
|
)
|
||||||||
|
Mark-to-Market
Interest Rate Swap Loss
|
-
|
-
|
22.3
|
-
|
||||||||||||
|
Foreign
Currency Loss (Gain)
|
-
|
15.5
|
-
|
(5.0
|
)
|
|||||||||||
|
Pension
Contribution in Excess of Expense
|
-
|
-
|
-
|
(23.8
|
)
|
|||||||||||
|
Changes
in Gas in Underground Storage
|
51.3
|
(84.2
|
)
|
(35.3
|
)
|
6.5
|
||||||||||
|
Changes
in Working Capital Items (Note 1(R))
|
104.0
|
(202.9
|
)
|
80.0
|
(13.4
|
)
|
||||||||||
|
(Payment
for) Proceeds from Termination of Interest Rate Swap
|
(2.2
|
)
|
51.9
|
-
|
(3.5
|
)
|
||||||||||
|
Kinder
Morgan Energy Partners’ Rate Reparations, Refunds and
Reserve Adjustments
|
140.0
|
-
|
(19.1
|
)
|
-
|
|||||||||||
|
Other,
Net
|
45.8
|
58.8
|
(31.4
|
)
|
0.7
|
|||||||||||
|
Net
Cash Flows Provided by Continuing
Operations
|
1,047.7
|
493.2
|
1,494.7
|
571.2
|
||||||||||||
|
Net
Cash Flows (Used in) Provided by Discontinued Operations
|
(3.2
|
)
|
109.8
|
212.6
|
45.0
|
|||||||||||
|
Net
Cash Flows Provided by Operating Activities
|
1,044.5
|
603.0
|
1,707.3
|
616.2
|
||||||||||||
|
|
||||||||||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||||||
|
Purchase
of Predecessor Stock
|
(11,534.3
|
)
|
-
|
-
|
-
|
|||||||||||
|
Capital
Expenditures
|
(1,287.0
|
)
|
(652.8
|
)
|
(1,375.6
|
)
|
(134.1
|
)
|
||||||||
|
Terasen
Acquisition, Net of $73.7 Cash Acquired
|
-
|
-
|
(10.6
|
)
|
(2,065.5
|
)
|
||||||||||
|
Other
Acquisitions
|
(122.0
|
)
|
(42.1
|
)
|
(396.5
|
)
|
-
|
|||||||||
|
Investment
in Kinder Morgan Energy Partners (Note 2)
|
-
|
-
|
-
|
(4.5
|
)
|
|||||||||||
|
Investment
in NGPL PipeCo LLC Restricted Cash
|
(3,030.0
|
)
|
-
|
-
|
-
|
|||||||||||
|
Net
(Investments in) Proceeds from Margin Deposits
|
(39.3
|
)
|
(54.8
|
)
|
38.6
|
27.5
|
||||||||||
|
Other
Investments
|
(246.4
|
)
|
(29.7
|
)
|
(6.1
|
)
|
(0.4
|
)
|
||||||||
|
Proceeds
from Sales of Kinder Morgan Management, LLC Shares
|
-
|
-
|
-
|
254.8
|
||||||||||||
|
Change
in Natural Gas Storage and NGL Line Fill Inventory
|
10.0
|
8.4
|
(12.9
|
)
|
-
|
|||||||||||
|
Property
Casualty Indemnifications
|
-
|
8.0
|
13.1
|
-
|
||||||||||||
|
Net
Proceeds (Costs of Removal) from Sales of Assets
|
301.3
|
(1.5
|
)
|
92.2
|
(4.1
|
)
|
||||||||||
|
Net
Cash Flows Used in Continuing Investing Activities
|
(15,947.7
|
)
|
(764.5
|
)
|
(1,657.8
|
)
|
(1,926.3
|
)
|
||||||||
|
Net
Cash Flows Provided by (Used in) Discontinued Investing
Activities
|
196.6
|
1,488.2
|
(138.1
|
)
|
(52.4
|
)
|
||||||||||
|
Net
Cash Flows (Used in) Provided by Investing Activities
|
$
|
(15,751.1
|
)
|
$
|
723.7
|
$
|
(1,795.9
|
)
|
$
|
(1,978.7
|
)
|
|||||
102
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
Knight
Inc. and Subsidiaries
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
|
||||||||||||||||
|
Ended
|
Five
Months
|
|||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||||||
|
Short-term
Debt,
Net
|
$
|
(52.6
|
)
|
$
|
(247.5
|
)
|
$
|
1,009.5
|
$
|
25.0
|
||||||
|
Bridge
Facility
Issued
|
-
|
-
|
-
|
2,134.7
|
||||||||||||
|
Bridge
Facility
Retired
|
-
|
-
|
-
|
(2,129.7
|
)
|
|||||||||||
|
Long-term
Debt
Issued
|
8,805.0
|
1,000.0
|
-
|
2,400.0
|
||||||||||||
|
Long-term
Debt
Retired
|
(829.2
|
)
|
(302.4
|
)
|
(140.7
|
)
|
(505.0
|
)
|
||||||||
|
Issuance of Kinder Morgan, G.P., Inc. Preferred Stock
|
100.0
|
-
|
-
|
-
|
||||||||||||
|
Cash
Book
Overdraft
|
(14.0
|
)
|
(14.9
|
)
|
17.9
|
-
|
||||||||||
|
Issuance
of Shares by Kinder Morgan Management, LLC
|
-
|
297.9
|
-
|
-
|
||||||||||||
|
Other
Common Stock Issued
|
-
|
9.9
|
38.7
|
62.8
|
||||||||||||
|
Excess
Tax Benefits from Share-based Payments
|
-
|
56.7
|
18.6
|
-
|
||||||||||||
|
Cash
Paid to Share-based Award Holders Due to Going Private
Transaction
|
(181.1
|
)
|
-
|
-
|
-
|
|||||||||||
|
Contributions
from Successor Investors
|
5,112.0
|
-
|
-
|
-
|
||||||||||||
|
Short-term
Advances from (to) Unconsolidated Affiliates
|
10.9
|
2.3
|
(4.9
|
)
|
(11.7
|
)
|
||||||||||
|
Treasury
Stock Acquired
|
-
|
-
|
(34.3
|
)
|
(317.1
|
)
|
||||||||||
|
Cash
Dividends, Common Stock
|
-
|
(234.9
|
)
|
(468.5
|
)
|
(355.2
|
)
|
|||||||||
|
Minority
Interests, Distributions
|
(259.6
|
)
|
(248.9
|
)
|
(575.0
|
)
|
(2.4
|
)
|
||||||||
|
Minority
Interests, Contributions
|
342.9
|
-
|
353.8
|
-
|
||||||||||||
|
Debt
Issuance Costs
|
(81.5
|
)
|
(13.1
|
)
|
(4.8
|
)
|
(14.3
|
)
|
||||||||
|
Other,
Net
|
4.0
|
(4.3
|
)
|
(3.5
|
)
|
-
|
||||||||||
|
Net
Cash Flows Provided by Continuing Financing Activities
|
12,956.8
|
300.8
|
206.8
|
1,287.1
|
||||||||||||
|
Net
Cash Flows Provided by (Used in) Discontinued Financing
Activities
|
-
|
140.1
|
(118.1
|
)
|
15.2
|
|||||||||||
|
Net Cash Flows Provided by Financing Activities
|
12,956.8
|
440.9
|
88.7
|
1,302.3
|
||||||||||||
|
Effect of Exchange Rate Changes on
Cash
|
(2.8
|
)
|
7.6
|
6.6
|
0.3
|
|||||||||||
|
|
||||||||||||||||
|
Effect of Accounting Change
on Cash
|
-
|
-
|
12.1
|
-
|
||||||||||||
|
|
||||||||||||||||
|
Cash Balance Included in Assets Held for Sale
|
(1.1
|
)
|
(2.7
|
)
|
(5.6
|
)
|
-
|
|||||||||
|
|
||||||||||||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
(1,753.7
|
)
|
1,772.5
|
13.2
|
(59.9
|
)
|
||||||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
1,902.3
|
129.8
|
116.6
|
176.5
|
||||||||||||
|
Cash
and Cash Equivalents at End of Period
|
$
|
148.6
|
$
|
1,902.3
|
$
|
129.8
|
$
|
116.6
|
||||||||
The
accompanying notes are an integral part of these statements.
103
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
1. Nature
of Operations and Summary of Significant Accounting Policies
(A)
Nature of Operations
We
are a large energy transportation and storage company, operating or owning an
interest in approximately 37,000 miles of pipelines and 165 terminals. We have
both regulated and nonregulated operations. We also own the general partner
interest and a significant limited partner interest in Kinder Morgan Energy
Partners, L.P., a publicly traded pipeline limited partnership. We began
including Kinder Morgan Energy Partners and its consolidated subsidiaries in our
consolidated financial statements effective January 1, 2006. This means that the
accounts, balances and results of operations of Kinder Morgan Energy Partners
and its consolidated subsidiaries are presented on a consolidated basis with
ours and those of our other consolidated subsidiaries for financial reporting
purposes; see the discussion under Note 1(B) “Basis of Presentation” following.
Our executive offices are located at 500 Dallas Street, Suite 1000, Houston,
Texas 77002 and our telephone number is (713) 369-9000. Unless the context
requires otherwise, references to “we,” “us,” “our,” or the “Company” are
intended to mean Knight Inc. (formerly Kinder Morgan, Inc.) and its consolidated
subsidiaries both before and after the Going Private transaction discussed
below. Unless the context requires otherwise, references to “Kinder Morgan
Energy Partners” and “KMP” are intended to mean Kinder Morgan Energy Partners,
L.P. and its consolidated subsidiaries.
Kinder
Morgan Management, LLC, referred to in this report as “Kinder Morgan Management”
or “KMR,” is a publicly traded Delaware limited liability company that was
formed on February 14, 2001. Kinder Morgan G.P., Inc., of which we indirectly
own all of the outstanding common equity, owns all of Kinder Morgan Management’s
voting shares. Kinder Morgan Management’s shares (other than the voting shares
we hold) are traded on the New York Stock Exchange under the ticker symbol
“KMR.” Kinder Morgan Management, pursuant to a delegation of control agreement,
has been delegated, to the fullest extent permitted under Delaware law, all of
Kinder Morgan G.P., Inc.’s power and authority to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder
Morgan G.P., Inc.’s right to approve certain transactions.
On
August 28, 2006, we entered into an agreement and plan of merger whereby
generally each share of our common stock would be converted into the right to
receive $107.50 in cash without interest. We in turn would merge with a wholly
owned subsidiary of Knight Holdco LLC, a privately owned company in which
Richard D. Kinder, our Chairman and Chief Executive Officer, would be a major
investor. Our board of directors, on the unanimous recommendation of a special
committee composed entirely of independent directors, approved the agreement and
recommended that our stockholders approve the merger. Our stockholders voted to
approve the proposed merger agreement at a special meeting held on December 19,
2006. On May 30, 2007, the merger closed, with Kinder Morgan, Inc. continuing as
the surviving legal entity and subsequently renamed “Knight Inc.” Additional
investors in Knight Holdco LLC include the following: other senior members of
our management, most of whom are also senior officers of Kinder Morgan G.P.,
Inc. and of Kinder Morgan Management; our co-founder William V. Morgan; Kinder
Morgan, Inc. board members Fayez Sarofim and Michael C. Morgan; and affiliates
of (i) Goldman Sachs Capital Partners; (ii) American International Group, Inc.;
(iii) The Carlyle Group; and (iv) Riverstone Holdings LLC. This transaction is
referred to in this report as “the Going Private transaction.” We are now
privately owned. Upon closing of the Going Private transaction, our common stock
is no longer traded on the New York Stock Exchange.
To
convert December 31, 2007 and 2006 balances denominated in Canadian dollars to
U.S. dollars, we used the December 31, 2007 and 2006 Bank of Canada closing
exchange rate of 1.012 and 0.8581 U.S. dollars per Canadian dollar,
respectively. All dollars are U.S. dollars, except where stated otherwise.
Canadian dollars are designated as C$.
(B)
Basis of Presentation
Our
consolidated financial statements include the accounts of Knight Inc. and our
majority-owned subsidiaries, as well as those of (i) Kinder Morgan Energy
Partners and (ii) Triton Power Company LLC, in which we have a preferred
investment. Except for Kinder Morgan Energy Partners and Triton Power Company
LLC, investments in 50% or less owned operations are accounted for under the
equity method. These investments, as was our investment in Kinder Morgan Energy
Partners prior to January 1, 2006, reported under the equity method include
jointly owned operations in which we have the ability to exercise significant
influence over their operating and financial policies. All material intercompany
transactions and balances have been eliminated. Certain prior period amounts
have been reclassified to conform to the current presentation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ from these estimates.
104
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
As
discussed preceding, on May 30, 2007, all of our outstanding common stock was
acquired by a group of investors including Richard D. Kinder, our Chairman and
Chief Executive Officer, in the Going Private transaction. This acquisition was
a “business combination” for accounting purposes, requiring that these
investors, pursuant to Statement of Financial Accounting Standards (“SFAS”) No.
141, Business
Combinations, record the assets acquired and liabilities assumed at their
fair market values as of the acquisition date, resulting in a new basis of
accounting.
As
a result of the application of the Securities and Exchange Commission rules and
guidance regarding “push down” accounting, the investors’ new accounting basis
in our assets and liabilities is reflected in our financial statements effective
with the closing of the Going Private transaction. Therefore, in the
accompanying consolidated financial statements, transactions and balances prior
to the closing of the Going Private transaction (the amounts labeled
“Predecessor Company”) reflect the historical accounting basis in our assets and
liabilities, while the amounts subsequent to the closing (labeled “Successor
Company”) reflect the push down of the investors’ new basis to our financial
statements. While the Going Private transaction closed on May 30, 2007, for
convenience, the Predecessor Company is assumed to end on May 31, 2007 and the
Successor Company is assumed to begin on June 1, 2007. The results for the
two-day period, from May 30 to May 31, 2007, are not material to any of the
periods presented.
As
required by SFAS No. 141 (applied by the investors and pushed down to our
financial statements), effective with the closing of the Going Private
transaction, all of our assets and liabilities have been recorded at their
estimated fair market values based on a preliminary allocation of the 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 and
Kinder Morgan Management), 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 KMP and 14% in the
case of KMR). The remaining percentage of these assets and liabilities,
reflecting the continuing unconsolidated ownership interest, is included at its
historical accounting basis. The purchase price paid in the Going Private
transaction and the preliminary 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
Preliminary Allocation of the Purchase Price is as
Follows:
|
|||
|
Current
Assets
|
$
|
1,551.2
|
|
|
Goodwill
|
13,407.2
|
||
|
Investments
|
1,072.2
|
||
|
Property,
Plant and Equipment, Net
|
15,638.7
|
||
|
Deferred
Charges and Other Assets
|
1,673.6
|
||
|
Current
Liabilities
|
(3,279.5
|
)
|
|
|
Deferred
Income Taxes
|
(2,588.0
|
)
|
|
|
Other
Deferred Credits
|
(1,777.5
|
)
|
|
|
Long-term
Debt
|
(9,855.9
|
)
|
|
|
Minority
Interests
|
(3,314.6
|
)
|
|
|
$
|
12,527.4
|
||
As
with all purchase accounting transactions, the preliminary allocation of
purchase price resulting from the Going Private transaction as shown preceding
and as reflected in the accompanying consolidated financial statements will be
adjusted during an allocation period as better or more complete information
becomes available. Some of these adjustments may be significant. Generally, this
allocation period will not exceed one year, and will end when we are no longer
waiting for information that is known to be available or
obtainable.
Due
to our implementation of Emerging Issues Task Force (“EITF”) No. 04-5, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights, we have
included Kinder Morgan Energy Partners and its consolidated subsidiaries as
consolidated subsidiaries in our consolidated financial statements effective
January 1, 2006. Notwithstanding the consolidation of Kinder Morgan Energy
Partners and its subsidiaries into our financial statements pursuant to EITF
04-5, we are not liable for, and our assets are not available to satisfy, the
obligations of Kinder Morgan Energy Partners and/or its subsidiaries and vice
versa. Responsibility for payments of obligations reflected in our or Kinder
Morgan Energy Partners’ financial statements is a legal
determination
105
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
based
on the entity that incurs the liability. The determination of responsibility for
payment among entities in our consolidated group of subsidiaries was not
impacted by the adoption of EITF 04-5.
We
prospectively applied EITF No. 04-5 using Transition Method A as set forth
therein. The adoption had no impact on our consolidated stockholders’ equity.
There also was no impact on the financial covenants in our loan agreements from
the implementation of EITF No. 04-5 because our $800 million credit facility was
amended to exclude the effect of consolidating Kinder Morgan Energy
Partners.
The
adoption of this pronouncement had the effect of increasing our consolidated
operating revenues and expenses and consolidated interest expense beginning
January 1, 2006. However, after recording the associated minority interests in
Kinder Morgan Energy Partners, our net income and earnings per common share were
not affected.
(C)
Accounting for Regulatory Activities
Our
regulated utility operations are accounted for in accordance with the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 71, Accounting for the Effects of
Certain Types of Regulation, which prescribes the circumstances in which
the application of generally accepted accounting principles is affected by the
economic effects of regulation. 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 following regulatory assets and liabilities are reflected in the
accompanying Consolidated Balance Sheets:
|
Successor
Company
|
Predecessor
Company
|
|||||
|
December
31,
|
December
31,
|
|||||
|
2007
|
2006
|
|||||
|
(In
millions)
|
(In
millions)
|
|||||
|
Regulatory
Assets:
|
||||||
|
Employee
Benefit Costs
|
$
|
0.6
|
$
|
12.5
|
||
|
Deferred
Income Taxes
|
-
|
19.1
|
||||
|
Rate
Regulation and Application Costs
|
5.8
|
6.8
|
||||
|
Debt
Issuance Costs
|
-
|
11.1
|
||||
|
Foreign
Currency Rate Stabilization
|
-
|
71.4
|
||||
|
Changes
in Fair Value of Derivatives
|
-
|
114.9
|
||||
|
Deferred
Development Costs on Capital Projects
|
-
|
20.2
|
||||
|
Commercial
Commodity Unbundling Costs
|
-
|
2.2
|
||||
|
Replacement
Transportation Agreement
|
-
|
3.2
|
||||
|
Tax
Reassessment Dispute
|
-
|
8.6
|
||||
|
Other
Regulatory Assets
|
-
|
17.5
|
||||
|
Total
Regulatory Assets
|
6.4
|
287.5
|
||||
|
|
||||||
|
Regulatory
Liabilities:
|
||||||
|
Deferred
Income Taxes
|
-
|
13.0
|
||||
|
Rate
Regulation and Application Costs
|
-
|
25.3
|
||||
|
Foreign
Currency Rate Stabilization
|
-
|
11.4
|
||||
|
Changes
in Fair Value of Derivatives
|
-
|
1.1
|
||||
|
Other
Regulatory Liabilities
|
-
|
30.5
|
||||
|
Total
Regulatory Liabilities
|
-
|
81.3
|
||||
|
|
||||||
|
Net
Regulatory
Assets
|
$
|
6.4
|
$
|
206.2
|
||
The
December 31, 2007 Regulatory Assets and Liabilities reflect the sale of our
Canada-based retail natural gas distribution operations (see Note 7) and the
application of the new accounting basis effective with the closing of the Going
Private transaction (see Note 1(B)).
As
discussed in Note 1(M), we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment. The closing of the sale
occurred on February 15, 2008. Accordingly, regulatory assets of $16.8 million
and regulatory liabilities of $8.7 million related to these operations have been
reclassified as “Assets Held for Sale, Non-current” and “Liabilities Held for
Sale, Non-current,” respectively, in the accompanying Consolidated Balance Sheet
as of December 31, 2007.
106
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
As
discussed in Note 7, on August 14, 2006, we entered into a definitive agreement
to sell our U.S.-based retail natural gas distribution assets. Accordingly,
regulatory assets of $29.4 million and regulatory liabilities of $30.4 million
related to these operations have been reclassified as “Assets Held for Sale,
Non-current” and “Liabilities Held for Sale, Non-current,” respectively, in the
accompanying Consolidated Balance Sheet as of December 31, 2006. This sale was
completed in March, 2007.
(D)
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.
We
provide various types of natural gas storage and transportation services to
customers. When we provide these services, 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” services, we also provide a natural gas park and loan
service to assist customers in managing short-term gas surpluses or deficits.
Revenues are recognized 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 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 natural 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.
(E)
Restricted Deposits
Except
for as discussed following, Restricted Deposits consist of restricted funds on
deposit with brokers in support of our risk management activities; see Note 11.
The $3 billion of proceeds from NGPL PipeCo LLC’s sale of debt in a
private placement (see Note 10) were held in escrow and are included in the
caption “Current Assets: Assets Held for Sale” in the accompanying Consolidated
Balance Sheet at December 31, 2007.
(F)
Accounts Receivable
The
caption “Accounts Receivable, Net” in the accompanying Consolidated Balance
Sheets is presented net of allowances for doubtful accounts. Our policy for
determining an appropriate allowance for doubtful accounts varies according to
the type of business being conducted and the customers being served. An
allowance for doubtful accounts is charged to expense monthly, generally using a
percentage of revenue or receivables, based on a historical analysis of
uncollected amounts, adjusted as necessary for changed circumstances and
customer-specific information. When specific receivables are determined to be
uncollectible, the reserve and receivable are relieved. In support of credit
extended to certain customers, we had received prepayments of $8.7 million,
$13.0 million and $4.4 million at December 31, 2007, 2006 and 2005,
respectively, included in
107
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
the
caption “Current Liabilities: Other” in the accompanying Consolidated Balance
Sheets. The following table shows the balance in the allowance for doubtful
accounts and activity for the years ended December 31, 2007, 2006 and
2005.
Allowance
for Doubtful Accounts
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
|
||||||||||||||||
|
Ended
|
Five
Months
|
|||||||||||||||
|
December
31,
|
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Beginning
Balance1
|
$
|
-
|
$
|
14.0
|
$
|
5.8
|
$
|
3.1
|
||||||||
|
Additions:
Charged to Cost and Expenses2
|
0.4
|
0.7
|
16.9
|
4.9
|
||||||||||||
|
Deductions:
|
||||||||||||||||
|
Write-off
of Uncollectible Accounts
|
(0.5
|
)
|
(4.7
|
)
|
(7.8
|
)
|
(2.2
|
)
|
||||||||
|
Reclassification
to Assets Held for Sale
|
-
|
-
|
(0.9
|
)
|
-
|
|||||||||||
|
Reclassification
to Accounts Receivable
|
0.1
|
-
|
-
|
-
|
||||||||||||
|
Ending
Balance
|
$
|
-
|
$
|
10.0
|
$
|
14.0
|
$
|
5.8
|
||||||||
__________
|
|
1
|
The
beginning balance as of June 1, 2007 has been adjusted to reflect the fair
value of accounts receivable as the result of the Going Private
transaction (see Note 1(B)).
|
|
|
2
|
Additions
include $0.7 million and $2.4 million associated with assets classified as
held for sale for the five months ended May 31, 2007 and the year ended
December 31, 2006, respectively, as discussed in Note 7, and $6.5 million
representing allowance for doubtful accounts balances of Kinder Morgan
Energy Partners as of December 31, 2005. Due to our adoption of EITF No.
04-5, beginning January 1, 2006, the accounts and balances of Kinder
Morgan Energy Partners are included in our consolidated results as
discussed in Note 1(B). Additions in 2005 include $3.1 million acquired
with Terasen.
|
(G)
Inventories
|
Successor
Company
|
Predecessor
Company
|
|||||
|
December
31,
|
December
31,
|
|||||
|
2007
|
20061
|
|||||
|
(In
millions)
|
(In
millions)
|
|||||
|
Gas
in Underground Storage (Current)
|
$
|
-
|
$
|
225.2
|
||
|
Product
Inventory
|
19.5
|
20.4
|
||||
|
Materials
and Supplies
|
18.3
|
29.4
|
||||
|
$
|
37.8
|
$
|
275.0
|
|||
Inventories
are carried at lower of cost or market and are accounted for using the methods
of average cost and last-in, first-out. We also maintain gas in our underground
storage facilities on behalf of certain third parties. We receive a fee from our
storage service customers but do not reflect the value of their gas stored in
our facilities in the accompanying Consolidated Balance Sheets.
(H)
Current Assets: Other
|
Successor
Company
|
Predecessor
Company
|
||||||
|
December
31,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
(In
millions)
|
(In
millions)
|
||||||
|
Assets
Held for Sale - Turbines and Boilers1
|
$
|
0.7
|
$
|
4.9
|
|||
|
Current
Deferred Tax Asset
|
-
|
12.9
|
|||||
|
Derivatives
|
47.0
|
134.0
|
|||||
|
Prepaid
Expenses
|
22.3
|
32.2
|
|||||
|
Income
Tax Overpayments
|
-
|
6.5
|
|||||
|
Other
|
3.9
|
13.7
|
|||||
|
$
|
73.9
|
$
|
204.2
|
||||
__________
|
1
|
See
Notes 5 and 6.
|
108
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(I)
Goodwill
Prior
to the adoption of EITF No. 04-5 on January 1, 2006, we accounted for our
investment in Kinder Morgan Energy Partners under the equity method. The
difference between the cost of our investment and our underlying equity in the
net assets of Kinder Morgan Energy Partners was recorded as equity method
goodwill. Upon the adoption of EITF No. 04-5, we ceased accounting for our
investment in Kinder Morgan Energy Partners under the equity method and
beginning January 1, 2006, we include the accounts, balances and results of
operations of Kinder Morgan Energy Partners in our consolidated financial
statements. As a result, the character of the equity method goodwill was changed
to goodwill arising from a business combination or acquisition, which must be
allocated to one or more reporting units as of the original date of combination
or acquisition.
We
purchased our investment in Kinder Morgan Energy Partners in October 1999. The
businesses of Kinder Morgan Energy Partners that existed at that time are
presently located in the Products Pipelines – KMP, CO2 – KMP, and
Terminals – KMP segments. The equity method goodwill recharacterized as goodwill
arising from an acquisition was allocated to these reporting units effective
January 1, 2006 based on the respective fair value of each reporting unit at the
date of our 1999 investment in Kinder Morgan Energy Partners. In addition,
treating Kinder Morgan Energy Partners as our consolidated subsidiary resulted
in goodwill balances residing on its books being included within our goodwill
balance. Previously, these amounts were included as part of our investment in
Kinder Morgan Energy Partners pursuant to the equity method.
In
accordance with the provisions of SFAS No. 141, Business Combinations, as a
result of the Going Private transaction, all previously recorded goodwill
assigned to our reportable segments at May 31, 2007 was eliminated, and the
goodwill arising from this transaction was allocated among our segments. Changes
in the carrying amount of our goodwill for the five months ended May 31, 2007,
the seven months ended December 31, 2007, and the year ended December 31, 2006
are summarized as follows:
|
Predecessor
Company
|
||||||||||||||||||||
|
Balance
December 31, 2005
|
KMP
Goodwill Consolidated into KMI1
|
Reallocation
of Equity Method Goodwill
|
Acquisitions
and Purchase Price Adjustments
|
Other2
|
Balance
December
31,
2006
|
|||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Kinder
Morgan Energy Partners
|
$
|
859.4
|
$
|
-
|
$
|
(859.4
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||
|
Power
Segment
|
24.8
|
-
|
-
|
-
|
-
|
24.8
|
||||||||||||||
|
Kinder
Morgan Canada Segment3
|
658.2
|
-
|
-
|
-
|
(1.2
|
)
|
657.0
|
|||||||||||||
|
Terasen
Gas Segment3
|
1,238.6
|
-
|
-
|
100.0
|
(646.0
|
)
|
692.6
|
|||||||||||||
|
Products
Pipelines Segment
|
-
|
263.2
|
695.5
|
-
|
(15.3
|
)
|
943.4
|
|||||||||||||
|
Natural
Gas Pipelines Segment
|
-
|
288.4
|
-
|
-
|
-
|
288.4
|
||||||||||||||
|
CO2
Segment
|
-
|
46.1
|
26.9
|
-
|
(0.6
|
)
|
72.4
|
|||||||||||||
|
Terminals
Segment
|
-
|
201.2
|
137.0
|
30.0
|
(3.0
|
)
|
365.2
|
|||||||||||||
|
|
||||||||||||||||||||
|
Consolidated
Total
|
$
|
2,781.0
|
$
|
798.9
|
$
|
-
|
$
|
130.0
|
$
|
(666.1
|
)
|
$
|
3,043.8
|
|||||||
__________
|
1
|
At
January 1, 2006.
|
|
2
|
Other
adjustments include the translation of goodwill denominated in foreign
currencies and reductions of the reallocation of equity method goodwill
due to reductions in Knight Inc.’s ownership percentage of KMP. The
adjustment of $646.0 to the Terasen Gas Segment was due mainly to an
impairment charge (see Note 6).
|
|
3
|
Goodwill
assigned to the Kinder Morgan Canada and Terasen Gas business segments is
based on the purchase price allocation for our November 30, 2005
acquisition of Terasen (see Note
4).
|
109
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
Predecessor
Company
|
|||||||||||||||||||
|
Balance
December
31,
2006
|
Acquisitions
and
Purchase
Price Adjustments
|
Dispositions
|
Other3
|
Balance
May
31, 2007
|
|||||||||||||||
|
(In
millions)
|
|||||||||||||||||||
|
Power
Segment
|
$
|
24.8
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
24.8
|
|||||||||
|
Kinder
Morgan Canada Segment1
|
65.0
|
-
|
(65.0
|
)
|
-
|
-
|
|||||||||||||
|
Terasen
Gas Segment2
|
692.6
|
-
|
(692.6
|
)
|
-
|
-
|
|||||||||||||
|
KMP
– Products Pipelines Segment
|
943.4
|
-
|
-
|
(14.1
|
)
|
929.3
|
|||||||||||||
|
KMP
– Natural Gas Pipelines Segment
|
288.4
|
-
|
-
|
-
|
288.4
|
||||||||||||||
|
KMP
– CO2
Segment
|
72.4
|
-
|
-
|
(0.5
|
)
|
71.9
|
|||||||||||||
|
KMP
– Terminals Segment
|
365.2
|
(2.7
|
)
|
-
|
-
|
362.5
|
|||||||||||||
|
KMP
– Trans Mountain Segment1
|
592.0
|
-
|
-
|
(360.2
|
)
|
231.8
|
|||||||||||||
|
|
|||||||||||||||||||
|
Consolidated
Total
|
$
|
3,043.8
|
$
|
(2.7
|
)
|
$
|
(757.6
|
)
|
$
|
(374.8
|
)
|
$
|
1,908.7
|
||||||
|
Successor
Company
|
|||||||||||||||||||
|
Balance
June
1,
2007
|
Acquisitions
and
Purchase
Price Adjustments
|
Dispositions
|
Other3
|
Balance
December
31, 2007
|
|||||||||||||||
|
(In
millions)
|
|||||||||||||||||||
|
NGPL
Segment4
|
$
|
4,624.3
|
$
|
592.1
|
$
|
(5,216.4
|
)
|
$
|
-
|
$
|
-
|
||||||||
|
KMP
– Products Pipelines Segment
|
2,586.9
|
(398.4
|
)
|
-
|
(9.1
|
)
|
2,179.4
|
||||||||||||
|
KMP
– Natural Gas Pipelines Segment
|
3,058.7
|
155.5
|
-
|
(13.2
|
)
|
3,201.0
|
|||||||||||||
|
KMP
– CO2
Segment
|
1,454.2
|
(372.1
|
)
|
-
|
(4.5
|
)
|
1,077.6
|
||||||||||||
|
KMP
– Terminals Segment
|
1,546.1
|
(74.1
|
)
|
-
|
(6.1
|
)
|
1,465.9
|
||||||||||||
|
KMP
– Trans Mountain Segment1
|
231.8
|
-
|
-
|
18.3
|
250.1
|
||||||||||||||
|
|
|||||||||||||||||||
|
Consolidated
Total
|
$
|
13,502.0
|
$
|
(97.0
|
)
|
$
|
(5,216.4
|
)
|
$
|
(14.6
|
)
|
$
|
8,174.0
|
||||||
__________
|
1
|
Kinder
Morgan Energy Partners acquired Trans Mountain from us on April 30, 2007.
Prior to this transaction, Trans Mountain was in the Kinder Morgan Canada
Segment. After the $377.1 million impairment of this asset, discussed
further below, the remaining goodwill related to Trans Mountain was
transferred to the KMP – Trans Mountain Segment. As a result of the sale
of Terasen Pipelines (Corridor) Inc. and the transfer of Trans Mountain to
Kinder Morgan Energy Partners, the business segment referred to in
previous filings as Kinder Morgan Canada is no longer reported.
|
|
2
|
As
discussed in Note 6, we closed the sale of our Terasen Gas segment on May
17, 2007.
|
|
3
|
Adjustments
include (i) the translation of goodwill denominated in foreign currencies,
(ii) reductions in the allocation of goodwill due to reductions in
Knight’s ownership percentage of KMP and (iii) the $377.1 million goodwill
impairment on the KMP-Trans Mountain
Segment.
|
|
4
|
In
the fourth quarter of 2007 the assets, including goodwill, of the NGPL
Segment were transferred to assets held for sale. See Note
1(M).
|
We
evaluate for the impairment of goodwill in accordance with the provisions of
SFAS No. 142, Goodwill and
Other Intangible Assets. For the investments we continue to account for
under the equity method of accounting, the premium or excess cost over
underlying fair value of net assets is referred to as equity method goodwill and
is not subject to amortization but rather to impairment testing in accordance
with APB No. 18, The Equity
Method of Accounting for Investments in Common Stock.
On
April 18, 2007, we announced that Kinder Morgan Energy Partners would acquire
the Trans Mountain pipeline system from us. This transaction was completed April
30, 2007. Because Kinder Morgan Energy Partners is a consolidated subsidiary of
us, this transaction was accounted for as a transfer between entities under
common control and the assets and liabilities of the Trans Mountain pipeline
system were transferred at book value. 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 information obtained regarding the fair values of the Trans
Mountain pipeline system assets, a goodwill impairment charge of $377.1 million
was recorded in the first quarter of 2007.
110
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(J)
Other Intangibles, Net
Our
intangible assets other than goodwill include lease value, contracts, customer
relationships and agreements. These intangible assets have definite lives, are
being amortized on a straight-line basis over their estimated useful lives, and
are reported separately as “Other Intangibles, Net” in the accompanying
Consolidated Balance Sheets. Following is information related to our intangible
assets:
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Customer
Relationships, Contracts and Agreements:
|
||||||||
|
Gross
Carrying
Amount
|
$
|
321.3
|
$
|
253.8
|
||||
|
Accumulated
Amortization
|
(11.6
|
)
|
(36.2
|
)
|
||||
|
Net
Carrying
Amount
|
309.7
|
217.6
|
||||||
|
Technology-based
Assets, Lease Value and Other:
|
||||||||
|
Gross
Carrying
Amount
|
11.7
|
13.3
|
||||||
|
Accumulated
Amortization
|
(0.3
|
)
|
(1.4
|
)
|
||||
|
Net
Carrying
Amount
|
11.4
|
11.9
|
||||||
|
Total
Other Intangibles,
Net
|
$
|
321.1
|
$
|
229.5
|
||||
Amortization
expense on our intangibles consisted of the following:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||
|
Seven
Months
|
Year
Ended December 31,
|
|||||||||||||
|
Ended
|
Five
Months
|
|||||||||||||
|
December
31, 2007
|
Ended
May
31, 2007
|
2006
|
2005
|
|||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||
|
Customer
Relationships, Contracts and Agreements
|
$
|
11.6
|
$
|
6.1
|
$
|
15.0
|
$
|
1.5
|
||||||
|
Technology-based
Assets, Lease Value and Other
|
0.3
|
0.2
|
0.2
|
-
|
||||||||||
|
Total
Amortizations
|
$
|
11.9
|
$
|
6.3
|
$
|
15.2
|
$
|
1.5
|
||||||
As
of December 31, 2007, our weighted-average amortization period for our
intangible assets was approximately 17.3 years. Our estimated amortization
expense for these assets for each of the next five fiscal years is approximately
$21.2 million, $20.1 million, $19.9 million, $19.9 million and $19.8 million,
respectively.
(K)
Other Investments
Our
significant equity investments as of December 31, 2007 (and our percentage of
ownership interests) consisted of:
|
|
·
|
NGPL
PipeCo LLC (20%, see Note 1(M));
|
|
|
·
|
Express
Pipeline System (33.33%);
|
|
|
·
|
Plantation
Pipe Line Company (51%);
|
|
|
·
|
Thermo
Cogeneration Partnership, L.P. and Greenhouse Holdings, LLC (Thermo
Companies) (49.5%);
|
|
|
·
|
West2East
Pipeline LLC (51%);
|
|
|
·
|
Red
Cedar Gathering Company (49%);
|
|
|
·
|
Midcontinent
Express Pipeline LLC (50%);
|
|
|
·
|
Thunder
Creek Gas Services, LLC (25%);
|
|
|
·
|
Cortez
Pipeline Company (50%); and
|
111
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
|
·
|
Horizon
Pipeline Company (50%);
|
Kinder
Morgan Energy Partners operates and owns an approximate 51% ownership interest
in Plantation Pipe Line Company, and an affiliate of ExxonMobil owns the
remaining approximate 49% 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
accounts for its investment under the equity method of accounting.
Kinder
Morgan Energy Partners operates and owns a 51% ownership interest in West2East
Pipeline LLC, a limited liability company that is the sole owner of Rockies
Express Pipeline LLC. ConocoPhillips owns a 24% ownership interest in West2East
Pipeline LLC and Sempra Energy holds the remaining 25% interest. As discussed in
Note 4, when construction of the entire Rockies Express Pipeline project is
completed, Kinder Morgan Energy Partners’ ownership interest will be reduced to
50% at which time the capital accounts of West2East Pipeline LLC will be trued
up to reflect its 50% economic interest in the project. According to the
provisions of current accounting standards, due to the fact that Kinder Morgan
Energy Partners will have a 50% economic interest in the Rockies Express project
on an ongoing basis, it is not considered the primary beneficiary of West2East
Pipeline LLC and thus, accounts for its investment under the equity method of
accounting. Prior to June 30, 2006, Kinder Morgan Energy Partners owned a 66
2/3% ownership interest in West2East Pipeline LLC and accounted for its
investment under the full consolidation method. Following the decrease in Kinder
Morgan Energy Partners’ ownership interest to 51% effective June 30, 2006, it
deconsolidated this entity and began to account for its investment under the
equity method. As of December 31, 2006, Kinder Morgan Energy Partners had no
material investment in the net assets of West2East Pipeline LLC due to the fact
that the amount of its assets, primarily property, plant and equipment, was
largely offset by the amount of its liabilities, primarily debt.
Kinder
Morgan Energy Partners also owns a 50% interest in Midcontinent Express Pipeline
LLC. Energy Transfer Partners, L.P. owns the remaining 50% interest. In January
2008, in conjunction with the signing of additional binding transportation
contracts, Midcontinent Express Pipeline LLC and MarkWest Pioneer, L.L.C.
(“MarkWest”) entered into an option agreement which provides MarkWest a one-time
right to purchase a 10% ownership interest in Midcontinent Express Pipeline LLC
after the pipeline is fully constructed and placed into service. If the option
is exercised, Kinder Morgan Energy Partners and Energy Transfer Partners, L.P.
will each own 45% of Midcontinent Express Pipeline LLC, while MarkWest will own
the remaining 10%. See Equity
Investee Natural Gas Pipeline Expansion Filings elsewhere in this note
for information on the pipeline expansion filings of Rockies Express Pipeline
LLC and Midcontinent Express Pipeline LLC.
The
amount of our recorded investment in each of our equity-method investees is as
follows:
|
Successor
Company
|
Predecessor
Company
|
|||||
|
December
31,
|
December
31,
|
|||||
|
2007
|
2006
|
|||||
|
(In
millions)
|
(In
millions)
|
|||||
|
NGPL
PipeCo
LLC
|
$
|
720.0
|
$
|
-
|
||
|
Express
Pipeline
System
|
402.1
|
449.7
|
||||
|
Plantation
Pipe Line Company
|
351.4
|
199.6
|
||||
|
Thermo
Companies
|
53.5
|
153.9
|
||||
|
West
2 East Pipeline LLC
|
191.9
|
-
|
||||
|
Red
Cedar Gathering Company
|
135.6
|
160.7
|
||||
|
Midcontinent
Express Pipeline LLC
|
63.0
|
-
|
||||
|
Customer
Works
LP
|
-
|
30.0
|
||||
|
Thunder
Creek Gas Services, LLC
|
37.0
|
37.2
|
||||
|
Cortez
Pipeline Company
|
14.2
|
16.2
|
||||
|
Horizon
Pipeline Company1
|
-
|
16.0
|
||||
|
Subsidiary
Trusts Holding Solely Debentures of Kinder Morgan
|
8.6
|
8.6
|
||||
|
All
Others
|
18.9
|
12.7
|
||||
|
Total
Equity Investments
|
$
|
1,996.2
|
$
|
1,084.6
|
||
|
|
______________
|
|
1
|
Balance
for 2007 is included in the caption “Assets Held for Sale, Non-current” in
the accompanying Consolidated Balance
Sheet.
|
112
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Our
earnings (losses) from equity investments were as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
May
31,
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Cortez
Pipeline Company
|
$
|
10.5
|
$
|
8.7
|
$
|
19.2
|
$
|
-
|
||||||||
|
Express
Pipeline System
|
14.9
|
5.0
|
17.1
|
2.0
|
||||||||||||
|
Plantation
Pipe Line Company
|
10.8
|
11.9
|
12.8
|
-
|
||||||||||||
|
Thermo
Companies
|
8.0
|
5.1
|
11.3
|
11.6
|
||||||||||||
|
Red
Cedar Gathering Company
|
16.1
|
11.9
|
36.3
|
-
|
||||||||||||
|
Customer
Works LP1
|
-
|
-
|
-
|
-
|
||||||||||||
|
Thunder
Creek Gas Services, LLC
|
1.2
|
1.0
|
2.5
|
-
|
||||||||||||
|
Midcontinent
Express Pipeline
|
1.2
|
0.2
|
-
|
-
|
||||||||||||
|
West2East
Pipeline LLC
|
(8.2
|
)
|
(4.2
|
)
|
-
|
-
|
||||||||||
|
Horizon
Pipeline Company
|
1.0
|
0.6
|
1.8
|
1.7
|
||||||||||||
|
Heartland
Pipeline Company2
|
-
|
-
|
-
|
-
|
||||||||||||
|
All
Others
|
1.3
|
0.5
|
3.2
|
-
|
||||||||||||
|
Total
|
$
|
56.8
|
$
|
40.7
|
$
|
104.2
|
$
|
15.3
|
||||||||
|
Amortization
of Excess Costs
|
$
|
(3.4
|
)
|
$
|
(2.4
|
)
|
$
|
(5.6
|
)
|
$
|
-
|
|||||
|
1
|
This
investment was part of the Terasen Inc. sale, therefore our earnings from
it are included in “(Loss) Income from Discontinued Operations, Net of
Tax” in the accompanying Consolidated Statements of Operations; see Note
7.
|
|
2
|
This
investment was part of the North System sale, therefore our earnings from
it are included in “(Loss) Income from Discontinued Operations, Net of
Tax” in the accompanying Consolidated Statements of Operations; see Note
7.
|
Summarized
combined unaudited financial information for our significant equity investments
(listed above) is reported below (amounts represent 100% of investee financial
information):
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(In
millions)
|
|||||||||||
|
Revenues
|
$
|
738.4
|
$
|
692.1
|
$
|
76.7
|
|||||
|
Costs
and Expenses
|
534.4
|
483.2
|
48.1
|
||||||||
|
Net
Income
|
$
|
204.0
|
$
|
208.9
|
$
|
28.6
|
|||||
|
December
31,
|
|||||
|
20071
|
2006
|
||||
|
(In
millions)
|
|||||
|
Current
Assets
|
$
|
3,566.2
|
$
|
241.2
|
|
|
Non-current
Assets
|
11,469.5
|
2,580.3
|
|||
|
Current
Liabilities
|
572.3
|
319.6
|
|||
|
Non-current
Liabilities
|
6,078.4
|
1,671.2
|
|||
|
Minority
Interest in Equity of Subsidiaries
|
1.7
|
-
|
|||
|
Partners’/Owners’
Equity
|
8,383.2
|
830.7
|
|||
|
1
|
Includes
amounts associated with our NGPL business segment. In December 2007, we
entered into a definitive agreement to sell an 80% ownership interest in
our NGPL business segment. The closing of the sale occurred on February
15, 2008 (see Note 1(M)).
|
Equity
Investee Natural Gas Pipeline Expansion Filings
Rockies
Express Pipeline-Currently Certificated Facilities
On
August 9, 2005, the FERC approved the application of Rockies Express Pipeline
LLC, formerly known as Entrega Gas Pipeline LLC, to construct 327 miles of
pipeline facilities in two phases. For phase I (consisting of two pipeline
segments), Rockies Express Pipeline LLC was granted authorization to construct
and operate approximately 136 miles of pipeline
113
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
extending
northward from the Meeker Hub, located at the northern end of Kinder Morgan
Energy Partners’ TransColorado pipeline system in Rio Blanco County, Colorado,
to the Wamsutter Hub in Sweetwater County, Wyoming (segment 1), and then
construct approximately 191 miles of pipeline eastward to the Cheyenne Hub in
Weld County, Colorado (segment 2). Construction of segments 1 and 2 has been
completed, with interim service commencing on segment 1 on February 24, 2006,
and full in-service of both segments on February 14, 2007. For phase II, Rockies
Express was authorized to construct three compressor stations referred to as the
Meeker, Big Hole and Wamsutter compressor stations. The Meeker and Wamsutter
stations were placed in service in January 2008. Construction of the Big Hole
compressor station is planned to commence in the second quarter of 2008, in
order to meet an expected in-service date of June 30, 2009.
Rockies
Express Pipeline-West Project
On
April 19, 2007, the FERC issued a final order approving the Rockies Express
application for authorization to construct and operate certain facilities
comprising its proposed “Rockies Express-West Project.” This project is the
first planned segment extension of Rockies Express’ currently certificated
facilities, and it will be comprised of approximately 713 miles of 42-inch
diameter pipeline extending from the Cheyenne Hub to an interconnection with
Panhandle Eastern Pipe Line located in Audrain County, Missouri. The segment
extension proposes to transport approximately 1.5 billion cubic feet per day of
natural gas across the following five states: Wyoming, Colorado, Nebraska,
Kansas and Missouri. The project will also include certain improvements to
existing Rockies Express facilities located west of the Cheyenne Hub.
Construction commenced on May 21, 2007, and the project began interim service to
upstream delivery points on January 12, 2008. This project is expected to be
fully operational in mid-April 2008.
Rockies
Express Pipeline-East Project
On
April 30, 2007, Rockies Express filed an application with the FERC requesting a
certificate of public convenience and necessity that would authorize
construction and operation of the Rockies Express-East Project. The Rockies
Express-East Project will be comprised of approximately 639 miles of 42-inch
diameter pipeline commencing from the terminus of the Rockies Express-West
pipeline to a terminus near the town of Clarington in Monroe County, Ohio and
will be capable of transporting approximately 1.8 billion cubic feet per day of
natural gas. On September 7, 2007, the FERC issued a Notice of Schedule for
Environmental Review for the Rockies Express-East Project, referred to as the
posted schedule. Rockies Express has requested that the FERC issue an updated
scheduling order to modify the posted schedule for earlier resolution. Without a
modification of the posted schedule, Rockies Express has concerns about its
ability to complete its project by June 2009. Rockies Express is working closely
with the FERC staff and other cooperating agencies to meet a revised schedule
developed in consultation with the FERC staff at a public meeting convened on
September 21, 2007. On November 23, 2007, the FERC issued a draft environmental
impact statement for the project, in advance of the posted schedule. Comments on
the environmental impact statement were submitted January 14, 2008, also in
advance of the posted schedule. While there can be no assurance that the FERC
will approve the revised schedule, subject to that approval, the Rockies
Express-East Project is expected to begin partial service on December 31, 2008,
and to be in full service in June 2009.
Midcontinent
Express Pipeline Project
On
October 9, 2007, in Docket No. CP08-6-000, Midcontinent Express Pipeline LLC
filed an application with the FERC requesting a certificate of public
convenience and necessity that would authorize construction and operation of the
proposed Midcontinent Express Pipeline natural gas transmission system. On
February 8, 2008, the FERC issued a draft environmental impact statement that
stated that the building and operation of the proposed Midcontinent Express
Pipeline would result in limited adverse environmental impact. A final
environmental impact statement must be released before the FERC can issue a
certificate authorizing construction. Subject to the receipt of regulatory
approvals, construction of the pipeline is expected to commence in August 2008
and be in service during the first quarter of 2009.
The
Midcontinent Express Pipeline will create long-haul, firm transportation
takeaway capacity either directly or indirectly connected to natural gas
producing regions located in Texas, Oklahoma and Arkansas. The pipeline will
originate in southeastern Oklahoma and traverse east through Texas, Louisiana,
Mississippi and terminate close to the Alabama border, providing capability to
transport natural gas supplies to major pipeline interconnects along the route
up to its terminus at Transcontinental Gas Pipe Line Corporation’s Station 85.
The Midcontinent Express Pipeline will have an initial capacity of up to 1.4
billion cubic feet and a total capital cost of approximately $1.3 billion. The
pipeline is currently a 50/50 joint venture between Kinder Morgan Energy
Partners and Energy Transfer Partners, L.P.
(L)
Property, Plant and Equipment
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. 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
114
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
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.
As
discussed under (G) preceding, we 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 to meet demand. 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 & Equipment balance) and 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.
Depreciation
on our long-lived assets is computed principally based on the straight-line
method over their estimated useful lives. Generally, we apply composite
depreciation rates to functional groups of property having similar economic
characteristics. The rates range from 1.13% to 12.0%, 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. In addition, we are
still reviewing the remaining useful lives of assets that have a new basis as a
result of the Going Private transaction. 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 activitities 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 market 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.
We
evaluate the impairment of our long-lived assets in accordance with Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less the cost to sell. 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. 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
115
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
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.
(M)
Assets and Liabilities Held for Sale
On
December 10, 2007, we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment (primarily MidCon Corp, which is
the parent of Natural Gas Pipeline Company of America) to Myria Acquisition Inc.
(“Myria”), a Delaware corporation, for approximately $5.9 billion, subject to
certain adjustments. The closing of the sale occurred on February 15, 2008. We
will continue to operate NGPL assets pursuant to a 15-year operating agreement.
See Note 19 for further information regarding this agreement.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 80% of the assets and liabilities
associated with the NGPL business segment transaction are included in our
Consolidated Balance Sheet at December 31, 2007 in the captions “Current Assets:
Assets Held for Sale,” “Assets Held for Sale, Non-current,” “Current
Liabilities: Liabilities Held for Sale” and “Other Liabilities and Deferred
Credits: Liabilities Held for Sale, Non-current” with the remaining 20%
(representing our retained investment) included in the caption
“Investments.”
Balances
in the captions “Current Assets: Assets Held for Sale,” “Assets Held for Sale,
Non-current,” “Current Liabilities: Liabilities Held for Sale” and “Other
Liabilities and Deferred Credits: Liabilities Held for Sale, Non-current.”
included in our Consolidated Balance Sheet at December 31, 2006 relate to the
assets and liabilities that were included in the sale of our U.S.-based retail
natural gas distribution properties, which closed in March of 2007. See Note 7
for further information regarding this transaction.
(N)
Asset Retirement Obligations
We
adopted SFAS No. 143, Accounting for Asset Retirement
Obligations, (“SFAS No. 143”) effective January 1, 2003. This statement
changed the financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated retirement
costs. The statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. In March 2005, the Financial
Accounting Standards Board (“FASB”) issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations—an interpretation of FASB Statement No. 143 (“FIN
47”). This Interpretation clarifies that the term “conditional asset retirement
obligation” as used in SFAS No. 143, refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Thus, the timing and (or) method of settlement may be conditional on a future
event. The implementation of FIN 47 did not change the application of the
guidance implemented under SFAS No. 143 in relation to our facts and
circumstances. The impact of the adoption of SFAS No. 143 on us is discussed
below by segment.
We
have included $1.4 million of our total asset retirement obligations as of
December 31, 2007 in the caption “Current Liabilities: Other,” $2.8 million
related to our NGPL operations in the caption “Liabilities Held for Sale,
Non-Current” and the remaining $50.8 million in the caption “Other Liabilities
and Deferred Credits: Other” in the accompanying Consolidated Balance Sheet. A
reconciliation of the changes in our accumulated asset retirement obligations
for the seven months ended December 31, 2007, the five months ended May 31, 2007
and year ended December 31, 2006 is as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31,
2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Balance
at Beginning of Period
|
$
|
53.1
|
$
|
52.5
|
$
|
3.2
|
||||||
|
KMP
ARO Consolidated into Knight Inc.1
|
n/a
|
n/a
|
43.2
|
|||||||||
|
Additions
|
1.2
|
0.2
|
6.8
|
|||||||||
|
Liabilities
Settled
|
(0.8
|
)
|
(0.7
|
)
|
(3.2
|
)
|
||||||
|
Accretion
Expense
|
1.5
|
1.1
|
2.5
|
|||||||||
|
Balance
at End of Period
|
$
|
55.0
|
$
|
53.1
|
$
|
52.5
|
||||||
___________
|
1
|
Represents
asset retirement obligation balances of Kinder Morgan Energy Partners as
of December 31, 2005. Due to our adoption of EITF No. 04-5, beginning
January 1, 2006, the accounts and balances of Kinder Morgan Energy
Partners are included in our consolidated results as discussed in Note
1(B).
|
116
|
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Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
In
general, within the NGPL business segment, the system is composed of underground
piping, compressor stations and associated facilities, natural gas storage
facilities and certain other facilities and equipment. Except as discussed
following, we have no plans to abandon any of these facilities, the majority of
which have been providing utility service for many years, making it impossible
to determine the timing of any potential retirement expenditures.
Notwithstanding our current intentions, in general, if we were to cease utility
operations in total or in any particular area, we would be permitted to abandon
the underground piping in place, but would have to remove our surface facilities
from land belonging to our customers or others. We would generally have no
obligations for removal or remediation with respect to equipment and facilities,
such as compressor stations, located on land we own.
NGPL
has various condensate drip tanks located throughout the system, storage wells
located within the storage fields, laterals no longer integral to the overall
mainline transmission system, compressor stations which are no longer active,
and other miscellaneous facilities, all of which have been officially abandoned.
Additionally, in August 2007, BP notified Canyon Creek Compression Company
(“Canyon Creek”) of its decision to discontinue operations at the Whitney Plant,
by October 1, 2007. As of September 4, 2007, BP has ceased operations at its
Whitney Canyon Gas Plant, which is located near Evanston, Wyoming. The Whitney
Plant is the exclusive source of gas compressed at Canyon Creek’s facility. For
these facilities, it is possible to reasonably estimate the timing of the
payment of obligations associated with their retirement. The recognition of the
NGPL and Canyon Creek obligations has resulted in a combined liability and
associated asset of approximately $2.8 million as of December 31, 2007. These
balances represent the present value of those future obligations for which we
are able to make reasonable estimations of the current fair value due to, as
discussed above, our ability to estimate the timing of the incurrence of the
expenditures. The remainder of NGPL’s asset retirement obligations have not been
recorded due to our inability, as discussed above, to reasonably estimate when
they will be settled in cash. As discussed in Note 1(M), we have sold an 80%
ownership interest in our NGPL business segment.
In
the CO2 – KMP
business segment, we are required to plug and abandon oil and gas wells that
have been removed from service and to remove our surface wellhead equipment and
compressors. As of December 31, 2007, we have recognized asset retirement
obligations relating to these requirements at existing sites within the CO2 – KMP
segment in the aggregate amount of $49.2 million.
In
the Natural Gas Pipelines – KMP business segment, if we were to cease providing
utility services, we would be required to remove surface facilities from land
belonging to our customers and others. The Texas intrastate natural gas pipeline
group has various condensate drip tanks and separators located throughout its
natural gas pipeline systems, as well as one inactive gas processing plant,
various laterals and gathering systems which are no longer integral to the
overall mainline transmission systems, and asbestos-coated underground pipe
which is being abandoned and retired. The Kinder Morgan Interstate Gas
Transmission system has compressor stations which are no longer active and other
miscellaneous facilities, all of which have been officially abandoned. We
believe we can reasonably estimate both the time and costs associated with the
retirement of these facilities. As of December 31, 2007, we have recognized
asset retirement obligations relating to the businesses within the Natural Gas
Pipelines – KMP segment in the aggregate amount of $3.0 million.
Subsequent
to the January 2008 sale of the Colorado power generation assets (see Note 19),
the remaining facilities utilized in our power generation activities consist of
the Jackson, Michigan power plant (which we do not own but we operate and
maintain a preferred interest in) and a gas-fired power facility in Snyder,
Texas (which we own and operate and which is located on land that we also own)
that provides electricity to Kinder Morgan Energy Partners’ SACROC operations.
With respect to the Jackson, Michigan power plant, we have no obligation for any
asset retirement obligation that may exist or arise. With respect to the Snyder,
Texas power plant, we have no asset retirement obligation with respect to those
facilities. Thus, our power generation activities do not give rise to any asset
retirement obligations.
(O)
Gas Imbalances and Gas Purchase Contracts
We
value gas imbalances due to or due from interconnecting pipelines at the lower
of cost or market. 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 settled in cash or made
up in-kind subject to the pipelines’ various terms.
117
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(P)
Interest Expense
Total
interest expense as presented in the accompanying Consolidated Statements of
Operations is comprised of the following.
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Interest
Expense
|
$
|
609.7
|
$
|
264.1
|
$
|
582.3
|
$
|
148.7
|
||||||||
|
Capitalized
Interest1
|
(25.5
|
)
|
(12.2
|
)
|
(23.3
|
)
|
(1.2
|
)
|
||||||||
|
Interest
Expense, Net
|
584.2
|
251.9
|
559.0
|
147.5
|
||||||||||||
|
Interest
Expense – Preferred Interest in General Partner of KMP
|
3.6
|
-
|
-
|
-
|
||||||||||||
|
Interest
Expense – Deferrable Interest Debentures
|
12.8
|
9.1
|
21.9
|
21.9
|
||||||||||||
|
Total
Interest Expense
|
$
|
600.6
|
$
|
261.0
|
$
|
580.9
|
$
|
169.4
|
||||||||
__________
|
1
|
Includes
the debt component of the allowance for funds used during construction for
our regulated utility operations, which are accounted for in accordance
with the provisions of SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation.
|
“Interest
Expense-Net” as presented in the in the accompanying Consolidated Statements of
Operations includes approximately $194.4 million of interest expense for the
seven months ended December 31, 2007 related to the increased debt incurred in
the Going Private transaction (See Note 1(B)). Included in “Interest
Expense-Net” in 2006 is $332.0 million relating to the inclusion of the results
of operations of Kinder Morgan Energy Partners in our consolidated results as
required by EITF No. 04-5 which, as discussed in Note 1(B), became effective and
was implemented on January 1, 2006 and $67.8 million relating to eleven months
of additional net interest expense associated with the acquisition of Terasen,
which was effective November 30, 2005 (see Note 4).
(Q)
Other, Net
“Other,
Net” as presented in the accompanying Consolidated Statements of Operations
includes a $14.5 million and a $3.3 million unrealized gain on exchange rate
fluctuations for the seven months ended December 31, 2007 and the five months
ended May 31, 2007, respectively, and $4.2 million and $9.3 million of interest
income for the seven months ended December 31, 2007 and the five months ended
May 31, 2007, respectively. Included in “Other, Net” in 2006 is a $22.5 million
net loss on currency transactions. This 2006 net loss on currency transactions
was partially offset by $6.2 million of interest income and $8.0 million in net
gains on contract settlements. Included in “Other, Net” in 2005 is a $78.5
million gain on sales of Kinder Morgan Management shares that we owned, which
transactions are discussed in Note 5, and a $15.0 million charge for our
charitable contribution to the Kinder Morgan Foundation.
(R)
Cash Flow Information
We
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. “Other, Net,” presented as a
component of “Net Cash Flows From Operating Activities” in the accompanying
Consolidated Statements of Cash Flows includes, among other things, non-cash
charges and credits to income including amortization of deferred revenue and
amortization of gains and losses realized on the termination of interest rate
swap agreements; see Note 11.
118
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
ADDITIONAL
CASH FLOW INFORMATION
Changes
in Working Capital Items
(Net
of Effects of Acquisitions and Sales)
Increase
(Decrease) in Cash and Cash Equivalents
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Accounts
Receivable
|
$
|
(64.3
|
)
|
$
|
(31.9
|
)
|
$
|
192.5
|
$
|
(15.1
|
)
|
|||||
|
Materials
and Supplies Inventory
|
(8.1
|
)
|
(1.7
|
)
|
(0.5
|
)
|
(0.1
|
)
|
||||||||
|
Other
Current Assets
|
(65.2
|
)
|
0.5
|
103.2
|
(52.0
|
)
|
||||||||||
|
Accounts
Payable
|
68.7
|
26.3
|
(243.4
|
)
|
6.6
|
|||||||||||
|
Income
Tax Benefits from Employee Benefit Plans
|
-
|
-
|
-
|
22.0
|
||||||||||||
|
Other
Current Liabilities
|
172.9
|
(196.1
|
)
|
28.2
|
25.2
|
|||||||||||
|
$
|
104.0
|
|
$
|
(202.9
|
)
|
$
|
80.0
|
$
|
(13.4
|
)
|
||||||
Supplemental
Disclosures of Cash Flow Information
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Cash
Paid for:
|
||||||||||||||||
|
Interest
(Net of Amount Capitalized)
|
$
|
586.5
|
$
|
381.8
|
$
|
731.6
|
$
|
184.0
|
||||||||
|
Income
Taxes Paid (Net of Refunds)1
|
$
|
146.4
|
$
|
133.3
|
$
|
314.9
|
$
|
204.0
|
||||||||
__________
|
1
|
Income
taxes paid includes taxes paid related to prior
periods.
|
As
discussed in Note 1(B), due to our adoption of EITF No. 04-5, beginning January
1, 2006, the accounts, balances and results of operations of Kinder Morgan
Energy Partners are included in our consolidated financial statements and we no
longer apply the equity method of accounting to our investment in Kinder Morgan
Energy Partners. Therefore, we have included Kinder Morgan Energy Partners’ cash
and cash equivalents at December 31, 2005 of $12.1 million as an “Effect of
Accounting Change on Cash” in the accompanying Consolidated Statement of Cash
Flows.
During
the seven months ended December 31, 2007, the five months ended May 31, 2007 and
the year ended December 31, 2006, we acquired $1.2 million, $18.5 million and
$6.1 million, respectively, of assets by the assumption of
liabilities.
Non-cash
investing activities during the seven months ended December 31, 2007, the five
months ended May 31, 2007 and the year ended December 31, 2006 include the
accrual for construction costs of $83.0 million, $4.9 million and $70.5 million,
respectively..
In
December 2006, Kinder Morgan Energy Partners contributed 34,627 common units,
representing approximately $1.7 million of value, as partial consideration for
the acquisition of Devco USA L.L.C.
In
March 2006, Kinder Morgan Energy Partners made a $17.0 million contribution of
net assets to its investment in Coyote Gulch.
On
November 30, 2005, we contributed 12.5 million shares of our common stock,
representing approximately $1.1 billion of value, as partial consideration for
the acquisition of Terasen Inc. The fair values of non-cash assets acquired and
liabilities assumed were $7.4 billion and $4.2 billion, respectively. See Note
4.
Distributions
received by our Kinder Morgan Management, LLC subsidiary from its investment in
i-units of Kinder Morgan Energy Partners are in the form of additional i-units,
while distributions made by Kinder Morgan Management, LLC to its shareholders
are in the form of additional Kinder Morgan Management, LLC shares, see Note
3.
119
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
As
discussed in Note 13 following, during the years ended December 31, 2006 and
2005, we made non-cash grants of restricted shares of common stock.
(S)
Transactions with Related Parties
Due
to our implementation of EITF No. 04-5, we have included Kinder Morgan Energy
Partners and its consolidated subsidiaries as consolidated subsidiaries in our
consolidated financial statements effective January 1, 2006.
Knight
Holdco LLC
In
accordance with SFAS No. 123R, our parent, Knight Holdco LLC is required to
recognize compensation expense in connection with its Class A-1 and Class B
units over the expected life of such units. As a subsidiary of Knight Holdco
LLC, we and certain of our subsidiaries are allocated this compensation expense,
which totaled $4.4 million for the seven months ended December 31, 2007,
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 $89.7 million and
$93.1 million as of December 31, 2007 and December 31, 2006, respectively. Of
these amounts, $2.4 million and $3.4 million are included within “Accounts,
Notes and Interest Receivable, Net: Related Parties” on our consolidated balance
sheets as of December 31, 2007 and December 31, 2006, respectively, and the
remainder is included within “Notes Receivable─Related Parties” at each
reporting date.
Coyote
Gas Treating, LLC
Coyote
Gas Treating, LLC is a joint venture that was organized in December 1996. It is
referred to as Coyote Gulch in this report. The sole asset owned by Coyote Gulch
is a 250 million cubic feet per day natural gas treating facility located in La
Plata County, Colorado. Prior to the contribution of Kinder Morgan Energy
Partners’ ownership interest in Coyote Gulch to Red Cedar Gathering on September
1, 2006, discussed below, Kinder Morgan Energy Partners was the managing partner
and owned a 50% equity interest in Coyote Gulch.
As
of January 1, 2006, Kinder Morgan Energy Partners had a $17.0 million note
receivable from Coyote Gulch. The term of the note was month-to-month. In March
2006, the owners of Coyote Gulch agreed to transfer Coyote Gulch’s notes payable
to members’ equity. Accordingly, Kinder Morgan Energy Partners contributed the
principal amount of $17.0 million related to its note receivable to its equity
investment in Coyote Gulch.
On
September 1, 2006, Kinder Morgan Energy Partners and the Southern Ute Tribe
(owners of the remaining 50% interest in Coyote Gulch) agreed to transfer all of
the members’ equity in Coyote Gulch to the members’ equity of Red Cedar
Gathering Company, a joint venture organized in August 1994. Red Cedar owns and
operates natural gas gathering, compression and treating facilities in the
Ignacio Blanco Field in La Plata County, Colorado, and is owned 49% by Kinder
Morgan Energy Partners and 51% by the Southern Ute Tribe. Under the terms of a
five-year operating lease agreement that became effective January 1, 2002, Red
Cedar also operates the gas treating facility owned by Coyote Gulch and is
responsible for all operating and maintenance expenses and capital
costs.
Accordingly,
on September 1, 2006, Kinder Morgan Energy Partners and the Southern Ute Tribe
contributed the value of their respective 50% ownership interests in Coyote
Gulch to Red Cedar, and as a result, Coyote Gulch became a wholly owned
subsidiary of Red Cedar. The value of Kinder Morgan Energy Partners’ 50% equity
contribution from Coyote Gulch to Red Cedar on September 1, 2006 was $16.7
million, and this amount remains included within “Investments: Other” in our
accompanying Consolidated Balance Sheet as of December 31, 2007.
The
“Accounts Receivable, Net—Related Parties” balances shown in the accompanying
Consolidated Balance Sheets primarily represent balances with Plantation
Pipeline Company at December 31, 2007 and 2006.
120
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Related-party
operating revenues are included in the accompanying Consolidated Statements of
Operations as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Natural
Gas Transportation and Storage
|
$
|
6.7
|
$
|
4.5
|
$
|
6.1
|
$
|
4.4
|
||||||||
|
Natural
Gas
Sales
|
-
|
-
|
-
|
9.4
|
||||||||||||
|
Other
Revenues
|
-
|
-
|
-
|
1.6
|
||||||||||||
|
Total
Related-party Operating Revenues
|
$
|
6.7
|
$
|
4.5
|
$
|
6.1
|
$
|
15.4
|
||||||||
During
2007 and 2006, related-party operating revenues were primarily attributable to
Horizon Pipeline Company and Plantation Pipeline Company. During 2005, when we
accounted for Kinder Morgan Energy Partners under the equity method,
related-party revenues were primarily attributable to Horizon Pipeline Company
and entities owned by Kinder Morgan Energy Partners.
The
caption “Purchases and Other Costs of Sales” in the accompanying Consolidated
Statements of Operations includes related-party costs totaling $0.8
million, $0.3 million, $1.5 million and $25.3 million for the seven months ended
December 31, 2007, the five months ended May 31, 2007 and the years ended
December 31, 2006 and 2005, respectively. Related-party costs during 2005, when
we accounted for Kinder Morgan Energy Partners under the equity method,
primarily related to natural gas transportation and storage services and natural
gas provided by entities owned by Kinder Morgan Energy Partners.
(T)
Accounting for Risk Management Activities
We
utilize energy derivatives for the purpose of mitigating our risk resulting from
fluctuations in the market price of natural gas, natural gas liquids, crude oil
and associated transportation. We also utilize interest rate swap agreements to
mitigate our exposure to changes in the fair value of our fixed rate debt
agreements and cross-currency interest rate swap agreements to mitigate foreign
currency risk from our investments in businesses owned and operated outside the
United States. Our accounting policy for these activities is in accordance with
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and related pronouncements.
This policy is described in detail in Note 11.
(U)
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 9 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.
(V)
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 matters, see Note 17.
121
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(W)
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. In general, we expense legal costs as incurred and all
recorded legal liabilities are revised as better information becomes available.
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. For more information on our legal disclosures, see Note
17.
(X)
Accounting for Minority Interests
Due
to our implementation of EITF No. 04-5, we have included Kinder Morgan Energy
Partners and its consolidated subsidiaries as consolidated subsidiaries in our
consolidated financial statements effective January 1, 2006.
The
caption “Minority Interests in Equity of Subsidiaries” in our Consolidated
Balance Sheets is comprised of the following balances:
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Kinder
Morgan Energy Partners
|
$
|
1,616.0
|
$
|
1,727.7
|
||||
|
Kinder
Morgan Management, LLC
|
1,657.7
|
1,328.4
|
||||||
|
Triton
Power
|
29.2
|
25.9
|
||||||
|
Other
|
11.1
|
13.5
|
||||||
|
$
|
3,314.0
|
$
|
3,095.5
|
|||||
During
the seven months ended December 31, 2007 and the five months ended May 31, 2007,
Kinder Morgan Energy Partners paid distributions of $1.73 and $1.66 per common
unit, respectively, of which $257.3 million and $246.6 million, respectively,
was paid to the public holders (represented in minority interests) of Kinder
Morgan Energy Partners’ common units. On January 16, 2008, Kinder Morgan Energy
Partners declared a quarterly distribution of $0.92 per common unit for the
quarterly period ended December 31, 2007. The distribution was paid on February
14, 2008, to unitholders of record as of January 31, 2008.
(Y)
Foreign Currency Translation
We
translate our Canadian dollar denominated financial statements into United
States dollars using the current rate method of foreign currency translation.
Under this method, assets and liabilities are translated at the rate of exchange
in effect at the balance sheet date, revenue and expense items are translated at
average rates of exchange for the period, and the exchange gains and losses
arising on the translation of the financial statements are reflected as a
separate component of Accumulated Other Comprehensive Income in the accompanying
Consolidated Balance Sheet.
Foreign
currency transaction gains or losses, other than hedges of net investments in
foreign companies, are included in results of operations. In 2006, we recorded
net pre-tax losses of $22.5 million from foreign currency transactions and
swaps. See Note 11 for information regarding our hedges of net investments in
foreign companies.
2.
Investment in Kinder Morgan Energy Partners, L.P.
At
December 31, 2007, we owned, directly, and indirectly in the form of i-units
corresponding to the number of shares of Kinder Morgan Management we owned,
approximately 30.0 million limited partner units of Kinder Morgan Energy
Partners. These units, which consist of 14.4 million common units, 5.3 million
Class B units and 10.3 million i-units, represent approximately 12.1% of the
total limited partner interests of Kinder Morgan Energy Partners. See Note 3 for
additional information regarding Kinder Morgan Management, LLC and Kinder Morgan
Energy Partners’ i-units. In addition, we are the sole common stockholder of the
general partner of Kinder Morgan Energy Partners, which holds an effective 2%
combined interest in Kinder Morgan Energy Partners and its operating
partnerships. Together, our limited partner and general partner interests
represented approximately 13.9% of Kinder Morgan Energy Partners’ total equity
interests at December 31, 2007. 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.
122
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
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.
Following
is summarized financial information for Kinder Morgan Energy Partners for 2005,
when we accounted for Kinder Morgan Energy Partners under the equity method. As
discussed in Note 1(B), due to our adoption of EITF No. 04-5, beginning
January 1, 2006, the accounts, balances and results of operations of Kinder
Morgan Energy Partners are included in our consolidated financial statements and
we no longer apply the equity method of accounting to our investment in Kinder
Morgan Energy Partners. Additional information regarding Kinder Morgan Energy
Partners’ results of operations and financial position are contained in its 2007
Annual Report on Form 10-K.
Summarized
Income
Statement
Information
|
Year
Ended
December
31, 2005
|
||||
|
(In
millions)
|
||||
|
Operating
Revenues
|
$
|
9,787.1
|
||
|
Operating
Expenses
|
8,773.6
|
|||
|
Operating
Income
|
$
|
1,013.5
|
||
|
|
||||
|
Net
Income
|
$
|
812.2
|
||
3. Kinder
Morgan Management, LLC
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’s shares (other than the voting shares we hold)
are traded on the New York Stock Exchange under the ticker symbol “KMR”. Kinder
Morgan Management, pursuant to a delegation of control agreement, has been
delegated, to the fullest extent permitted under Delaware law, all of Kinder
Morgan G.P., Inc.’s power and authority to manage and control the business and
affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder Morgan G.P.,
Inc.’s right to approve certain transactions.
On
November 14, 2007, Kinder Morgan Management made a distribution of 0.017686 of
its shares per outstanding share (1,258,778 total shares) to shareholders of
record as of October 31, 2007, based on the $0.88 per common unit distribution
declared by Kinder Morgan Energy Partners. On February 14, 2008, Kinder Morgan
Management made a distribution of 0.017312 of its shares per outstanding share
(1,253,951 total shares) to shareholders of record as of January 31, 2008, based
on the $0.92 per common unit distribution declared by Kinder Morgan Energy
Partners. These 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 market price 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 4,430,806, 4,383,303 and
3,760,732 shares in the years ended December 31, 2007, 2006 and 2005,
respectively.
On
May 15, 2007, Kinder Morgan Management issued 5.7 million listed shares in a
public offering at a price of $52.26 per share. Kinder Morgan Management used
the net proceeds of $297.9 million from the sale to purchase 5.7 million i-units
from Kinder Morgan Energy Partners.
At
December 31, 2007, we owned 10.3 million Kinder Morgan Management shares
representing 14.3% of Kinder Morgan Management’s outstanding
shares.
4. Business
Combinations
The
following acquisitions were accounted for as business combinations and the
assets acquired and liabilities assumed were recorded at their estimated fair
market values as of the acquisition date. The preliminary allocation of purchase
price to assets acquired (and any liabilities assumed) may be adjusted to
reflect the final determined amounts during a period of time following the
acquisition. Although the time that is required to identify and measure the fair
value of the assets acquired and the liabilities assumed in a business
combination will vary with circumstances, generally our allocation period ends
when we no longer are waiting for information that is known to be available or
obtainable. The results of operations from these acquisitions are included in
our consolidated financial statements from the acquisition date.
123
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Terasen
On
November 30, 2005, we completed the acquisition of Terasen and, accordingly,
Terasen’s results of operations are included in our consolidated results of
operations beginning on that date. Terasen is an energy transportation and
utility services provider headquartered in Burnaby, British Columbia, Canada.
Terasen’s two core businesses are its natural gas distribution business and its
petroleum pipeline business. Terasen Gas is the largest distributor of natural
gas in British Columbia, serving approximately 905,000 customers at December 31,
2006. Terasen Pipelines, which we have renamed Kinder Morgan Canada, owned and
operated Trans Mountain Pipe Line prior to its transfer to Kinder Morgan Energy
Partners (see Note 1(I)), which extends from Edmonton to Vancouver and
Washington State. Terasen Pipelines (Corridor) Inc., which extends from the
Alberta oilsands to Edmonton, is owned by Terasen. Kinder Morgan Canada also
operates, and Terasen owns a one-third interest in, the Express System, which
extends from Alberta to the U.S. Rocky Mountain region and Midwest. In 2007, we
sold significant portions of Terasen (see Note 7).
Pursuant
to the Combination Agreement among us, one of our wholly owned subsidiaries, and
Terasen, Terasen shareholders were able to elect, for each Terasen share held,
either (i) C$35.75 in cash, (ii) 0.3331 shares of Kinder Morgan common stock, or
(iii) C$23.25 in cash plus 0.1165 shares of Kinder Morgan common stock. In the
aggregate, we issued approximately 12.48 million shares of Kinder Morgan common
stock and paid approximately C$2.49 billion (US$2.13 billion) in cash to Terasen
securityholders.
The
acquisition was accounted for as a purchase and, accordingly, the assets
acquired and liabilities assumed were recorded at their respective estimated
fair market values as of the acquisition date. The calculation of the total
purchase price and the allocation of that purchase price to the assets acquired
and liabilities assumed based on their estimated fair market values is shown
following.
|
The Total Purchase
Price Consisted of the Following:
|
(In
millions)
|
||
|
Total
Market Value of Kinder Morgan, Inc. Common Shares Issued
|
$
|
1,146.8
|
|
|
Cash
Paid – U.S. Dollar Equivalent
|
2,134.3
|
||
|
Transaction
Fees
|
15.7
|
||
|
Total
Purchase Price
|
$
|
3,296.8
|
|
|
The Allocation of the
Purchase Price was as Follows:
|
(In
millions)
|
||
|
Current
Assets
|
$
|
812.7
|
|
|
Goodwill
|
1,990.4
|
||
|
Investments
|
504.8
|
||
|
Property,
Plant and Equipment
|
3,592.7
|
||
|
Deferred
Charges and Other Assets
|
602.4
|
||
|
Current
Liabilities
|
(1,517.8
|
)
|
|
|
Deferred
Income
Taxes
|
(667.2
|
)
|
|
|
Other
Deferred
Credits
|
(264.5
|
)
|
|
|
Long-term
Debt
|
(1,756.7
|
)
|
|
|
$
|
3,296.8
|
||
The
final allocation of the purchase price resulted in the recording of $1.99
billion of total goodwill, which we do not expect to be deductible for income
tax purposes. During 2006, the allocation to goodwill increased by approximately
$100 million, primarily related to revisions in the estimated fair value of
regulated assets. There were a number of factors contributing to the total
purchase price that resulted in our recognition of goodwill from this
transaction, including: a stable portfolio of natural gas distribution assets;
potential future deregulation or unbundling of natural gas distribution
services; expected increases in Canadian oilsands production and worldwide oil
demand and the potential for expansion projects with attractive overall returns
combined with our ability to capitalize on those projects due to our expertise
in developing and operating energy-related assets. The allocation of goodwill to
reporting segments was as follows:
|
Allocation of
Goodwill:
|
(In
millions)
|
|
|
Terasen
Gas
|
$
|
1,334.3
|
|
Kinder
Morgan Canada
|
656.1
|
|
|
$
|
1,990.4
|
|
In
consideration of the Terasen Inc. sales agreement entered into in February 2007,
which was closed on May 17, 2007 (see Note 7), and the transfer of Trans
Mountain pipeline system to Kinder Morgan Energy Partners on April 30, 2007 (see
Note 5), significant portions of this goodwill were considered impaired and
charges were recorded in 2006 and 2007, respectively (see Note 6).
124
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Entrega Gas Pipeline
LLC
Effective
February 23, 2006, Rockies Express Pipeline LLC acquired Entrega Gas Pipeline
LLC from EnCana Corporation for $244.6 million in cash. West2East Pipeline LLC
is a limited liability company and is the sole owner of Rockies Express Pipeline
LLC. Kinder Morgan Energy Partners contributed 66 2/3% of the consideration for
this purchase, which corresponded to its percentage ownership of West2East
Pipeline LLC at that time. At the time of acquisition, Sempra Energy held the
remaining 33 1/3% ownership interest and contributed this same proportional
amount of the total consideration.
With
regard to Rockies Express Pipeline LLC’s acquisition of Entrega Gas Pipeline
LLC, the allocation of the purchase price to assets acquired and liabilities
assumed was as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
244.6
|
|
Liabilities
Assumed
|
-
|
|
|
Total
Purchase Price
|
$
|
244.6
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
-
|
|
Property,
Plant and Equipment
|
244.6
|
|
|
Deferred
Charges and Other Assets
|
-
|
|
|
$
|
244.6
|
On
the acquisition date, Entrega Gas Pipeline LLC owned the Entrega Pipeline, an
interstate natural gas pipeline that will, when fully constructed, consist of
two segments: (i) a 136-mile, 36-inch diameter pipeline that extends from the
Meeker Hub in Rio Blanco County, Colorado to the Wamsutter Hub in Sweetwater
County, Wyoming and (ii) a 191-mile, 42-inch diameter pipeline that extends from
the Wamsutter Hub to the Cheyenne Hub in Weld County, Colorado. In the first
quarter of 2006, EnCana Corporation completed construction of the pipeline
segment that extends from the Meeker Hub to the Wamsutter Hub, and interim
service began on that portion of the pipeline on February 24, 2006. Under the
terms of the purchase and sale agreement, Rockies Express Pipeline LLC
constructed the segment that extends from the Wamsutter Hub to the Cheyenne Hub.
Construction on this pipeline segment began in the second quarter of 2006, and
both pipeline segments were placed into service on February 14,
2007.
In
April 2006, Rockies Express Pipeline LLC merged with and into Entrega Gas
Pipeline LLC, and the surviving entity was renamed Rockies Express Pipeline LLC.
Going forward, the entire pipeline system (including the lines currently being
developed by Rockies Express Pipeline LLC) will be known as the Rockies Express
Pipeline. The combined 1,679-mile pipeline system will be one of the largest
natural gas pipelines ever constructed in North America. The approximately $4.9
billion project will have the capability to transport 1.8 billion cubic feet per
day of natural gas, and binding firm commitments have been secured for virtually
all of the pipeline capacity.
On
June 30, 2006, ConocoPhillips exercised its option to acquire a 25% ownership
interest in West2East Pipeline LLC. On that date, a 24% ownership interest was
transferred to ConocoPhillips, and an additional 1% interest will be transferred
once construction of the entire project is completed. Through Kinder Morgan
Energy Partners’ subsidiary Kinder Morgan W2E Pipeline LLC, Kinder Morgan Energy
Partners will continue to operate the project but its ownership interest
decreased to 51% of the equity in the project (down from 66 2/3%). Sempra’s
ownership interest in West2East Pipeline LLC decreased to 25% (down from 33
1/3%). When construction of the entire project is completed, Kinder Morgan
Energy Partners’ ownership interest will be reduced to 50% at which time the
capital accounts of West2East Pipeline LLC will be trued up to reflect our 50%
economics in the project. We do not anticipate any additional changes in the
ownership structure of the Rockies Express Pipeline project.
West2East
Pipeline LLC qualifies as a variable interest entity as defined by Financial
Accounting Standards Board Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities-An Interpretation of ARB No. 51 (“FIN 46R”), due to the fact
that the total equity at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support provided by any
parties, including equity holders. Furthermore, following ConocoPhillips’
acquisition of its ownership interest in West2East Pipeline LLC on June 30,
2006, Kinder Morgan Energy Partners receives 50% of the economics of the Rockies
Express project on an ongoing basis, and thus, effective June 30, 2006, Kinder
Morgan Energy Partners was no longer considered the primary beneficiary of this
entity as defined by FIN 46R. Accordingly, on that date, we made the change in
accounting for the investment in West2East Pipeline LLC from full consolidation
to the equity method following the decrease in Kinder Morgan Energy Partners’
ownership percentage.
Under
the equity method, the costs of the investment in West2East Pipeline LLC are
recorded within the “Investments: Other” caption on our consolidated balance
sheet and as changes in the net assets of West2East Pipeline LLC occur (for
example, earnings and dividends), we recognize our proportional share of that
change in the “Investments” account. We also record our
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Knight
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|
proportional
share of any accumulated other comprehensive income or loss within the
“Accumulated Other Comprehensive Loss” caption on our Consolidated Balance
Sheet.
In
addition, Kinder Morgan Energy Partners has guaranteed its proportionate share
of West2East Pipeline LLC’s debt entered into by Rockies Express Pipeline LLC.
See Note 14 for additional information regarding Rockies Express Pipeline LLC’s
debt.
April 2006 Oil and Gas
Properties
On
April 5, 2006, Kinder Morgan Production Company L.P. purchased various oil and
gas properties from Journey Acquisition – I, L.P. and Journey 2000, L.P. for an
aggregate consideration of approximately $63.6 million, consisting of $60.0
million in cash and $3.6 million in assumed liabilities. The acquisition was
effective March 1, 2006. However, Kinder Morgan Energy Partners divested certain
acquired properties that are not considered candidates for carbon dioxide
enhanced oil recovery, thus reducing the total investment. Kinder Morgan Energy
Partners received proceeds of approximately $27.1 million from the sale of these
properties.
The
properties are primarily located in the Permian Basin area of West Texas,
produce approximately 400 barrels of oil equivalent per day, and include some
fields with potential for enhanced oil recovery development near Kinder Morgan
Energy Partners’ current carbon dioxide operations. The acquired operations are
included as part of the CO2 – KMP business segment.
The
allocation of the purchase price to assets acquired and liabilities assumed was
as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
60.0
|
|
Liabilities
Assumed
|
3.6
|
|
|
Total
Purchase Price
|
$
|
63.6
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
0.1
|
|
Property,
Plant and Equipment
|
63.5
|
|
|
$
|
63.6
|
April 2006 Terminal
Assets
In
April 2006, Kinder Morgan Energy Partners acquired terminal assets and
operations from A&L Trucking, L.P. and U.S. Development Group in three
separate transactions for an aggregate consideration of approximately $61.9
million, consisting of $61.6 million in cash and $0.3 million in assumed
liabilities.
The
first transaction included the acquisition of equipment and infrastructure on
the Houston Ship Channel that loads and stores steel products. The acquired
assets complement Kinder Morgan Energy Partners’ nearby bulk terminal facility
purchased from General Stevedores, L.P. in July 2005. The second acquisition
included the purchase of a rail terminal at the Port of Houston that handles
both bulk and liquids products. The rail terminal complements Kinder Morgan
Energy Partners’ existing Texas petroleum coke terminal operations and maximizes
the value of its existing deepwater terminal by providing customers with both
rail and vessel transportation options for bulk products. Thirdly, Kinder Morgan
Energy Partners acquired the entire membership interest of Lomita Rail Terminal
LLC, a limited liability company that owns a high-volume rail ethanol terminal
in Carson, California. The terminal serves approximately 80% of the Southern
California demand for reformulated fuel blend ethanol with expandable
offloading/distribution capacity, and the acquisition expanded Kinder Morgan
Energy Partners’ existing rail transloading operations. All of the acquired
assets are included in the Terminals – KMP business segment.
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The
allocation of the purchase price to assets acquired and liabilities assumed was
as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
61.6
|
|
Liabilities
Assumed
|
0.3
|
|
|
Total
Purchase Price
|
$
|
61.9
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
0.5
|
|
Property,
Plant and Equipment
|
43.6
|
|
|
Goodwill
|
17.8
|
|
|
$
|
61.9
|
A
total of $17.8 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 these acquisitions resulted in the
recognition of goodwill due to the fact that the purchase price allocations
agreed upon by Kinder Morgan Energy Partners and the sellers reflected purchase
costs exceeding the fair values of the acquired identifiable net assets and
liabilities.
November 2006 Transload
Services, LLC
Effective
November 20, 2006, Kinder Morgan Energy Partners acquired all of the membership
interests of Transload Services, LLC from Lanigan Holdings, LLC for an aggregate
consideration of approximately $16.6 million, consisting of $15.8 million in
cash and $0.8 million of assumed liabilities. Transload Services, LLC is a
leading provider of innovative, high quality material handling and steel
processing services, operating 14 steel-related terminal facilities located in
the Chicago metropolitan area and various cities in the United States. Its
operations include transloading services, steel fabricating and processing,
warehousing and distribution, and project staging. Specializing in steel
processing and handling, Transload Services can inventory product, schedule
shipments and provide customers cost-effective modes of transportation. The
combined operations include over 92 acres of outside storage and 445,000 square
feet of covered storage that offers customers environmentally controlled
warehouses with indoor rail and truck loading facilities for handling
temperature and humidity sensitive products. The acquired assets are included in
the Terminals – KMP business segment, and the acquisition further expanded and
diversified Kinder Morgan Energy Partners’ existing terminals’ materials
services (rail transloading) operations.
The
allocation of the purchase price to assets acquired and liabilities assumed was
as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
15.8
|
|
Liabilities
Assumed
|
0.8
|
|
|
Total
Purchase Price
|
$
|
16.6
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
1.6
|
|
Property,
Plant and Equipment
|
6.6
|
|
|
Goodwill
|
8.4
|
|
|
$
|
16.6
|
A
total of $8.4 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 due to the fact that it establishes a business
presence in several key markets, taking advantage of the non-residential and
highway construction demand for steel that contributed to our acquisition price
exceeding the fair value of acquired identifiable net assets and liabilities -
in the aggregate, these factors represented goodwill.
December 2006 Devco USA
L.L.C.
Effective
December 1, 2006, Kinder Morgan Energy Partners acquired all of the membership
interests in Devco USA L.L.C., an Oklahoma limited liability company, for an
aggregate consideration of approximately $7.3 million, consisting of $4.8
million in cash, $1.6 million in common units, and $0.9 million of assumed
liabilities. The primary asset acquired was a technology based identifiable
intangible asset, a proprietary process that transforms molten sulfur into
premium solid formed pellets that are environmentally friendly, easy to handle
and store, and safe to transport. The process was developed internally by
Devco’s engineers and employees. Devco, a Tulsa, Oklahoma based company, has
more than 20 years of sulfur handling expertise and Kinder Morgan Energy
Partners believes the acquisition and subsequent application of this acquired
technology
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|
complements
its existing dry-bulk terminal operations. Kinder Morgan Energy Partners
allocated $6.5 million of the total purchase price to the value of this
intangible asset, which is included as part of the Terminals – KMP business
segment.
The
allocation of the purchase price to assets acquired and liabilities assumed was
as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
4.8
|
|
Issuance
of Common Units
|
1.6
|
|
|
Liabilities
Assumed
|
0.9
|
|
|
Total
Purchase Price
|
$
|
7.3
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
0.8
|
|
Deferred
Charges and Other Assets
|
6.5
|
|
|
$
|
7.3
|
December 2006 Roanoke,
Virginia Products Terminal
Effective
December 15, 2006, Kinder Morgan Energy Partners acquired a refined petroleum
products terminal located in Roanoke, Virginia from Motiva Enterprises, LLC for
approximately $6.4 million in cash. The terminal has storage capacity of
approximately 180,000 barrels per day for refined petroleum products like
gasoline and diesel fuel. The terminal is served exclusively by the Plantation
Pipeline and Motiva has entered into a long-term contract to use the terminal.
The acquisition complemented the other refined products terminals Kinder Morgan
Energy Partners owns in the southeastern region of the United States, and the
acquired terminal is included as part of the Products Pipelines – KMP business
segment.
The
allocation of the purchase price to assets acquired and liabilities assumed was
as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
6.4
|
|
Liabilities
Assumed
|
-
|
|
|
Total
Purchase Price
|
$
|
6.4
|
|
Allocation
of Purchase Price:
|
||
|
Property,
Plant and Equipment
|
$
|
6.4
|
|
$
|
6.4
|
January 2007 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 12-inch diameter pipe operating between Fort Saskatchewan,
Alberta, and Windsor, Ontario, Canada. The entire Cochin pipeline system
traverses three provinces in Canada and seven states in the United States,
serving the Midwestern United States and eastern Canadian petrochemical and fuel
markets. Its operations are included as part of the Products Pipelines - KMP
business segment.
As
of December 31, 2007, our allocation of the purchase price was preliminary,
pending final determination of deferred income tax balances at the time of
acquisition. We expect these final purchase price adjustments to be
in the first quarter of 2008.
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The
preliminary allocation of the purchase price to assets acquired and liabilities
assumed was as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
5.5
|
|
Notes
Payable (Fair Value)
|
42.3
|
|
|
Total
Purchase Price
|
$
|
47.8
|
|
Allocation
of Purchase Price:
|
||
|
Property,
Plant and Equipment
|
$
|
47.8
|
|
$
|
47.8
|
May 2007 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 aggregate consideration of $57.2
million, consisting of $38.8 million in cash and $18.4 million in assumed
liabilities.
The
Vancouver Wharves facility is located on the north shore of the Port of
Vancouver’s main harbor and includes five deep-sea vessel berths situated on a
139-acre site. The terminal assets include significant rail infrastructure, dry
bulk and liquid storage and material handling systems, which allow the terminal
to handle over 3.5 million tons of cargo annually. Vancouver Wharves also has
access to three major rail carriers connecting to shippers in western and
central Canada and the U.S. Pacific Northwest. The acquisition both expanded and
complemented Kinder Morgan Energy Partners’ existing terminal operations and all
of the acquired assets are included in the Terminals – KMP business
segment.
The
preliminary allocation of the purchase price to assets acquired and liabilities
assumed was as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
38.8
|
|
Assumed
Liabilities
|
18.4
|
|
|
Total
Purchase Price
|
$
|
57.2
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
6.5
|
|
Property,
Plant and Equipment
|
50.7
|
|
|
$
|
57.2
|
September 2007 Marine
Terminals, Inc.
Effective
September 1, 2007, Kinder Morgan Energy Partners acquired certain bulk terminals
assets from Marine Terminals, Inc. for an aggregate consideration of
approximately $101.5 million, consisting of $100.3 million in cash and an
assumed liability of $1.2 million. The acquired assets and operations are
primarily involved in the handling and storage of steel and alloys, and also
provide stevedoring and harbor services, scrap handling, and scrap processing
services to customers in the steel and alloys industry. The operations consist
of two separate facilities located in Blytheville, Arkansas, and individual
terminal facilities located in Decatur, Alabama; Hertford, North Carolina, and
Berkley, South Carolina. Combined, the five facilities handled approximately
13.4 million tons of steel products in 2006. Under long-term contracts, the
acquired terminal facilities will continue to provide handling, processing,
harboring and warehousing services to Nucor Corporation, one of the nation’s
largest steel and steel products companies.
As
of December 31, 2007, we have preliminarily allocated $60.8 million of the
combined purchase price to “Property, Plant and Equipment, Net”. The $40.5
million allocated to deferred charges and other assets included $39.7 million of
intangible assets, representing the fair value of intangible customer
relationships which encompass both the contractual life of customer contracts
plus any future customer relationship value beyond the contract life. We expect
to make further purchase price adjustments to the acquired assets in the first
half of 2008 based on further analysis of fair values. The 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. All of the acquired
assets are included in the Terminals – KMP business segment.
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The
preliminary allocation of the purchase price to assets acquired and liabilities
assumed was as follows (in millions):
|
Purchase
Price:
|
||
|
Cash
Paid, Including Transaction Costs
|
$
|
100.3
|
|
Assumed
Liabilities
|
1.2
|
|
|
Total
Purchase Price
|
$
|
101.5
|
|
Allocation
of Purchase Price:
|
||
|
Current
Assets
|
$
|
0.2
|
|
Property,
Plant and Equipment
|
60.8
|
|
|
Deferred
Charges and Other
|
40.5
|
|
|
$
|
101.5
|
Pro Forma
Information
Pro
forma information regarding consolidated income statement information that
assumes all of the acquisitions we have made and joint ventures we have entered
into since January 1, 2006, including the ones listed above, had occurred as of
January 1, 2006, is not materially different from the information presented in
our accompanying Consolidated Statements of Operations.
5. Investments
and Sales
In
March 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units (see Note 19).
In
January 2008, we completed the sale of our interests in three natural gas-fired
power plants in Colorado (see Note 19).
During
2007, we completed the sales of (i) our U.S.-based retail natural gas
distribution and related operations, (ii) Terasen Inc., our Canada-based retail
natural gas distribution operations, which, in prior periods, we referred to as
the Terasen Gas business segment, and (iii) Terasen Pipelines (Corridor) Inc.
Additionally, in 2007 Kinder Morgan Energy Partners completed the sale of its
North System and its 50% ownership interest in the Heartland Pipeline Company.
Note 7 contains additional information regarding these discontinued
operations.
On
December 10, 2007, we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment to Myria for approximately $5.9
billion, subject to certain adjustments. Notes 1(M) and 19 contain additional
information regarding this transaction.
On
December 5, 2007, Kinder Morgan Energy Partners issued, in a public offering,
7,130,000 of its common units, including common units sold pursuant to the
underwriters’ over-allotment option, at a price of $48.09 per common unit, less
underwriting expenses, receiving total net proceeds of $342.9 million. This
transaction had the associated effects of increasing our minority interests
associated with Kinder Morgan Energy Partners by $330.1 million and reducing our
(i) goodwill by $33.8 million, (ii) associated accumulated deferred income taxes
by $7.6 million and (iii) paid-in capital by $13.4 million.
In
December 2007, we sold the remainder of our surplus power equipment for $3.0
million (net of marketing fees.) We did not recognize any gain or loss
associated with this sale.
On
May 15, 2007, Kinder Morgan Management issued 5.7 million listed shares in a
public offering at a price of $52.26 per share. Kinder Morgan Management used
the net proceeds of $297.9 million from the sale to purchase 5.7 million i-units
from Kinder Morgan Energy Partners. This transaction had the associated effects
of increasing our (i) minority interests associated with Kinder Morgan Energy
Partners by $22.7 million, (ii) associated accumulated deferred income taxes by
$1.9 million and (iii) paid-in capital by $3.4 million, and reducing our
goodwill by $17.4 million.
On
April 18, 2007, we announced that Kinder Morgan Energy Partners would acquire
the Trans Mountain pipeline system from us. Due to the inclusion of Kinder
Morgan Energy Partners and its subsidiaries in our consolidated financial
statements resulting from the implementation of EITF 04-5 (see Note 1(B)), we
accounted for this transaction as a transfer of net assets between entities
under common control as prescribed by SFAS No. 141, which is similar to the
pooling-of-interests method of accounting. Therefore, following Kinder Morgan
Energy Partners’ acquisition of Trans Mountain from us on April 30, 2007, Kinder
Morgan Energy Partners recognized the Trans Mountain assets and liabilities
acquired at our carrying amounts (historical cost) at the date of transfer. As
discussed in Note 6, based on an evaluation of the fair value of the Trans
Mountain pipeline system, an estimated goodwill impairment charge of
approximately $377.1 million was recorded in the first quarter of
2007.
During
2007, Kinder Morgan Energy Partners made incremental investments of $202.7
million for its share of construction costs of the Rockies Express Pipeline.
Kinder Morgan Energy Partners owns a 51% equity interest through
West2East
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|
Pipeline
LLC, a limited liability company that is the sole owner of Rockies Express
Pipeline LLC. (See note 1(K) for further information regarding this equity
investment.)
During
2007, Kinder Morgan Energy Partners made incremental investments of $61.6
million for its share of construction costs of the Midcontinent Express
Pipeline. Kinder Morgan Energy Partners owns a 50% equity interest in the
approximate $1.3 billion, 500-mile interstate natural gas pipeline that will
extend between Bennington, Oklahoma and Butler, Alabama.
In
December 2006, Kinder Morgan Energy Partners issued 34,627 common units as
partial consideration for the acquisition of Devco USA L.L.C. This transaction
had the associated effects of increasing our minority interests associated with
Kinder Morgan Energy Partners by $1.57 million and reducing our (i) goodwill by
$110,000, (ii) associated accumulated deferred income taxes by $11,411 and (iii)
paid-in capital by $18,589.
In
December 2006, we sold power generation equipment for $13.3 million (net of
marketing fees). We recognized a pre-tax gain of $1.2 million associated with
this sale. During the first quarter of 2006, we sold power generation equipment
for $7.5 million (net of marketing fees). We recognized a pre-tax gain of $1.5
million associated with this sale. This equipment was a portion of the equipment
that became surplus as a result of our decision to exit the power development
business.
In
August 2006, Kinder Morgan Energy Partners issued 5.75 million common units in a
public offering at a price of $44.80 per common unit, receiving total net
proceeds (after underwriting discount) of $248.0 million. This transaction had
the associated effects of increasing our minority interests associated with
Kinder Morgan Energy Partners by $236.8 million and reducing our (i) goodwill by
$18.8 million, (ii) associated accumulated deferred income taxes by $2.8 million
and (iii) paid-in capital by $4.7 million.
Effective
April 1, 2006, Kinder Morgan Energy Partners sold its Douglas natural gas
gathering system and its Painter Unit fractionation facility to Momentum Energy
Group, LLC for approximately $42.5 million in cash. Kinder Morgan Energy
Partners’ investment in the net assets sold in this transaction, including all
transaction related accruals, was approximately $24.5 million, most of which
represented property, plant and equipment, and Kinder Morgan Energy Partners
recognized approximately $18.0 million of gain on the sale of these net assets.
Kinder Morgan Energy Partners used the proceeds from these asset sales to reduce
the outstanding balance on its commercial paper borrowings.
Additionally,
upon the sale of Kinder Morgan Energy Partners’ Douglas gathering system, Kinder
Morgan Energy Partners reclassified a net loss of $2.9 million from “Accumulated
Other Comprehensive Loss” into net income on those derivative contracts that
effectively hedged uncertain future cash flows associated with forecasted
Douglas gathering transactions. We included the net amount of the gain, $15.1
million, within the caption “Operating Costs and Expenses: Other Expenses
(Income)” in our accompanying Consolidated Statement of Operations for the year
ended December 31, 2006.
The
Douglas gathering system is comprised of approximately 1,500 miles of 4-inch to
16-inch diameter pipe that gathers approximately 26 million cubic feet per day
of natural gas from approximately 650 active receipt points. Gathered volumes
are processed at Kinder Morgan Energy Partners’ Douglas plant (which Kinder
Morgan Energy Partners retained), located in Douglas, Wyoming. As part of the
transaction, Kinder Morgan Energy Partners executed a long-term processing
agreement with Momentum Energy Group, LLC, which dedicates volumes from the
Douglas gathering system to Kinder Morgan Energy Partners’ Douglas processing
plant. The Painter Unit, located near Evanston, Wyoming, consists of a natural
gas processing plant and fractionator, a nitrogen rejection unit, a natural gas
liquids terminal, and interconnecting pipelines with truck and rail loading
facilities. Prior to the sale, Kinder Morgan Energy Partners leased the plant to
BP, which operates the fractionator and the associated Millis terminal and
storage facilities for its own account.
On
December 27, 2005, we sold 1,670,000 Kinder Morgan Management shares that we
owned for approximately $74.2 million. We recognized a pre-tax gain of $22.2
million associated with this sale.
On
November 10, 2005, we sold 279,631 Kinder Morgan Management shares that we owned
for approximately $13.0 million. We recognized a pre-tax gain of $4.2 million
associated with this sale.
On
November 8, 2005, Kinder Morgan Energy Partners issued 2.6 million common units
in a public offering at a price of $51.75 per common unit, receiving total net
proceeds (after underwriting discount) of $130.1 million. We did not acquire any
of these common units. This transaction reduced our percentage ownership of
Kinder Morgan Energy Partners (at the time of the transactions) from
approximately 16.2% to approximately 16.0% and had the associated effects of
increasing our investment in the net assets of Kinder Morgan Energy Partners by
$6.7 million and reducing our (i) equity method goodwill in Kinder Morgan Energy
Partners by $9.0 million, (ii) associated accumulated deferred income taxes by
$0.9 million and (iii) paid-in capital by $1.4 million. In addition, in November
2005, in order to maintain our 1% general partner interest in Kinder Morgan
Energy Partners’ operating partnerships, we made a contribution of approximately
$1.3 million.
On
October 31, 2005, we sold 1,586,965 Kinder Morgan Management shares that we
owned for approximately $75.1 million. We recognized a pre-tax gain of $25.6
million associated with this sale.
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|
In
August and September 2005, Kinder Morgan Energy Partners issued 5.75 million
common units in a public offering at a price of $51.25 per common unit,
receiving total net proceeds (after underwriting discount) of $283.6 million. We
did not acquire any of these common units. In August 2005, Kinder Morgan Energy
Partners issued 64,412 common units as partial consideration for the acquisition
of General Stevedores, L.P. These issuances, collectively, reduced our
percentage ownership of Kinder Morgan Energy Partners (at the time of the
transactions) from approximately 17.3% to approximately 16.9% and had the
associated effects of increasing our investment in the net assets of Kinder
Morgan Energy Partners by $18.0 million and reducing our (i) equity method
goodwill in Kinder Morgan Energy Partners by $21.2 million, (ii) associated
accumulated deferred income taxes by $1.2 million and (iii) paid-in capital by
$1.9 million. In addition, in August 2005, in order to maintain our 1% general
partner interest in Kinder Morgan Energy Partners’ operating partnerships, we
made a contribution of approximately $2.6 million.
On
June 1, 2005, we sold 1,717,033 Kinder Morgan Management shares that we owned
for approximately $75.0 million. We recognized a pre-tax gain of $22.0 million
associated with this sale.
In
April 2005, Kinder Morgan Energy Partners issued 957,656 common units as partial
consideration for the acquisition of seven bulk terminal operations. This
transaction reduced our percentage ownership of Kinder Morgan Energy Partners
(at the time of the transaction) from approximately 18.13% to approximately
18.06% and had the associated effects of increasing our investment in the net
assets of Kinder Morgan Energy Partners by $2.9 million and reducing our (i)
equity method goodwill in Kinder Morgan Energy Partners by $3.6 million, (ii)
associated accumulated deferred income taxes by $0.3 million and (iii) paid-in
capital by $0.4 million. In addition, in April 2005, in order to maintain our 1%
general partner interest in Kinder Morgan Energy Partners’ operating
partnerships, we made a contribution of approximately $0.6 million.
On
January 31, 2005, we sold 413,516 Kinder Morgan Management shares that we owned
for approximately $17.5 million. We recognized a pre-tax gain of $4.5 million
associated with this sale.
6. Impairment
of Assets
On
April 18, 2007, we announced that Kinder Morgan Energy Partners would acquire
the Trans Mountain pipeline system from us. This transaction was completed April
30, 2007. This transaction caused us to evaluate the fair value of the Trans
Mountain pipeline system, in determining whether goodwill related to these
assets was impaired. Accordingly, based on our consideration of information
obtained regarding the fair values of the Trans Mountain pipeline system assets,
a goodwill impairment charge of $377.1 million was recorded in the first quarter
of 2007.
In
February 2007, we entered into a definitive agreement, which closed on May 17,
2007 (see Note 7), to sell Terasen Inc. to Fortis, Inc., a Canada-based company
with investments in regulated distribution utilities. Execution of this sale
agreement constituted an event of the type that, under Generally Accepted
Accounting Principles, required us to consider the market value indicated by the
definitive sales agreement in our 2006 goodwill impairment evaluation.
Accordingly, based on the fair values of these reporting unit(s) derived
principally from this definitive sales agreement, an estimated goodwill
impairment charge of approximately $650.5 million was recorded in the 2006
period and is reported in the accompanying Consolidated Statement of Operations
for the year ended December 31, 2006 within the caption, “Income (Loss) from
Discontinued Operations, Net of Tax.”
From
1998 until January 2008, we had an investment in a 76 megawatt gas-fired power
generation facility located in Greeley, Colorado. We wrote off the remaining
carrying value of this investment ($6.5 million) in the fourth quarter of 2005.
We sold this investment in January 2008 (see Note 19).
In
the fourth quarter of 2006, we reduced the asset values of certain equipment
associated with our power investment by $1.2 million when it was determined that
this equipment could no longer be sold as complete units since the manufacturer,
who had agreed to fabricate and provide site specific external materials upon
the sale of the units, had declared bankruptcy. During 2006, we sold our
turbines and a portion of certain associated equipment, and during 2007, sold
our remaining inventory of associated equipment (see Note 5).
7. Discontinued
Operations
On
October 5, 2007, Kinder Morgan Energy Partners announced that it had completed
the previously announced 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. Due to the fair market revaluation resulting from the
Going Private transaction (see Note 1(B)), the consideration of Kinder Morgan
Energy Partners’ sale of its North System was equal to our carrying value,
therefore no gain or loss was recorded on this disposal transaction for the
portion that we owned. 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 are eight propane truck-loading terminals, located at
various points in three states along the pipeline system, and one multi-product
terminal complex located in Morris, Illinois. All of the assets are included in
our Products Pipelines – KMP business segment.
132
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
On
March 5, 2007, we entered into a definitive agreement to sell Terasen Pipelines
(Corridor) Inc. to Inter Pipeline Fund, a Canada-based company. Terasen
Pipelines (Corridor) Inc. 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). This transaction closed on June 15,
2007, for approximately $711 million (C$760 million) plus assumption of all
construction debt. The consideration was equal to Terasen Pipelines (Corridor)
Inc.’s carrying value, therefore no gain or loss was recorded on this disposal
transaction.
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. The sale did not include assets of Kinder Morgan Canada (formerly
Terasen Pipelines). 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 will be
utilized to reduce capital gain 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 $775.1
million expires in 2012. Based on a revised estimate of the fair values of this
reporting unit based principally on this definitive sales agreement, an
estimated goodwill impairment charge of approximately $650.5 million was
recorded in the fourth quarter of 2006.
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). Incremental losses of approximately $9.1 million were recorded during
the third and fourth quarters of 2007 to reflect final working capital
adjustments. An incremental tax benefit of approximately $3.3 million related to
these adjustments was recorded as an adjustment to the capital loss carryforward
associated with the Terasen Inc. sale. See Note 9 for additional information
regarding our income taxes. Our Natural Gas Pipelines – KMP business segment (1)
provides natural gas transportation and storage services and sells natural gas
to and (2) 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 are expected to continue to a
similar extent into the future. For the twelve months ended December 31, 2006
and the five months ended May 31, 2007, revenues and expenses of our continuing
operations totaling $19.3 million and $3.4 million, and $3.1 million and $1.2
million, respectively for products and services sold to and purchased from our
discontinued U.S.-based retail natural gas distribution operations prior to its
sale in March 2007, have been eliminated in our Consolidated Statements of
Operations. Revenues and expenses for these products and services were not
eliminated in 2005 due to the fact that we did not include Kinder Morgan Energy
Partners in our consolidated operating results until the implementation of EITF
04-5, effective January 1, 2006 (see Note 1(B)). We are currently receiving fees
from SourceGas LLC, 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 will 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 disposal group.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the financial results of these operations
have been reclassified to discontinued operations for all periods presented and
reported in the caption, “Income (Loss) from Discontinued Operations, Net of
Tax” in our accompanying Consolidated Statements of Operations. The assets and
liabilities of the U.S.-based retail natural gas distribution sale are included
in our Consolidated Balance Sheet at December 31, 2006 in the captions “Current
Assets: Assets Held for Sale,” “Assets Held for Sale, Non-current,” “Current
Liabilities: Liabilities Held for Sale” and “Other Liabilities and Deferred
Credits: Liabilities Held for Sale, Non-current.” Summarized financial results
and financial position information of these operations is as
follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Operating
Revenues
|
$
|
24.1
|
$
|
921.8
|
$
|
1,999.3
|
$
|
569.0
|
||||||||
|
Earnings
(Loss) from Discontinued Operations Before Income Taxes
|
$
|
(10.2
|
)
|
$
|
393.2
|
$
|
(530.6
|
)
|
$
|
65.8
|
||||||
|
Income
Taxes
|
8.7
|
(94.6
|
)
|
2.1
|
(25.4
|
)
|
||||||||||
|
Earnings
(Loss) from Discontinued Operations
|
$
|
(1.5
|
)
|
$
|
298.6
|
$
|
(528.5
|
)
|
$
|
40.4
|
||||||
The
cash flows attributable to discontinued operations are included in our
accompanying Consolidated Statements of Cash Flows for the seven months ended
December 31, 2007, the five months ended May 31, 2007 and the twelve months
ended
133
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
December
31, 2006 in the captions “Net Cash Flows (Used in) Provided by Discontinued
Operations”, “Net Cash Flows Provided by (Used in) Discontinued Investing
Activities” and “Net Cash Flows Provided by (Used in) Discontinued Financing
Activities.”
8. Property,
Plant and Equipment
Classes
and Depreciation
As
of December 31, 2007 and 2006, investments in property, plant and equipment are
as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Knight
Inc.:
|
||||||||
|
Natural
Gas and Liquids Pipelines
|
$
|
16.1
|
$
|
4,320.4
|
||||
|
Storage
Facilities
|
-
|
1,035.2
|
||||||
|
Electric
Generation
|
10.3
|
37.9
|
||||||
|
General
and Other
|
43.9
|
149.0
|
||||||
|
Terasen:
|
||||||||
|
Natural
Gas Pipelines
|
-
|
968.8
|
||||||
|
Petroleum
Pipelines
|
-
|
1,104.9
|
||||||
|
Retail
Natural Gas Distribution
|
-
|
1,180.7
|
||||||
|
General
and Other
|
-
|
381.0
|
||||||
|
Kinder Morgan Energy
Partners1:
|
||||||||
|
Natural
Gas, Liquids and Carbon Dioxide Pipelines
|
6,572.6
|
4,559.7
|
||||||
|
Pipeline
and Terminals Station Equipment
|
5,596.0
|
4,508.8
|
||||||
|
General
and Other
|
1,095.9
|
850.8
|
||||||
|
|
||||||||
|
Accumulated
Amortization, Depreciation and Depletion
|
(277.0
|
)
|
(2,306.3
|
)
|
||||
|
13,057.8
|
16,790.9
|
|||||||
|
Land
|
297.3
|
273.9
|
||||||
|
Natural
Gas, Liquids (including Line Fill) and Transmix Processing
|
168.2
|
615.9
|
||||||
|
Construction
Work in Process
|
1,280.6
|
1,158.9
|
||||||
|
Property,
Plant and Equipment, Net
|
$
|
14,803.9
|
$
|
18,839.6
|
||||
|
|
____________
|
|
1
|
Includes
allocation of purchase accounting adjustment associated with the Going
Private transaction (see note
1(B)).
|
Casualty
Gain
Several
of Kinder Morgan Energy Partners’ terminal facilities were affected by
Hurricanes Katrina and Rita in August and September, 2005. To account for
property damage, repair expense was recognized as incurred. In addition, the net
book value of assets that were damaged or destroyed by the hurricanes was
removed from the books and offset with indemnity proceeds received (and
receivable in the future). Any proceeds received in excess of the net book value
of assets were recorded as a casualty gain.
In
the fourth quarter of 2006, Kinder Morgan Energy Partners reached settlements
with its insurance carriers on all property damage claims related to the 2005
hurricanes and recognized a casualty gain of $15.2 million, excluding repair and
clean-up expenses. Kinder Morgan Energy Partners collected $8.0 million and
$13.1 million in proceeds in 2007 and 2006, respectively, which is included in
the caption “Property Casualty Indemnifications” within investing activities in
our accompanying Consolidated Statement of Cash Flows. With the settlement of
these claims, all hurricane property damage claims are now closed. Kinder Morgan
Energy Partners recognized approximately $1.8 million of casualty gain in the
first quarter of 2007 based upon the final determination of the book value of
damaged or destroyed fixed assets and flood insurance indemnities.
Kinder
Morgan Energy Partners’ total increase in net income for hurricane income and
expense items, including casualty gains, was $8.6 million in 2006.
134
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
9.
Income Taxes
The
components of income (loss) before income taxes from continuing operations are
as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
United
States
|
$
|
474.2
|
$
|
279.2
|
$
|
903.6
|
$
|
844.8
|
||||||||
|
Foreign
|
1.7
|
(376.4
|
)
|
(17.3
|
)
|
6.5
|
||||||||||
|
Total
|
$
|
475.9
|
$
|
(97.2
|
)
|
$
|
886.3
|
$
|
851.3
|
|||||||
Components
of the income tax provision applicable to continuing operations for federal and
state income taxes are as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Current
Tax Provision:
|
||||||||||||||||
|
U.S.
|
||||||||||||||||
|
Federal
|
$
|
268.6
|
$
|
(7.0
|
)
|
$
|
246.6
|
$
|
213.9
|
|||||||
|
State
|
25.1
|
3.2
|
10.2
|
27.4
|
||||||||||||
|
Foreign
|
23.5
|
0.6
|
18.3
|
3.8
|
||||||||||||
|
317.2
|
(3.2
|
)
|
275.1
|
245.1
|
||||||||||||
|
|
||||||||||||||||
|
Deferred
Tax Provision:
|
||||||||||||||||
|
U.S.
|
||||||||||||||||
|
Federal
|
(95.2
|
)
|
134.0
|
46.9
|
86.3
|
|||||||||||
|
State
|
0.5
|
6.4
|
(36.3
|
)
|
5.5
|
|||||||||||
|
Foreign
|
4.9
|
(1.7
|
)
|
0.2
|
0.2
|
|||||||||||
|
(89.8
|
)
|
138.7
|
10.8
|
92.0
|
||||||||||||
|
Total
Tax Provision
|
$
|
227.4
|
$
|
135.5
|
$
|
285.9
|
$
|
337.1
|
||||||||
|
Effective
Tax Rate
|
47.8
|
%
|
139.3
|
%
|
32.3
|
%
|
39.6
|
%
|
||||||||
135
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
difference between the statutory federal income tax rate and our effective
income tax rate is summarized as follows:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Federal
Income Tax Rate
|
35.0
|
%
|
(35.0
|
%)
|
35.0
|
%
|
35.0
|
%
|
||||||||
|
Increase
(Decrease) as a Result of:
|
%
|
|||||||||||||||
|
Nondeductible
Goodwill Impairment
|
-
|
|
135.8
|
%
|
-
|
-
|
||||||||||
|
Terasen
Acquisition Financing Structure
|
-
|
(17.1
|
%)
|
(5.1
|
%)
|
-
|
||||||||||
|
Nondeductible
Going Private Costs
|
-
|
31.6
|
%
|
-
|
-
|
|||||||||||
|
Deferred
Tax Rate Change
|
-
|
-
|
(4.3
|
%)
|
-
|
|||||||||||
|
Kinder
Morgan Management Minority Interest
|
2.7
|
%
|
6.4
|
%
|
2.7
|
%
|
1.9
|
%
|
||||||||
|
Foreign
Earnings Subject to Different Tax Rates
|
5.8
|
%
|
8.6
|
%
|
2.6
|
%
|
-
|
|||||||||
|
Net
Effects of Consolidating Kinder Morgan Energy Partners’ United
States Income Tax Provision
|
2.5
|
%
|
4.1
|
%
|
1.4
|
%
|
-
|
|||||||||
|
State
Income Tax, Net of Federal Benefit
|
2.3
|
%
|
6.9
|
%
|
1.7
|
%
|
2.4
|
%
|
||||||||
|
Other
|
(0.5
|
%)
|
(2.0
|
%)
|
(1.7
|
%)
|
0.3
|
%
|
||||||||
|
Effective
Tax Rate
|
47.8
|
%
|
139.3
|
%
|
32.3
|
%
|
39.6
|
%
|
||||||||
Income
taxes included in the financial statements were composed of the
following:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Continuing
Operations
|
$
|
227.4
|
$
|
135.5
|
$
|
285.9
|
$
|
337.1
|
||||||||
|
Discontinued
Operations
|
(8.7
|
)
|
94.6
|
(2.1
|
)
|
25.4
|
||||||||||
|
Equity
Items
|
(219.4
|
)
|
(51.7
|
)
|
(22.2
|
)
|
(121.2
|
)
|
||||||||
|
Total
|
$
|
(0.7
|
)
|
$
|
178.4
|
$
|
261.6
|
$
|
241.3
|
|||||||
136
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Deferred
tax assets and liabilities result from the following:
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Deferred
Tax Assets:
|
||||||||
|
Postretirement
Benefits
|
$
|
12.1
|
$
|
57.7
|
||||
|
Book
Accruals
|
-
|
10.4
|
||||||
|
Derivatives
|
270.9
|
118.6
|
||||||
|
Capital
Loss Carryforwards
|
279.5
|
0.9
|
||||||
|
Rate
Matters
|
-
|
29.3
|
||||||
|
Other
|
-
|
5.7
|
||||||
|
Total
Deferred Tax
Assets
|
562.5
|
222.6
|
||||||
|
Deferred
Tax Liabilities:
|
||||||||
|
Property,
Plant and Equipment
|
125.2
|
2,380.0
|
||||||
|
Investments
|
1,909.0
|
953.6
|
||||||
|
Book
Accruals
|
62.1
|
-
|
||||||
|
Rate
Matters
|
0.4
|
-
|
||||||
|
Prepaid
Pension Costs
|
17.9
|
16.5
|
||||||
|
Assets/Liabilities
Held for Sale
|
897.5
|
-
|
||||||
|
Other
|
66.2
|
3.5
|
||||||
|
Total
Deferred Tax
Liabilities
|
3,078.3
|
3,353.6
|
||||||
|
Net
Deferred Tax
Liabilities
|
$
|
2,515.8
|
$
|
3,131.0
|
||||
|
|
||||||||
|
Current
Deferred Tax
Asset
|
$
|
-
|
$
|
13.0
|
||||
|
Current
Deferred Tax
Liability
|
666.4
|
-
|
||||||
|
Non-current
Deferred Tax
Liability
|
1,849.4
|
3,144.0
|
||||||
|
Net
Deferred Tax
Liabilities
|
$
|
2,515.8
|
$
|
3,131.0
|
||||
See
Note 18 for the reconciliation of our gross unrecognized tax benefit for the
year ended December 31, 2007.
During
2006, the effective tax rate applied in calculating deferred tax was reduced due
to a decrease in the state effective tax rate. As a result, net deferred tax
liabilities decreased by approximately $38.0 million.
During
the third quarter of 2005, the Wrightsville power facility (in which we owned an
interest) was sold to Arkansas Electric Cooperative Corporation, generating an
estimated capital loss for tax purposes of $68.7 million. We did not record a
loss for book purposes due to the fact that, for book purposes, we wrote off the
carrying value of our investment in the Wrightsville power facility in
2003.
During
2005, in order to offset our capital loss carrryforward expiring in 2005 and our
capital loss from the Wrightsville power facility, we sold 5.7 million Kinder
Morgan Management shares that we owned, generating a gain for tax purposes of
$118.1 million. As a result of these and other transactions, we had remaining at
December 31, 2006 a $2.4 million capital loss carryforward that expires $1.6
million during 2008 and $0.8 million during 2009. During 2007, our sale of
Terasen Inc. resulted in a capital loss of $998.6 million of which approximately
$223.3 million will be utilized to reduce capital gain principally associated
with the sale of our U.S.-based retail natural gas operations. The remaining
capital loss will be carried forward and utilized to reduce capital gain on the
sale of an 80% ownership interest in our NGPL business segment. No valuation
allowance has been provided with respect to our capital loss carryforward as we
believe future realization of the deferred tax asset attributable to this net
loss carryforward is more likely than not.
10.
Financing
On
May 17, 2007 and June 15, 2007, we closed transactions to sell Terasen Inc. and
Terasen Pipelines (Corridor) Inc., respectively. Our consolidated debt was
reduced by the debt balances of Terasen Inc. and Terasen Pipelines (Corridor)
Inc., of approximately $2.9 billion, including the Capital Securities, as a
result of these sales transactions. See Note 7 for additional information
regarding our Discontinued Operations.
137
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(A)
Notes Payable
We
and our consolidated subsidiaries had the following unsecured credit facilities
outstanding at December 31, 2007.
|
Credit
Facilities
|
|
Knight
Inc.
|
|
$1.0
billion, six-year secured revolver, due May 2013
|
|
$1.0
billion, six-year and six-month secured term facility, due November
2013
|
|
$3.3
billion, seven-year secured term facility, due May 2014
|
|
Kinder
Morgan Energy Partners
|
|
$1.85
billion, five-year unsecured revolver, due August
2010
|
The
following are short-term borrowings, issued by the below-listed borrowers, where
the commercial paper and bankers’ acceptances are supported by each borrower’s
respective credit facilities. The short-term borrowings shown in the tables
below, totaling $888.1 million and $1,665.3 million, respectively, are reported
in the caption “Notes Payable” in the accompanying Balance Sheets at December
31, 2007 and 2006, respectively.
|
Successor
Company
|
|||||||||||||
|
December
31, 2007
|
|||||||||||||
|
Short-term
Borrowings
Outstanding
Under
Revolving
Credit
Facility
|
Commercial
Paper
Outstanding
|
Weighted
Average
Interest
Rate of
Short-term
Debt
Outstanding
|
|||||||||||
|
(In
millions)
|
|||||||||||||
|
Knight
Inc.
|
|||||||||||||
|
$1.0
billion
|
$
|
299.0
|
$
|
-
|
6.42
|
%
|
|||||||
|
Kinder
Morgan Energy Partners
|
|||||||||||||
|
$1.85
billion
|
$
|
-
|
$
|
589.1
|
5.58
|
%
|
|||||||
|
Predecessor
Company
|
|||||||||||||
|
December
31, 2006
|
|||||||||||||
|
Short-term
Borrowings
Outstanding
Under
Revolving
Credit
Facility
|
Commercial
Paper
and
Bankers’
Acceptances
Outstanding
|
Weighted-Average
Interest
Rate of
Short-term
Debt
Outstanding
|
|||||||||||
|
(In
millions of U.S. dollars)
|
|||||||||||||
|
Knight
Inc.
|
|||||||||||||
|
$800
million
|
$
|
90.0
|
$
|
-
|
5.70
|
%
|
|||||||
|
Kinder
Morgan Energy Partners
|
|||||||||||||
|
$1.85
billion
|
$
|
-
|
$
|
1,098.2
|
5.42
|
%
|
|||||||
|
Terasen
|
|||||||||||||
|
C$450
million
|
$
|
-
|
$
|
97.8
|
4.34
|
%
|
|||||||
|
Terasen
Gas Inc.
|
|||||||||||||
|
C$500
million
|
$
|
-
|
$
|
186.2
|
4.22
|
%
|
|||||||
|
Terasen
Pipelines (Corridor) Inc.
|
|||||||||||||
|
C$225
million
|
$
|
-
|
$
|
193.1
|
4.22
|
%
|
|||||||
138
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
following are average short-term borrowings outstanding and the weighted-average
interest rates during the periods shown, for the below listed borrowers. The
commercial paper and bankers’ acceptances are supported by their respective
credit facilities. The commercial paper and bankers’ acceptances borrowings are
comprised of unsecured short-term notes with maturities not to exceed 364 days
from the date of issue.
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||||||||||
|
Seven
Months Ended
December
31, 2007
|
Five
Months Ended
May
31, 2007
|
Twelve
Months Ended
December
31, 2006
|
|||||||||||||||||||||||||
|
Average
Short-term
Debt
Outstanding
|
Weighted-
Average
Interest
Rate of
Short-term
Debt
Outstanding
|
Average
Short-term
Debt
Outstanding
|
Weighted-
Average
Interest
Rate of
Short-term
Debt
Outstanding
|
Average
Short-term
Debt
Outstanding
|
Weighted-
Average
Interest
Rate of
Short-term
Debt
Outstanding
|
||||||||||||||||||||||
|
(In
millions of U.S. dollars)
|
(In
millions of U.S. dollars)
|
||||||||||||||||||||||||||
|
Credit
Facilities:
|
|||||||||||||||||||||||||||
|
Knight Inc.1
|
|||||||||||||||||||||||||||
|
$1.0
billion
|
$
|
346.0
|
6.61
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
|||||||||||||||
|
Kinder Morgan, Inc.2
|
|||||||||||||||||||||||||||
|
$800
million
|
$
|
-
|
-
|
%
|
$
|
134.5
|
5.81
|
%
|
$
|
114.6
|
5.77
|
%
|
|||||||||||||||
|
|
|||||||||||||||||||||||||||
|
Commercial
Paper and Bankers’ Acceptances:
|
|||||||||||||||||||||||||||
|
Kinder Morgan, Inc.2
|
|||||||||||||||||||||||||||
|
$800
million
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
$
|
6.6
|
4.77
|
%
|
|||||||||||||||
|
Kinder
Morgan Energy Partners
|
|||||||||||||||||||||||||||
|
$1.85
billion
|
$
|
575.2
|
5.46
|
%
|
$
|
614.0
|
5.40
|
%
|
$
|
1,000.8
|
5.16
|
%
|
|||||||||||||||
|
Terasen Inc.3
|
|||||||||||||||||||||||||||
|
C$450
million
|
$
|
-
|
-
|
%
|
$
|
79.9
|
4.34
|
%
|
$
|
92.0
|
4.69
|
%
|
|||||||||||||||
|
Terasen Gas Inc.3
|
|||||||||||||||||||||||||||
|
C$500
million
|
$
|
-
|
-
|
%
|
$
|
141.5
|
4.23
|
%
|
$
|
169.3
|
4.03
|
%
|
|||||||||||||||
|
Terasen Pipelines (Corridor)
Inc.3
|
|||||||||||||||||||||||||||
|
C$375
million
|
$
|
443.7
|
4.33
|
%
|
$
|
298.8
|
4.24
|
%
|
$
|
134.9
|
3.93
|
%
|
|||||||||||||||
__________
|
1
|
In
conjunction with the Going Private transaction, Knight Inc. entered into a
$5.755 billion credit agreement dated May 30, 2007, which included three
term credit facilities, discussed following, and one revolving credit
facility. Knight Inc. does not have a commercial paper
program.
|
|
2
|
Our
$800 million credit facility was terminated on May 30,
2007.
|
|
3
|
On
February 26, 2007 and March 5, 2007, we entered into two definitive
agreements to sell Terasen Inc., including Terasen Gas Inc., and Terasen
Pipelines (Corridor) Inc., respectively. These transactions closed on May
17, 2007 and June 15, 2007, respectively (See Note 7). Accordingly, the
average short-term debt outstanding and the associated weighted-average
interest rate under the Terasen Inc. facilities for the five months ended
May 31, 2007 and under the Terasen Pipelines (Corridor) Inc. facility for
the seven months ended December 31, 2007 are only through the respective
dates of sale.
|
At
December 31, 2007, we had available a $1.0 billion six-year secured revolving
credit facility dated May 30, 2007. This revolving credit facility, as part of a
$5.755 billion credit agreement used to financing the Going Private transaction,
replaced an $800 million five-year credit facility dated August 5, 2005. The
$5.755 billion credit agreement dated May 30, 2007, is with a syndicate of
financial institutions and Citibank, N.A., as administrative agent. The senior
secured credit facilities consist of the following:
|
|
·
|
a
$1.0 billion senior secured Tranche A term loan facility with a term of
six years and six months (subsequently retired in February 2008, see
below);
|
|
|
·
|
a
$3.3 billion senior secured Tranche B term loan facility, with a term of
seven years (subsequently retired in February 2008, see
below);
|
|
|
·
|
a
$455 million senior secured Tranche C term loan facility with a term of
three years (subsequently retired in June 2007, see below)
and
|
|
|
·
|
a
$1.0 billion senior secured revolving credit facility with a term of six
years. The revolving credit facility includes a sublimit of $300 million
for the issuance of letters of credit and a sublimit of $50 million for
swingline loans.
|
The
credit agreement permits one or more incremental increases under the revolving
credit facility or an addition of new term facilities in an aggregate amount of
up to $1.5 billion, provided certain conditions are met. Such additional
capacity is uncommitted. Additionally, the revolving credit facility allows for
one or more swingline loans from Citibank, N.A., in its individual capacity, up
to an aggregate amount of $50.0 million provided certain conditions are
met.
139
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Our
obligations under the credit agreement and certain existing notes issued by us
and Kinder Morgan Finance Company, ULC, the sale of which were registered under
the Securities Act of 1933, as amended, are secured, subject to specified
exceptions, by a first-priority lien on all the capital stock of each of our
wholly owned subsidiaries (limited, in the case of foreign subsidiaries, to 65%
of the capital stock of such subsidiaries) and by perfected security interests
in, and mortgages on, substantially all of our and our subsidiaries’ tangible
and intangible assets (including, without limitation, accounts (other than
deposit accounts or other bank or securities accounts), inventory, equipment,
investment property, intellectual property, other general intangibles, material
fee-owned real property (other than pipeline assets and any leasehold property)
and proceeds of the foregoing). None of the assets of Kinder Morgan G.P., Inc.,
Kinder Morgan Management, Kinder Morgan Energy Partners or their respective
subsidiaries are pledged as security as part of this financing.
In
June 2007, we repaid the borrowings outstanding under the Tranche C term
facility. On September 28, 2007, we made quarterly payments of $2.5 million on
the Tranche A and $8.25 million on the Tranche B term loan facilities.
Additionally on July 31, 2007, we made a $100 million voluntary prepayment on
the Tranche B term loan facility using the proceeds from the issuance of Kinder
Morgan G.P., Inc.’s preferred shares as discussed following. At December 31,
2007, we had approximately $4.2 billion outstanding under the term loan
facilities at a weighted-average interest rate of 6.32%. Average borrowings
outstanding under the term loan facilities during the seven months ended
December 31, 2007 were approximately $4.3 billion at a weighted-average interest
rate of 6.67%. On February 15, 2008, the entire outstanding balances of our
senior secured credit facility’s Tranche A and Tranche B term loans and amounts
outstanding at the time under our $1.0 billion revolving credit facility, on a
combined basis totaling approximately $4.6 billion, were paid off with proceeds
from the closing of the sale of an 80% ownership interest in our NGPL business
segment.
Loans
under the revolving credit facility will bear interest, at Knight Inc.’s option,
at:
|
|
·
|
a
rate equal to LIBOR (London Interbank Offered Rate) plus an applicable
margin, or
|
|
|
·
|
a
rate equal to the higher of (a) U.S. prime rate and (b) the federal funds
effective rate plus 0.50%, in each case, plus an applicable
margin.
|
The
swingline loans will bear interest at:
|
|
·
|
a
rate equal to the higher of (a) U.S. prime rate and (b) the federal funds
effective rate plus 0.50%, in each case, plus an applicable
margin.
|
The
applicable margin for the revolving credit facility is subject to decrease
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. Based on our ratio, as defined in the credit
agreement, of consolidated total debt to earnings before interest, income taxes
and depreciation and amortization at December 31, 2007, our facility fee was 35
basis points. 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
$5.755 billion credit agreement includes the following restrictive
covenants:
|
|
·
|
Total
debt divided by earnings before interest, income taxes, depreciation and
amortization for (i) the test period ending December 31, 2007 may not
exceed 8.75:1.00, (ii) January 1, 2008 to December 31, 2008 may not exceed
8.00:1.00, (iii) January 1, 2009 to December 31, 2009 may not exceed
7.00:1.00 and (iv) thereafter may not exceed
6.00:1.00
|
|
|
·
|
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.
|
The
following constitutes events of default under the credit agreement, subject in
certain cases to cure periods:
|
|
·
|
Nonpayment
of interest, principal or fees;
|
|
|
·
|
Failure
to make required payments under other agreements that exceed
$75,000,000;
|
140
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
|
·
|
Unsatisfied
and unbonded judgments (for a period of 60 days from entry) in excess of
$75,000,000; and
|
|
|
·
|
Voluntary
or involuntary bankruptcy or
liquidation.
|
On
January 5, 2007, after shareholder approval of the merger agreement associated
with the Going Private transaction was announced, Kinder Morgan, Inc.’s debt
rating was downgraded by Standard & Poor’s Rating Services to BB- due to the
anticipated increase in debt related to the proposed transaction. On April 11,
2007 and May 30, 2007, Fitch and Moody’s Investor Services lowered their ratings
to BB and Ba2, respectively, also related to the transaction. Following the sale
of an 80% ownership interest in our NGPL business segment on February 15, 2008
(see Note 1(M)), Standard & Poor’s Rating Services upgraded Knight Inc.’s
secured senior debt to BB, and Fitch upgraded its rating to BB+. Because we have
a non-investment grade credit rating, we do not have access to the commercial
paper market. As a result, we are currently utilizing our $1.0 billion revolving
credit facility for Knight Inc.’s short-term borrowing needs.
As
discussed preceding, the loan agreements we had in place prior to the Going
Private transaction were cancelled and replaced with a new loan agreement. Our
indentures related to publicly issued notes do not contain covenants related to
maintenance of credit ratings. Accordingly, no such covenants were impacted by
the downgrade in our credit ratings occasioned by the Going Private
transaction.
On
November 23, 2005, 1197774 Alberta ULC, a wholly owned subsidiary of Knight
Inc., entered into a 364-day credit agreement, with Knight Inc. as guarantor,
which provided for a committed credit facility in the Canadian dollar equivalent
of US$2.25 billion. This credit facility was used to finance the cash portion of
the acquisition of Terasen (see Note 4), but could also be used for general
corporate purposes. Under this bank facility, a facility fee is required to be
paid based on the total commitment, whether used or unused, at a rate that
varies based on Knight Inc.’s senior debt rating. On November 30, 2005, 1197774
Alberta ULC borrowed $2.1 billion under this facility to finance the cash
portion of the acquisition of Terasen. The facility was terminated when the loan
was repaid on December 9, 2005 after permanent financing was obtained as
discussed further in this section. Interest paid during 2005 under this credit
facility was $1.9 million.
At
December 31, 2007, Kinder Morgan Energy Partners had a $1.85 billion five-year
unsecured credit facility with a syndicate of financial institutions and
Wachovia Bank, National Association as the administrative agent. Effective
August 28, 2006, Kinder Morgan Energy Partners terminated its $250 million
unsecured nine-month bank credit facility due November 21, 2006, and increased
its existing five-year bank credit facility from $1.60 billion to $1.85 billion
and this facility can now be amended to allow for borrowings up to $2.1 billion.
The $1.85 billion credit facility can be used for general corporate purposes and
to support commercial paper issuance. This credit facility is due August 18,
2010 and includes covenants and requires payment of facility fees that are
common in such arrangements. The $1.85 billion credit facility permits Kinder
Morgan Energy Partners to obtain bids for fixed rate loans from members of the
lending syndicate. Interest on the credit facility accrues at Kinder Morgan
Energy Partners’ option at a floating rate equal to either the administrative
agent’s base rate (but not less than the Federal Funds Rate, plus 0.5%), or
London Interbank Offered Rate (“LIBOR”), plus a margin, which varies depending
upon the credit rating of Kinder Morgan Energy Partners’ long-term senior
unsecured debt. Excluding the relatively non-restrictive specified negative
covenants and events of defaults, the credit facility does not contain any
provisions designed to protect against a situation where a party to an agreement
is unable to find a basis to terminate that agreement while its counterparty’s
impending financial collapse is revealed and perhaps hastened through the
default structure of some other agreement. The 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 Kinder Morgan Energy
Partners will pay on the total commitment will vary based on Kinder Morgan
Energy Partners’ senior debt investment rating. None of Kinder Morgan Energy
Partners debt is subject to payment acceleration as a result of any change to
their credit ratings.
The
Kinder Morgan Energy Partners $1.85 billion credit facility includes the
following restrictive covenants:
|
|
·
|
Total
debt divided by earnings before interest, income taxes, depreciation and
amortization for the preceding four quarters may not exceed (i) 5.5, in
the case of any such period ended on the last day of (1) a fiscal quarter
in which Kinder Morgan Energy Partners makes any Specified Acquisition, or
(2) the first or second fiscal quarter next succeeding such a fiscal
quarter or (ii) 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.
|
141
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
following constitute events of default under the credit facility, subject to
certain cure periods:
|
|
·
|
Nonpayment
of interest, principal or fees;
|
|
|
·
|
Failure
to make required payments under hedging agreements that equal or exceed
$75 million;
|
|
|
·
|
Failure
of the general partner of Kinder Morgan Energy Partners to make required
payments equal to or in excess of $75
million;
|
|
|
·
|
Adverse
judgments in excess of $75 million;
and
|
|
|
·
|
Voluntary
or involuntary bankruptcy or
liquidation.
|
Based
on Kinder Morgan Energy Partners’ credit rating at December 31, 2007, the annual
facility fee is 10 basis points on the total credit amount.
Commercial
paper issued by Kinder Morgan Energy Partners are unsecured short-term notes
with maturities not to exceed 270 days from the date of issue. During the five
months ended May 31, 2007, all of Kinder Morgan Energy Partners’ commercial
paper was redeemed within 35 days, with interest rates ranging from 5.34% to
5.58%. During the seven months ended December 31, 2007, all of Kinder Morgan
Energy Partners’ commercial paper was redeemed within 90 days, with interest
rates ranging from 4.60% to 6.55%.
On
January 5, 2007, after shareholder approval of the merger agreement associated
with the Going Private transaction was announced, Kinder Morgan Energy Partners’
credit rating was downgraded to BBB by Standard & Poor’s Rating Services due
to the anticipated increase in Kinder Morgan, Inc.’s debt related to the
proposed transaction. Kinder Morgan Energy Partners’ credit rating was
downgraded by Fitch Ratings from BBB+ to BBB on April 11, 2007 and upon
completion of the Going Private transaction, was downgraded from Baa1 to Baa2 by
Moody’s Investors Service.
On
February 22, 2006, Kinder Morgan Energy Partners entered into a nine-month $250
million credit facility due November 21, 2006 with a syndicate of financial
institutions, and Wachovia Bank, National Association as the administrative
agent. Borrowings under the credit facility can be used for general corporate
purposes and as backup for Kinder Morgan Energy Partners’ commercial paper
program and include financial covenants and events of default that are common in
such arrangements. This agreement was terminated concurrent with Kinder Morgan
Energy Partners’ increase in its 5-year credit facility from $1.6 billion to
$1.85 billion.
142
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
(B)
Long-term Debt
Since
we are accounting for the Going Private transaction (see Note 1(B)) as a
purchase business combination that is required to be “pushed-down” to us, we
have adjusted the carrying value of our long-term debt securities to reflect
their fair values at the time of the Going Private transaction and the
adjustments are being amortized over the remaining lives of the debt securities.
The unamortized fair value adjustment balances reflected within the caption
“Long-term Debt” in the accompanying Consolidated Balance Sheet at December 31,
2007 were $93.5 million and $1.2 million, representing a decrease to the
carrying value of our long-term debt and an increase in the value of our
interest rate swaps, respectively. Our long-term debt balances at December 31,
2007 and 2006 of $15,297.4 million and $11,060.8 million, respectively,
consisted of the balances shown in the table below. On February 15, 2008, we
repaid all amounts outstanding under the Tranche A and Tranche B term loans
listed below. Additionally, on February 21, 2008, we commenced a cash tender
offer to purchase up to $1.6 billion of Knight Inc.’s outstanding debt
securities. See Note 19 for additional information regarding this cash tender
offer.
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
|
(In
millions)
|
||||||
|
Knight Inc.1
|
|||||||
|
Debentures:
|
|||||||
|
6.50%
Series, Due
2013
|
$
|
30.1
|
$
|
35.0
|
|||
|
6.67%
Series, Due
2027
|
148.3
|
150.0
|
|||||
|
7.25%
Series, Due
2028
|
494.3
|
493.0
|
|||||
|
7.45%
Series, Due
2098
|
146.3
|
150.0
|
|||||
|
Senior
Notes:
|
|||||||
|
6.80%
Series, Due
2008
|
-
|
300.0
|
|||||
|
6.50%
Series, Due
2012
|
1,010.5
|
1,000.0
|
|||||
|
5.15%
Series, Due
2015
|
231.2
|
250.0
|
|||||
|
Senior
Secured Credit Term Loan Facilities (See Note 10(A)):
|
|||||||
|
Tranche
A Term Loan, Due 2013
|
997.5
|
-
|
|||||
|
Tranche
B Term Loan, Due 2014
|
3,191.7
|
-
|
|||||
|
Deferrable
Interest Debentures Issued to Subsidiary Trusts:
|
|||||||
|
8.56%
Junior Subordinated Deferrable Interest Debentures Due
2027
|
106.9
|
103.1
|
|||||
|
7.63%
Junior Subordinated Deferrable Interest Debentures Due
2028
|
176.2
|
180.5
|
|||||
|
Carrying Value Adjustment for
Interest Rate Swaps2
|
-
|
24.1
|
|||||
|
|
|||||||
|
Unamortized
Gain (Loss) on Termination of Interest Rate Swap
|
11.5
|
(2.7
|
)
|
||||
|
|
|||||||
|
Kinder Morgan Finance Company,
ULC1
|
|||||||
|
5.35%
Series, Due 2011
|
738.5
|
750.0
|
|||||
|
5.70%
Series, Due 2016
|
801.9
|
850.0
|
|||||
|
6.40%
Series, Due 2036
|
503.8
|
550.0
|
|||||
|
Carrying Value Adjustment for
Interest Rate Swaps2
|
23.2
|
(18.7
|
)
|
||||
|
Unamortized
Gain on Termination of Interest Rate Swap
|
11.6
|
-
|
|||||
|
|
|||||||
|
$1,000
Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative
Preferred Stock
|
100.0
|
-
|
|||||
|
|
|||||||
|
Kinder Morgan Energy
Partners1
|
|||||||
|
Senior
Notes:
|
|||||||
|
5.35%
Series, Due
2007
|
-
|
250.0
|
|||||
|
6.30%
Series, Due
2009
|
250.9
|
250.0
|
|||||
|
7.50%
Series, Due
2010
|
255.7
|
250.0
|
|||||
|
6.75%
Series, Due
2011
|
710.6
|
700.0
|
|||||
|
7.125%
Series, Due
2012
|
461.1
|
450.0
|
|||||
|
5.85%
Series, Due
2012
|
500.0
|
-
|
|||||
|
5.00%
Series, Due
2013
|
489.8
|
500.0
|
|||||
|
5.125%
Series, Due
2014
|
488.9
|
500.0
|
|||||
|
6.00%
Series, Due
2017
|
597.5
|
-
|
|||||
|
7.40%
Series, Due
2031
|
310.5
|
300.0
|
|||||
|
7.75%
Series, Due
2032
|
316.7
|
300.0
|
|||||
|
7.30%
Series, Due
2033
|
514.1
|
500.0
|
|||||
|
5.80%
Series, Due
2035
|
477.1
|
500.0
|
|||||
|
6.50%
Series, Due
2037
|
395.7
|
-
|
|||||
143
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
6.95%
Series, Due
2038
|
550.0
|
-
|
|||||
|
Other
|
1.1
|
1.1
|
|||||
|
Carrying Value Adjustment for
Interest Rate Swaps2
|
146.2
|
42.6
|
|||||
|
Unamortized
Gain on Termination of Interest Rate Swap
|
7.2
|
-
|
|||||
|
Central
Florida Pipe Line LLC
|
|||||||
|
7.84%
Series, Due
2008
|
5.0
|
10.0
|
|||||
|
|
|||||||
|
Arrow Terminals
L.P.
|
|||||||
|
Illinois
Development Finance Authority Adjustable Rate Industrial Development
Revenue Bonds, Due 2010, weighted-average interest rate of 3.87% for the
five months ended May 31, 2007 and 3.77% for the seven months ended
December 31, 2007 (2006 - 4.089%)
|
5.3
|
5.3
|
|||||
|
|
|||||||
|
Kinder
Morgan Texas Pipeline, L.P.
|
|||||||
|
8.85%
Series, Due
2014
|
43.2
|
49.1
|
|||||
|
|
|||||||
|
KM
Liquids Terminals LLC
|
|||||||
|
New
Jersey Economic Development Revenue Refunding Bonds, Due 2018,
weighted-average interest rate of 3.63% for the five months ended May 31,
2007 and 3.48 % for the seven months ended December 31, 2007 (2006 -
3.87%)
|
25.0
|
25.0
|
|||||
|
|
|||||||
|
Kinder
Morgan Operating, L.P. “A” and Kinder Morgan Canada
|
|||||||
|
5.40%
Note, Due 2012
|
44.6
|
-
|
|||||
|
|
|||||||
|
Kinder
Morgan Operating, L.P. “B”
|
|||||||
|
Jackson-Union
Counties Illinois Regional Port District Tax-exempt Floating Rate Bonds,
Due 2024, weighted-average interest rate of 3.58% for the five months
ended May 31, 2007 and 3.68% for the seven months ended December 31, 2007
(2006 - 3.90%)
|
23.7
|
23.7
|
|||||
|
Other
|
0.2
|
0.2
|
|||||
|
|
|||||||
|
International
Marine Terminals
|
|||||||
|
Plaquemines
Port, Harbor and Terminal District (Louisiana) Adjustable Rate Annual
Tender Port Facilities Revenue Refunding Bonds, Due 2025, weighted-average
interest rate of 3.59% for the five months ended May 31, 2007 and 3.65%
for the seven months ended December 31, 2007 (2006 -
3.50%)
|
40.0
|
40.0
|
|||||
|
|
|||||||
|
Terasen Inc.3
|
|||||||
|
Medium
Term Notes:
|
|||||||
|
6.30%
Series 1, Due 20084
|
-
|
178.3
|
|||||
|
5.56%
Series 3, Due 20144
|
-
|
112.4
|
|||||
|
8% Capital Securities, Due
20404
|
-
|
106.9
|
|||||
|
Carrying Value Adjustment for
Interest Rate Swaps2
|
-
|
1.1
|
|||||
|
|
|||||||
|
Terasen Gas Inc.
3
|
|||||||
|
Purchase
Money Mortgages:
|
|||||||
|
11.80%
Series A, Due 2015
|
-
|
64.3
|
|||||
|
10.30%
Series B, Due 2016
|
-
|
171.6
|
|||||
|
Debentures
and Medium Term Notes:
|
|||||||
|
10.75%
Series E, Due 2009
|
-
|
51.4
|
|||||
|
6.20%
Series 9, Due 2008
|
-
|
161.4
|
|||||
|
6.95%
Series 11, Due 2029
|
-
|
128.7
|
|||||
|
6.50%
Series 13, Due 2007
|
-
|
85.8
|
|||||
|
6.50%
Series 18, Due 2034
|
-
|
128.7
|
|||||
|
5.90%
Series 19, Due 2035
|
-
|
128.7
|
|||||
|
5.55%
Series 21, Due 2036
|
-
|
103.0
|
|||||
|
Floating
Rate Series 20, interest rate of 4.55% in 2006, Due 2007
|
-
|
128.7
|
|||||
|
Obligations
under Capital Leases, at interest rate of 5.62% in 2006
|
-
|
6.2
|
|||||
|
|
|||||||
|
Terasen Gas (Vancouver Island)
Inc.3
|
144
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
Syndicated
credit facility at short-term floating rates,
weighted-average
interest
rate of 4.43% for the five months ended May 31, 2007 (2006 –
4.41%)
|
-
|
257.2
|
|||||
|
Government
Loans
|
-
|
3.1
|
|||||
|
Terasen Pipelines (Corridor)
Inc.3
|
|||||||
|
Debentures:
|
|||||||
|
4.24%
Series A, Due 2010
|
-
|
128.7
|
|||||
|
5.033%
Series B, Due 2015
|
-
|
128.7
|
|||||
|
Unamortized
Premium on Long-term Debt
|
-
|
2.5
|
|||||
|
Unamortized
Debt Discount on Long-term Debt
|
(6.4
|
)
|
(16.7
|
)
|
|||
|
Current
Maturities of Long-term Debt
|
(79.8
|
)
|
(511.2
|
)
|
|||
|
Total
Long-term
Debt
|
$
|
15,297.4
|
$
|
11,060.8
|
__________
|
1
|
Includes
purchase accounting adjustments to the carrying value of the debt to
reflect fair value at the time of the Going Private transaction (See Note
1(B)). The purchase accounting adjustments are being amortized over the
remaining lives of the debt
securities.
|
|
2
|
Adjustment
of carrying value of long-term securities subject to outstanding interest
rate swaps; see Note 11.
|
|
3
|
We
closed transactions to sell Terasen Inc., which included Terasen Gas Inc.
and Terasen Gas (Vancouver Island) Inc., and Terasen Pipelines (Corridor)
Inc. on May 17, 2007 and June 15, 2007, respectively (see Note 7).
Accordingly, the weighted-average interest rate under the Terasen Gas
(Vancouver Island) Inc. facility for the five months ended May 31, 2007 is
only through the Terasen Inc. date of sale. Debt shown in the above table
for Terasen Inc. and its subsidiaries is denominated in Canadian dollars
but has been converted to and reported above in U.S. dollars at the
exchange rate at December 31, 2006 of 0.8581 U.S. dollars per Canadian
dollar.
|
|
4
|
Includes
purchase accounting adjustments made to adjust the carrying values of the
debt instruments and related interest rate swap agreements to their fair
values at the date of acquisition. The adjustments were being amortized
over the remaining lives of the Medium-Term Notes and Capital Securities
until their disposition (see Note
4).
|
Prior
to the cash tender offer announced in February of 2008 to repurchase up to $1.6
billion of Knight Inc.’s outstanding debt securities (see Note 19), as of
December 31, 2007, maturities of long-term debt (in millions) for the five years
ending December 31, 2012 were $79.8, $313.8, $318.7, $1,513.1 and $3,262.3,
respectively.
At
December 31, 2007 and 2006, the carrying amount of our long-term debt was $15.4
billion and $11.6 billion, respectively. The estimated fair values of our
long-term debt based on prevailing interest rate information available to us at
December 31, 2007 and 2006 were $15.1 billion and $11.6 billion,
respectively.
Knight
Inc.
The
2013 Debentures are not redeemable prior to maturity. The 2028 and 2098
Debentures and the 2012 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 2015 senior notes are redeemable in whole or in part at our
option, but at redemption prices that generally do not make early redemption an
economically favorable alternative. 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, which redemption prices generally do not
make early redemption an economically favorable alternative.
On
September 3, 2007, we made a $5.0 million payment on our 6.50% Series
Debentures, Due 2013.
On
May 7, 2007, we retired our $300 million 6.80% senior notes due March 1, 2008 at
101.39% of the face amount. We recorded a pre-tax loss of $4.2 million in
connection with this early extinguishment of debt.
In
July 2006, we received notification of election from the holders of our 7.35%
Series Debentures due 2026 electing the option, as provided in the indenture
governing the debentures, to require us to redeem the securities on August 1,
2006. The full $125 million of principal was elected to be redeemed and was
paid, along with accrued interest of approximately $4.6 million, on August 1,
2006, utilizing incremental borrowing under our $800 million credit
facility.
On
September 1, 2006, we made a $5.0 million payment on our 6.50% Series
Debentures, Due 2013.
Kinder
Morgan Finance Company, ULC
On
December 9, 2005, Kinder Morgan Finance Company, ULC issued $750 million of
5.35% senior notes due 2011, $850 million of 5.70% senior notes due 2016 and
$550 million of 6.40% senior notes due 2036. The 2011, 2016 and 2036 senior
145
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
notes
issued by Kinder Morgan Finance Company, ULC 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 Knight 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. The proceeds of $2.1 billion, net of underwriting
discounts and commissions, were ultimately distributed to repay in full the
bridge facility incurred to finance the cash portion of the consideration for
Knight Inc.’s acquisition of Terasen on November 30, 2005 (see Note 4). These
notes were sold in a private placement pursuant to a Purchase Agreement, dated
December 6, 2005 among Kinder Morgan Finance Company, ULC, Knight Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global
Markets Inc., as representatives of the several initial purchasers named in the
Purchase Agreement, and resold by the initial purchasers to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The
notes were not initially registered under the Securities Act and could not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. In February 2006, Kinder Morgan
Finance Company, ULC exchanged these notes for substantially identical notes
that have been registered under the Securities Act. Additionally, the 6.40%
senior notes due 2016 have an associated fixed-to-floating interest rate swap
agreement with a notional principal amount of $275 million. See Note 11 for
additional information on this swap agreement.
Kinder
Morgan Energy Partners
Kinder
Morgan Energy Partners’ fixed rate notes provide for redemption 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. Approximately $2.3 billion of
Kinder Morgan Energy Partners’ senior notes have associated fixed-to-floating
interest rate swap agreements that effectively convert the related interest
expense from fixed rates to floating rates. See Note 11 for additional
information on these swap agreements.
On
August 28, 2007, Kinder Morgan Energy Partners issued $500 million of its 5.85%
senior notes due September 15, 2012. Kinder Morgan Energy Partners used the
$497.8 million net proceeds received after underwriting discounts and
commissions to reduce the borrowings under its commercial paper
program.
On
August 15, 2007, Kinder Morgan Energy Partners repaid $250 million of 5.35%
senior notes that matured on that date.
On
June 21, 2007, Kinder Morgan Energy Partners issued $550 million of its 6.95%
senior notes due January 15, 2038. Kinder Morgan Energy Partners used the $543.9
million net proceeds received after underwriting discounts and commissions to
reduce the borrowings under its commercial paper program.
On
January 30, 2007, Kinder Morgan Energy Partners completed a public offering of
senior notes, issuing a total of $1.0 billion in principal amount of senior
notes, consisting of $600 million of 6.00% notes due February 1, 2017 and $400
million of 6.50% notes due February 1, 2037. Kinder Morgan Energy Partners
received proceeds from the issuance of the notes, after underwriting discounts
and commissions, of approximately $992.8 million, and used the proceeds to
reduce the borrowings under its commercial paper program.
Central
Florida Pipeline LLC Debt
Central
Florida Pipeline LLC is an obligor on an aggregate principal amount of $40
million of senior notes originally issued to a syndicate of eight insurance
companies. The senior notes have a fixed annual interest rate of 7.84% with
repayments in annual installments of $5 million beginning July 23, 2001. The
final payment is due July 23, 2008. Interest is payable semiannually on January
1 and July 23 of each year. In both July 2007 and July 2006, Kinder Morgan
Energy Partners made an annual repayment of $5.0 million.
Arrow
Terminals L.P.
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
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, 2007, the interest rate
was 3.595%. 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.
Kinder
Morgan Texas Pipeline, L.P. Debt
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%. The
principal amount, along with interest, is due in monthly installments of
approximately $0.7 million. The final payment is due January 2,
2014.
146
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Additionally,
the unsecured senior notes may be prepaid at any time in amounts of at least
$1.0 million 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, 2007, the
interest rate was 3.57%. Kinder Morgan Energy Partners has an outstanding letter
of credit issued by Citibank in the amount of $25.3 million that backs-up the
$25.0 million principal amount of the bonds and $0.3 million of interest on the
bonds for up to 42 days computed at 12% on a per annum basis on the principal
thereof.
Kinder
Morgan Operating L.P. “B” Debt
This
$23.7 million principal amount of tax-exempt bonds due April 1, 2024 was issued
by the Jackson-Union Counties Regional Port District. These bonds bear interest
at a weekly floating market rate. As of December 31, 2007, the interest rate on
these bonds was 3.33%. As of December 31, 2007, Kinder Morgan Energy Partners
had an outstanding letter of credit issued by Wachovia in the amount of $24.1
million that backs-up the $23.7 million principal amount of the bonds and $0.4
million of interest on the bonds for up to 55 days computed at 12% per annum on
the principal amount thereof.
International
Marine Terminals Debt
Kinder
Morgan Energy Partners owns a 66 2/3% interest in 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, 2007, the interest rate on these bonds was
3.65%.
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 KBC Bank
N.V. 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 their ownership interest. Kinder Morgan Energy Partners’ obligation is
approximately $30.3 million for principal, plus interest and other
fees.
Kinder
Morgan Operating L.P. “A” and Kinder Morgan Canada Company
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 (see Note 4). As part of Kinder Morgan Energy Partners’ purchase price, two
of its subsidiaries issued a long-term note payable to the seller having a fair
value of $42.3 million. Kinder Morgan Energy Partners valued the debt equal to
the present value of amounts to be paid, determined using an annual interest
rate of 5.40%. The principal amount of the note, along with interest, is due in
five annual installments of $10.0 million beginning March 31, 2008. The final
payment is due March 31, 2012. Kinder Morgan Energy Partners’ subsidiaries
Kinder Morgan Operating L.P. “A” and Kinder Morgan Canada Company are the
obligors on the note.
NGPL
PipeCo LLC Debt
On
December 21, 2007, NGPL PipeCo LLC, which at that time was an indirect
wholly owned subsidiary of Knight Inc., issued $1.25 billion aggregate principal
amount of 6.514% senior notes due December 15, 2012, $1.25 billion aggregate
principal amount of 7.119% senior notes due December 15, 2017 and $0.5 billion
aggregate principal amount of 7.768% senior notes due December 15, 2037. The
notes were sold in a private placement to a syndicate of investment banks led by
Lehman Brothers Inc., Banc of America Securities LLC and Deutsche Bank
Securities Inc., and resold by the initial purchasers to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933. The notes
have not been registered under the Securities Act and may not be offered or sold
in the United States absent registration or an applicable exemption from the
registration requirements. The notes are the senior unsecured obligations of
NGPL PipeCo LLC and rank equally in right of payment with any of NGPL PipeCo
LLC’s future unsecured senior debt. The 2012, 2017 and 2037 senior notes are
redeemable in whole or in part, at NGPL PipeCo LLC’s option 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.
The
$3 billion in proceeds from the sale of senior notes private placement were held
in escrow at December 31, 2007 and included in the balance sheet caption:
“Current Assets: Assets Held for Sale.” Upon the February 15, 2008 closing of
the sale
147
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
of
an 80% ownership interest in our NGPL business segment, the $3 billion in
proceeds from the above debt placement were used, along with other proceeds from
the sale, to pay off term loan facilities.
As
of December 31, 2007, 80% of this $3 billion outstanding balance on senior notes
has been included within the caption “Other Liabilities and Deferred Credits:
Liabilities Held for Sale, Non-current” and 20% as a reduction of the caption
“Investments: Other” in our accompanying Consolidated Balance
Sheet.
(C)
Capital Trust Securities
Our
business trusts, K N Capital Trust I and K N Capital Trust III, are obligated
for $100 million of 8.56% Capital Trust Securities maturing on April 15, 2027
and $175 million of 7.63% Capital Trust Securities maturing on April 15, 2028,
respectively, which are guaranteed by us. The 2028 Securities are redeemable in
whole or in part, at our option at any time, at redemption prices as defined in
the associated prospectus, but at redemption prices that generally do not make
early redemption an economically favorable alternative. The 2027 Securities are
redeemable in whole or in part (i) at our option after April 14, 2007 and (ii)
at any time in certain limited circumstances upon the occurrence of certain
events and at prices, all defined in the associated prospectus supplements. Upon
redemption by us or at maturity of the Junior Subordinated Deferrable Interest
Debentures, we must use the proceeds to make redemptions of the Capital Trust
Securities on a pro rata basis. As a result of adopting FASB Interpretation No.
46 (revised December 2003), Consolidation of Variable Interest
Entities, effective December 31, 2003, we (i) no longer include the
transactions and balances of K N Capital Trust I and K N Capital Trust III
in our consolidated financial statements and (ii) began including our Junior
Subordinated Deferrable Interest Debentures issued to the Capital Trusts in a
separate caption under the heading “Long-term Debt” in our Consolidated Balance
Sheets. In addition, effective July 1, 2003 we (i) reclassified our trust
preferred securities to the debt portion of our balance sheet and (ii) began
classifying payments made by us in conjunction with the trust preferred
securities as interest expense, rather than minority interest. For periods and
dates prior to July 1, 2003, the Capital Trust Securities are treated as a
minority interest, shown in our Consolidated Balance Sheets under the caption
“Kinder Morgan-Obligated Mandatorily Redeemable Preferred Capital Trust
Securities of Subsidiary Trust Holding Solely Debentures of Kinder Morgan,” and
periodic payments made to the holders of these securities are classified under
“Minority Interests” in our Consolidated Statements of Operations.
(D)
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 Knight 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 7). In connection with the Going Private transaction, on
May 30, 2007, we filed a certificate with the State of Kansas changing the total
number of shares of all classes of stock that can be authorized for issuance
under our restated articles of incorporation, as amended, to 100 shares of
common stock having a par value of $0.01 per share. On May 30, 2007, we issued
100 shares of our common stock to Knight Midco Inc. After the Going Private
transaction was completed, our shares were delisted from the New York Stock
Exchange.
(E)
Kinder Morgan Energy Partners’ Common Units
On
March 3, 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units, including common units sold pursuant to the
underwriters’ over-allotment option, at a price of $57.70 per unit, less
commissions and underwriting expenses. Kinder Morgan Energy partners received
net proceeds of $324.2 million from the issuance of these common units, and used
the proceeds to reduce the borrowings under its commercial paper
program.
On
February 14, 2008, Kinder Morgan Energy Partners paid a quarterly distribution
of $0.92 per common unit for the quarterly period ended December 31, 2007, of
which $143.4 million was paid to the public holders of Kinder Morgan Energy
Partners’ common units. The distributions were declared on January 16, 2008,
payable to unitholders of record as of January 31, 2008. See Note 1(X) for
additional information regarding our minority interests.
In
August 2006, Kinder Morgan Energy Partners issued, in a public offering,
5,750,000 common units, including common units sold pursuant to an underwriters’
over-allotment option, at a price of $44.80 per unit, less commissions and
underwriting
148
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
expenses.
Kinder Morgan Energy Partners received net proceeds of approximately $248.0
million for the issuance of these 5,750,000 common units.
(F)
Kinder Morgan G.P., Inc. Preferred Shares
On
July 27, 2007, Kinder Morgan G.P., Inc. sold 100,000 shares of its $1,000
Liquidation Value Series A Fixed-to-Floating Rate Term Cumulative Preferred
Stock due 2057 to a single purchaser. We used the net proceeds of approximately
$98.6 million after the initial purchaser’s discounts and commissions to reduce
debt. 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 or Calnev subsidiaries.
On
January 16, 2008, Kinder Morgan G.P., Inc.’s board of directors declared a
quarterly cash dividend on its Series A Fixed-to-Floating Rate Term Cumulative
Preferred Stock of $20.825 per share payable on February 18, 2008 to
shareholders of record as of January 31, 2008. On October 17, 2007, Kinder
Morgan G.P., Inc.’s board of directors declared a quarterly cash dividend on its
Cumulative Preferred Stock of approximately $25.684 per share which was paid on
November 18, 2007 to shareholders of record as of October 31, 2007.
(G)
Kinder Morgan Management
On
May 15, 2007, Kinder Morgan Management sold 5.7 million listed shares in a
registered offering. None of the shares in the offering were purchased by us.
Kinder Morgan Management used the net proceeds from the sale to purchase 5.7
million
i-units
from Kinder Morgan Energy Partners. Kinder Morgan Energy Partners used the net
proceeds of approximately $298 million to reduce its outstanding commercial
paper debt. Additional information concerning the business of, and our
obligations to, Kinder Morgan Management is contained in Kinder Morgan
Management’s Annual Report on Form 10-K for the year ended December 31,
2007.
On
November 14, 2007, Kinder Morgan Management made a distribution of 0.017686 of
its shares per outstanding share (1,258,778 total shares) to shareholders of
record as of October 31, 2007, based on the $0.88 per common unit distribution
declared by Kinder Morgan Energy Partners. On February 14, 2008, Kinder Morgan
Management made a distribution of 0.017312 of its shares per outstanding share
(1,253,951 total shares) to shareholders of record as of January 31, 2008, based
on the $0.92 per common unit distribution declared by Kinder Morgan Energy
Partners. These 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 market price 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 4,430,806, 4,383,303 and
3,760,732 shares in the years ended December 31, 2007, 2006 and 2005,
respectively.
11.
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 our expected future purchase or
sale of these products. We have exposure to interest rate risk as a result of
the issuance of variable and fixed rate debt and commercial paper and to foreign
currency risk from our investments in businesses owned and operated outside the
United States. Pursuant to our risk management policy, we engage in derivative
transactions for the purpose of mitigating these risks, which transactions are
accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and associated amendments (“SFAS No.
133”).
Commodity
Price Risk Management
We
enter into derivative contracts solely for the purpose of hedging exposures that
accompany our normal business activities. In accordance with the provisions of
SFAS No. 133, we designated these instruments as hedges of various exposures as
discussed following, and we test the effectiveness of changes in the value of
these hedging instruments with the risk being hedged. Hedge ineffectiveness is
recognized in income in the period in which it occurs. Our over-the-counter
swaps and options are entered into with counterparties outside central trading
facilities such as a futures, options or stock exchange. These contracts are
with a number of parties all of which have investment grade credit ratings.
While we enter into derivative transactions principally with investment grade
counterparties and actively monitor their ratings, it is nevertheless possible
that from time to time losses will result from counterparty credit risk in the
future.
149
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Our
normal business activities expose us to risks associated with changes in the
market price of natural gas, natural gas liquids and crude oil. Specifically,
these risks are associated with (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. Apart from our derivatives for retail distribution gas
supply contracts under Terasen Gas (the sale of which was closed during the
second quarter, see Note 7), during each period presented in the accompanying
Consolidated Statements of Operations our derivative activities relating to the
mitigation of these risks were designated and qualified as cash flow hedges in
accordance with SFAS No. 133. 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, and a
pre-tax gain of approximately $5.9 million and a pre-tax loss of approximately
$3.5 million for the years ended December 31, 2006 and 2005, respectively, as a
result of ineffectiveness of these hedges, which amounts are reported within the
captions “Natural Gas Sales,” “Oil and Product Sales” and “Gas Purchases and
Other Costs of Sales” in the accompanying Consolidated Statements of Operations.
There was no component of these derivatives instruments’ gain or loss excluded
from the assessment of hedge effectiveness.
In
connection with the Going Private transaction, all of our commodity derivatives
were re-designated as cash flow hedges effective June 1, 2007. Accumulated other
comprehensive income of $417.8 million related to our share of accumulated
losses on commodity derivatives was removed from other comprehensive income and
thus will not be reclassified into earnings in future periods. However, the
corresponding derivative liabilities related to these losses remained on our
balance sheet and the settlement of them will negatively impact our cash flows
in future periods.
As
hedged sales and purchases take place and we record them into earnings, we also
reclassify the gains and losses included in accumulated other comprehensive
income into earnings. During the seven months ended December 31, 2007 and the
five months ended May 31, 2007, we reclassified gains of $0.4 million and losses
of $11.4 million, respectively, of accumulated other comprehensive loss into
earnings, as a result of hedged forecasted transactions
occurring during these periods. During 2006 and 2005, we
reclassified, $21.7 million and $102.3 million, respectively, of accumulated
other comprehensive loss into earnings, as a result of hedged forecasted
transactions occurring during these periods. During the five months ended May
31, 2007 and the year ended December 31, 2006, we reclassified $1.1 million of
net gains and $2.9 million of net losses, respectively, 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. During the seven months ended December 31, 2007 and the
year ended December 31, 2005, we did not reclassify any of our accumulated other
comprehensive loss into earnings as a result of the discontinuance of cash flow
hedges. We expect to reclassify approximately $85.4 million of accumulated other
comprehensive loss as of December 31, 2007 to earnings during the next twelve
months.
Derivative
instruments that are entered into for the purpose of mitigating commodity price
risk include swaps, futures and options. The fair values of these derivative
contracts reflect the amounts that we would receive or pay to terminate the
contracts at the reporting date and are included in the accompanying
Consolidated Balances Sheets as of December 31, 2007 and 2006 within the
captions indicated in the following table:
|
Successor
Company
|
Predecessor
Company
|
|||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
(In
millions)
|
|||||||
|
Derivatives
Asset (Liability)
|
||||||||
|
Current
Assets: Other
|
$
|
37.1
|
$
|
133.6
|
||||
|
Current
Assets: Assets Held for Sale
|
$
|
8.4
|
$
|
9.0
|
||||
|
Deferred
Charges and Other Assets
|
$
|
4.4
|
$
|
13.8
|
||||
|
Assets
Held for Sale, Non-current
|
$
|
-
|
$
|
0.1
|
||||
|
Current
Liabilities: Other
|
$
|
(594.7
|
)
|
$
|
(556.9
|
)
|
||
|
Current
Liabilities: Liabilities Held for Sale
|
$
|
(0.4
|
)
|
$
|
(18.0
|
)
|
||
|
Other
Liabilities and Deferred Credits: Other
|
$
|
(836.8
|
)
|
$
|
(510.2
|
)
|
||
|
Other
Liabilities and Deferred Credits: Liabilities Held for Sale,
Non-current
|
$
|
-
|
$
|
(0.1
|
)
|
|||
As
of December 31, 2007, the maximum length of time over which we have hedged our
exposure to the variability in future cash flows associated with commodity price
risk is through December 2012.
Interest
Rate Risk Management
We
have exposure to interest rate risk as a result of the issuance of variable and
fixed rate debt and commercial paper. We enter into interest rate swap
agreements to mitigate our exposure to changes in the fair value of our fixed
rate debt agreements.
150
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
These
hedging relationships are accounted for as fair value hedges under SFAS No. 133.
Prior to the Going Private transaction, all of our interest rate swaps qualified
for the “short-cut” method prescribed in SFAS No. 133 for qualifying fair value
hedges. Accordingly, the carrying value of the swap was adjusted to its fair
value as of the end of each reporting period, and an offsetting entry was made
to adjust the carrying value of the debt securities whose fair value was being
hedged. We recorded interest expense equal to the floating rate payments, which
was accrued monthly and paid semi-annually.
In
connection with the Going Private transaction, all of our debt was recorded on
our balance sheet at fair value and, except for Terasen Pipelines (Corridor)
Inc.’s outstanding interest rate swap agreements classified as held for sale,
all of our interest rate swaps were re-designated as fair value hedges effective
June 1, 2007. Because these swaps did not have a fair value of zero as of June
1, 2007 they did not meet the requirements for the “short-cut” method of
assessing their effectiveness. Accordingly, subsequent changes in the carrying
value of the swap is adjusted to its fair value as of the end of each reporting
period, and an offsetting entry is made to adjust the carrying value of the debt
securities whose fair value is being hedged. Any hedge ineffectiveness resulting
from the difference between the change in fair value of the interest rate swap
and the change in fair value of the hedged debt instrument is recorded as
interest expense in the current period. During the seven months ended December
31, 2007, no hedge ineffectiveness related to these hedges was recognized.
Interest expense equal to the floating rate payments is accrued monthly and paid
semi-annually.
As
of December 31, 2006, we, and our subsidiary Kinder Morgan Energy Partners were
party to interest rate swap agreements with notional principal amounts of $2.325
billion and $2.1 billion, respectively, for a consolidated total of $4.425
billion. In addition, we were a party to interest rate swap agreements in Canada
with notional principal amounts of C$609 million.
During
the five months ended May 31, 2007, our subsidiary Kinder Morgan Energy
Partners, entered into additional fixed-to-floating interest rate swap
agreements associated with its $600 million of 5.95% senior notes due February
15, 2018 with a combined notional principal of $500 million. Also during the
five months ended May 31, 2007, we, and our subsidiary Kinder Morgan Energy
Partners, terminated interest rate swaps with a notional value of $900 million
and $100 million, respectively. The termination of these swaps resulted in a net
gain of $52 million that was amortized to interest expense over the periods in
which the hedged interest payments were forecasted to occur. In connection with
the Going Private transaction, our portion of the unamortized gain as of May 31,
2007 was removed from the books in purchase accounting and will not impact our
interest expense after that date.
During
the seven months ended December 31, 2007, interest rate swap agreements with a
notional amount of $200 million matured on the same day as the corresponding
hedged debt, the $250 million of 5.35% senior notes, became due at Kinder Morgan
Energy Partners. Also during the seven months ended December 31, 2007, we
terminated interest rate swaps with a notional value of $1.15 billion. The
termination of these swaps resulted in a net gain of $24.5 million that is being
amortized to interest expense over the periods in which the hedged interest
payments were forecasted to occur. The total unamortized net gain on the
termination of interest rate swaps of $30.3 million is included within the
caption “Long-term Debt: Value of Interest Rate Swaps” in the accompanying
Consolidated Balance Sheet December 31, 2007.
The
swaps denominated in Canadian dollars were sold as part of the respective sales
of Terasen Inc. and Terasen Pipelines (Corridor) Inc. (see Note 7) in May and
June of 2007, respectively.
As
of December 31, 2007, we and our subsidiary Kinder Morgan Energy Partners, were
party to interest rate swap agreements with notional principal amounts of $275
million and $2.3 billion, respectively, for a consolidated total of $2.575
billion. The fair value of our interest rate swaps as of December 31, 2007 was
$139.1 million and is included in the accompanying Consolidated Balance Sheet
within the caption “Deferred Charges and Other Assets.” Additionally, as
discussed in Note 19, on March 7, 2008, we terminated our remaining interest
rate swap having a notional value of $275 million associated with Kinder Morgan
Finance Company, ULC’s 6.40% senior notes due 2036.
All
of our interest rate swap agreements and those of our subsidiary, Kinder Morgan
Energy Partners, have a termination date that corresponds to the maturity date
of one of the associated series of senior notes and, as of December 31, 2007,
the maximum length of time over which we have hedged a portion of our exposure
to the variability in the value of this debt due to interest rate risk is
through January 15, 2038. In addition, certain of our swap agreements contain
mutual cash-out provisions that allow us or our counterparties to settle the
agreement at certain future dates before maturity based on the then-economic
value of the swap agreement.
We
are exposed to credit related losses in the event of nonperformance by
counterparties to our interest rate swap agreements, and while we enter into
derivative contracts primarily with investment grade counterparties and actively
monitor their credit ratings, it is nevertheless possible that from time to time
losses will result from counterparty credit risk. As of December 31, 2007, all
of our interest rate swap agreements were with counterparties with investment
grade credit ratings.
151
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
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 in
accordance with SFAS No. 133. We have recognized no ineffectiveness through the
income statement as a result of these hedging relationships during the seven
months ended December 31, 2007, the five months ended May 31, 2007 or during
2006. The effective portion of the changes in fair value of these swap
transactions is reported as a cumulative translation adjustment under the
caption “Accumulated Other Comprehensive Loss” in the accompanying Consolidated
Balance Sheets at December 31, 2007 and 2006.
In
December 2005 we entered into three receive-fixed-rate, pay-fixed-rate U.S.
dollar to Canadian dollar cross-currency interest rate swap agreements having a
combined notional value of C$1,240 million. These derivative instruments were
designated as a hedge of our net investment in Canadian operations in accordance
with Statement 133. Also, in December 2005, we entered into three
receive-fixed-rate, pay-variable-rate U.S. dollar to Canadian dollar
cross-currency interest rate swap agreements having a combined notional value of
C$1,254 million. These derivative instruments did not qualify for hedge
accounting under SFAS No. 133. In February 2006 we entered into a series of
transactions to effectively terminate these agreements and entered into a series
of receive-fixed-rate, pay-fixed-rate U.S. dollar to Canadian dollar
cross-currency interest rate swap agreements with the same notional value. The
new derivative instruments were designated as hedges of our net investment in
Canadian operations in accordance with SFAS No. 133. We recognized a one time
non-cash, after-tax loss of approximately $14 million in the first quarter of
2006 from changes in the fair value of our receive-fixed-rate, pay-variable rate
U.S. dollar to Canadian dollar cross-currency interest rate swaps from January
1, 2006 to the termination of the agreements.
Due
to the divestiture of a significant portion of our Canadian operations (see Note
7), we terminated approximately C$250 million and C$1,963 million of our
cross-currency interest rate swaps during the seven months ended December 31,
2007 and the five months ended May 31, 2007, respectively. We paid a total of
approximately US$43.2 million and US$151.3 million, respectively, to terminate
these swaps. The portion of accumulated losses on these hedges relating to the
disposed Canadian operations was included in the corresponding gain or loss on
sale calculation for each asset group divested. The combined notional value of
our remaining cross-currency interest rate swaps at December 31, 2007 is
approximately C$281.6 million. The fair value of the swaps as of December 31,
2007 is a liability of US$51.2 million which is included in the caption “Other
Liabilities and Deferred Credits: Other” in the accompanying Consolidated
Balance Sheet.
12.
Employee Benefits
On
September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statement
Nos. 87, 88, 106 and 132(R) (“SFAS No. 158”). This statement requires a
company to recognize the overfunded or underfunded status of its defined benefit
pension and postretirement plans as assets or liabilities in its statement of
financial position. The statement also requires a company to recognize as a
component of other comprehensive income the gains or losses and prior service
costs or credits that arise during a period but that are not recognized as part
of net periodic benefit costs in the current period.
Knight
Inc.
(A)
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, 2007
and 2006.
152
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Total
amounts recognized in net periodic pension cost include the following
components:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Net
Periodic Pension Benefit Cost:
|
||||||||||||||||
|
Service
Cost
|
$
|
5.6
|
$
|
4.5
|
$
|
10.6
|
$
|
9.6
|
||||||||
|
Interest
Cost
|
8.1
|
5.6
|
12.7
|
12.1
|
||||||||||||
|
Expected
Return on Assets
|
(14.0
|
)
|
(9.6
|
)
|
(21.3
|
)
|
(20.2
|
)
|
||||||||
|
Amortization
of Transition Asset
|
-
|
-
|
-
|
(0.1
|
)
|
|||||||||||
|
Amortization
of Prior Service Cost
|
-
|
0.1
|
0.2
|
0.2
|
||||||||||||
|
Amortization
of Loss
|
-
|
0.2
|
0.9
|
0.6
|
||||||||||||
|
Net
Periodic Pension Benefit Cost
|
$
|
(0.3
|
)
|
$
|
0.8
|
$
|
3.1
|
$
|
2.2
|
|||||||
The
following table sets forth the reconciliation of the beginning and ending
balances of the pension benefit obligation:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31, 2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31, 2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Benefit
Obligation at Beginning of Period
|
$
|
236.5
|
$
|
232.0
|
$
|
224.5
|
||||||
|
Service
Cost
|
5.6
|
4.5
|
10.6
|
|||||||||
|
Interest
Cost
|
8.1
|
5.6
|
12.7
|
|||||||||
|
Actuarial
Loss (Gain)
|
18.5
|
(2.5
|
)
|
(4.3
|
)
|
|||||||
|
Plan
Amendments
|
-
|
2.7
|
-
|
|||||||||
|
Business
Combinations/Mergers
|
-
|
-
|
0.2
|
|||||||||
|
Benefits
Paid
|
(10.7
|
)
|
(5.8
|
)
|
(11.7
|
)
|
||||||
|
Benefit
Obligation at End of Period
|
$
|
258.0
|
$
|
236.5
|
$
|
232.0
|
||||||
The
accumulated benefit obligation through December 31, 2007 and 2006 was $248.1
million and $220.6 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:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31, 2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31, 2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Fair
Value of Plan Assets at Beginning of Period
|
$
|
273.4
|
$
|
261.6
|
$
|
242.4
|
||||||
|
Actual
Return on Plan Assets During the Period
|
1.9
|
17.6
|
30.7
|
|||||||||
|
Contributions
by Employer
|
-
|
-
|
-
|
|||||||||
|
Benefits
Paid During the Period
|
(10.7
|
)
|
(5.8
|
)
|
(11.7
|
)
|
||||||
|
Business
Combinations/Mergers
|
-
|
-
|
0.2
|
|||||||||
|
Fair
Value of Plan Assets at End of Period
|
264.6
|
273.4
|
261.6
|
|||||||||
|
Benefit
Obligation at End of Period
|
(258.0
|
)
|
(236.5
|
)
|
(232.0
|
)
|
||||||
|
Funded
Status at End of Period
|
$
|
6.6
|
$
|
36.9
|
$
|
29.6
|
||||||
153
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
accompanying Consolidated Balance Sheets at December 31, 2007 and 2006 include
balances of $7.1 million and $28.2 million, respectively, under the caption
“Deferred Charges and Other Assets” and balances of $0.4 million and $0.4
million respectively, under the caption “Other Liabilities and Deferred Credits:
Other,” related to our pension plans. Amounts recognized in “Accumulated Other
Comprehensive Loss” consist of:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31, 2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31, 2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Application
of SFAS 158 – Net Loss
|
$
|
-
|
$
|
-
|
$
|
19.6
|
||||||
|
Application
of SFAS 158 – Prior Service Cost
|
-
|
-
|
1.5
|
|||||||||
|
Net
(Gain)/Loss Arising During Period
|
30.6
|
(10.5
|
)
|
-
|
||||||||
|
Prior
Service Cost Arising During Period
|
-
|
2.7
|
-
|
|||||||||
|
Business
Combinations
|
-
|
(13.0
|
)
|
-
|
||||||||
|
Amortization
of (Gain)/Loss
|
-
|
(0.2
|
)
|
-
|
||||||||
|
Amortization
of Prior Service Cost
|
-
|
(0.1
|
)
|
-
|
||||||||
|
$
|
30.6
|
$
|
(21.1
|
)
|
$
|
21.1
|
||||||
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 $0.4 million.
We
do not expect to contribute to the Plan during 2008.
The
following net benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
Fiscal
Year
|
Expected
Net
Benefit
Payments
|
|||
|
(In
millions)
|
||||
|
2008
|
$
|
13.7
|
||
|
2009
|
$
|
14.9
|
||
|
2010
|
$
|
15.9
|
||
|
2011
|
$
|
17.4
|
||
|
2012
|
$
|
18.8
|
||
|
2013-2016
|
$
|
114.2
|
||
Effective
January 1, 2001, we added a cash balance plan to our retirement plan. Certain
collectively bargained employees and “grandfathered” employees continue to
accrue benefits through the defined pension benefit plan described above. All
other employees accrue benefits through a personal retirement account in the
cash balance plan. All employees converting to the cash balance plan were
credited with the current fair value of any benefits they had previously accrued
through the defined benefit plan. We make contributions on behalf of these
employees equal to 3% of eligible compensation every pay period. Interest is
credited to the personal retirement accounts at the 30-year U.S. Treasury bond
rate, or an approved substitute, in effect each year. Employees become fully
vested in the plan after three years (five years prior to January 1, 2008) and
they may take a lump sum distribution upon termination of employment or
retirement.
In
addition to our retirement plan described above, we have the Knight Inc. Savings
Plan (the “Plan”), a defined contribution 401(k) plan. The plan permits all
full-time employees to contribute between 1% and 50% of base compensation, on a
pre-tax basis, into participant accounts. In addition to a mandatory Company
contribution equal to 4% of base compensation per year for most plan
participants, we may make discretionary contributions. Certain employees’
contributions are based on collective bargaining agreements. The mandatory
contributions are made each pay period on behalf of each eligible employee.
Participants may direct the investment of their contributions and all employer
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 seven months ended December 31, 2007, the
five months ended May 31, 2007 and the years ended 2006 and 2005 was $11.0
million, $8.1 million, $18.3 million and $14.6 million,
respectively.
Employer
contributions for employees vest on the second anniversary of the date of hire.
Effective October 1, 2005, a tiered employer contribution schedule was
implemented for new employees of Kinder Morgan Energy Partners, L.P.’s Terminals
segment. This tiered schedule provides for employer contributions of 1% for
service less than one year, 2% for service
154
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
between
one and two years, 3% for services between two and five years, and 4% for
service of five years or more. All employer contributions for Terminals
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 employees was changed to three years to comply with changes in federal
regulations. Vesting and contributions for bargaining employees will follow the
collective bargaining agreements.
At
its July 2007 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 employee. Each eligible employee will receive an additional 1%
Company contribution based on eligible base pay each pay period beginning with
the first pay period of August 2007 and continuing through the last pay period
of July 2008. The additional 1% contribution does not change or otherwise
impact, the annual 4% contribution that eligible employees currently receive and
the vesting schedule mirrors the Company’s 4% contribution. Since this
additional 1% Company contribution is discretionary, compensation committee
approval will be required annually for each additional contribution. During the
first quarter of 2008, excluding the 1% additional contribution described above,
we will not make any additional discretionary contributions to individual
accounts for 2007.
Additionally,
in 2006, an option to make after-tax “Roth” contributions (Roth 401(k) option)
to a separate participant account was added to the Savings Plan as an additional
benefit to all participants. 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 employer
contribution will still be considered taxable income at the time of
withdrawal.
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 2006 and July of 2007.
During the seven months ended December 31, 2007, the five months ended May 31,
2007 and the year ended December 31, 2006, we amortized $5.3 million, $1.3
million and $1.9 million, respectively, related to these grants.
(B)
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. We fund 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:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||||||
|
Net
Periodic Postretirement Benefit Cost:
|
||||||||||||||||
|
Service
Cost
|
$
|
0.2
|
$
|
0.2
|
$
|
0.4
|
$
|
0.4
|
||||||||
|
Interest
Cost
|
2.7
|
1.9
|
4.9
|
5.3
|
||||||||||||
|
Expected
Return on Assets
|
(3.9
|
)
|
(2.7
|
)
|
(5.8
|
)
|
(5.7
|
)
|
||||||||
|
Amortization
of Prior Service Credit
|
-
|
(0.7
|
)
|
(1.6
|
)
|
(1.7
|
)
|
|||||||||
|
Amortization
of Loss
|
-
|
2.0
|
5.2
|
5.0
|
||||||||||||
|
Net
Periodic Postretirement Benefit Cost
|
$
|
(1.0
|
)
|
$
|
0.7
|
$
|
3.1
|
$
|
3.3
|
|||||||
155
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
following table sets forth the reconciliation of the beginning and ending
balances of the accumulated postretirement benefit obligation:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
December
31,
2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Benefit
Obligation at Beginning of Period
|
$
|
78.7
|
$
|
84.0
|
$
|
89.8
|
||||||
|
Service
Cost
|
0.2
|
0.2
|
0.4
|
|||||||||
|
Interest
Cost
|
2.7
|
1.9
|
4.9
|
|||||||||
|
Actuarial
Loss (Gain)
|
7.5
|
(3.5
|
)
|
(3.5
|
)
|
|||||||
|
Benefits
Paid
|
(8.5
|
)
|
(5.3
|
)
|
(10.8
|
)
|
||||||
|
Retiree
Contributions
|
1.4
|
1.4
|
2.7
|
|||||||||
|
Plan
Amendments
|
-
|
-
|
0.5
|
|||||||||
|
Benefit
Obligation at End of Period
|
$
|
82.0
|
$
|
78.7
|
$
|
84.0
|
||||||
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:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31,
2007
|
Five
Months
Ended
May
31, 2007
|
December
31,
2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Fair
Value of Plan Assets at Beginning of Period
|
$
|
76.9
|
$
|
67.5
|
$
|
59.4
|
||||||
|
Actual
Return on Plan Assets
|
0.1
|
4.5
|
7.2
|
|||||||||
|
Contributions
by Employer
|
-
|
8.7
|
8.7
|
|||||||||
|
Retiree
Contributions
|
1.6
|
1.2
|
2.7
|
|||||||||
|
Transfers
In
|
0.1
|
-
|
-
|
|||||||||
|
Benefits
Paid
|
(9.5
|
)
|
(5.0
|
)
|
(10.5
|
)
|
||||||
|
Fair
Value of Plan Assets at End of Period
|
69.2
|
76.9
|
67.5
|
|||||||||
|
Benefit
Obligation at End of Period
|
(82.0
|
)
|
(78.7
|
)
|
(84.0
|
)
|
||||||
|
Funded
Status at End of Period
|
$
|
(12.8
|
)
|
$
|
(1.8
|
)
|
$
|
(16.5
|
)
|
|||
The
accompanying Consolidated Balance Sheets at December 31, 2007 and 2006 include
balances of $12.8 million and $16.9 million, respectively, under the caption
“Other Liabilities and Deferred Credits: Other,” related to our other
postretirement benefit plans.
Amounts
recognized in “Accumulated Other Comprehensive Loss” consist of:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
Seven
Months
Ended
December
31, 2007
|
Five
Months
Ended
May
31, 2007
|
Year
Ended
December
31, 2006
|
||||||||||
|
(In
millions)
|
(In
millions)
|
|||||||||||
|
Application
of SFAS 158 – Net Loss
|
$
|
-
|
$
|
-
|
$
|
60.2
|
||||||
|
Application
of SFAS 158 – Prior Service Cost
|
-
|
-
|
(15.8
|
)
|
||||||||
|
Net
(Gain)/Loss Arising During Period
|
12.0
|
(5.4
|
)
|
-
|
||||||||
|
Business
Combinations
|
-
|
(37.7
|
)
|
-
|
||||||||
|
Amortization
of (Gain)/Loss
|
-
|
(2.0
|
)
|
-
|
||||||||
|
Amortization
of Prior Service Cost
|
-
|
0.7
|
-
|
|||||||||
|
$
|
12.0
|
$
|
(44.4
|
)
|
$
|
44.4
|
||||||
156
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
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 $0.3 million.
We
expect to make contributions of approximately $1.3 million to the plan in
2008.
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 2007 net periodic postretirement
benefit cost by approximately $5 $(4) thousand and would have increased
(decreased) the accumulated postretirement benefit obligation as of December 31,
2007 by approximately $79 $(74) thousand.
The
following net benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
Fiscal
Year
|
Expected
Net
Benefit
Payments
|
|||
|
(In
millions)
|
||||
|
2008
|
$
|
7.7
|
||
|
2009
|
$
|
7.5
|
||
|
2010
|
$
|
7.2
|
||
|
2011
|
$
|
7.0
|
||
|
2012
|
$
|
6.8
|
||
|
2013-2016
|
$
|
31.8
|
||
In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (“the Act”) was signed into law. In January 2004, the FASB issued Staff
Position (“FSP”) FAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, to provide guidance on accounting and
disclosure for the Act as it pertains to postretirement benefit plans, and in
May 2004, the FASB issued FSP FAS 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which superseded FSP FAS 106-1 effective July
1, 2004, which provides specific authoritative guidance on the accounting for
the federal subsidy included in the Act. In the third quarter of 2004, our board
approved a resolution to amend our postretirement benefit plan to eliminate
prescription drug benefits for Medicare eligible retirees effective January 1,
2006, which eliminates any potential effects on our periodic postretirement
benefit costs due to the federal subsidy included in the Act.
(C)
Actuarial Assumptions
The
assumptions used to determine benefit obligations for the pension and
postretirement benefit plans were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Discount
Rate
|
5.75
|
%
|
6.00
|
%
|
6.00%
|
5.75%
|
||||||||||
|
Expected
Long-term Return on Assets
|
9.00
|
%
|
9.00
|
%
|
9.00%
|
9.00%
|
||||||||||
|
Rate
of Compensation Increase (Pension Plan Only)
|
3.50
|
%
|
3.50
|
%
|
3.50%
|
3.50%
|
||||||||||
The
assumptions used to determine net periodic benefit cost for the pension and
postretirement benefits were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Discount
Rate
|
6.00
|
%
|
6.00
|
%
|
5.75%
|
6.00%
|
||||||||||
|
Expected
Long-term Return on Assets
|
9.00
|
%
|
9.00
|
%
|
9.00%
|
9.00%
|
||||||||||
|
Rate
of Compensation Increase (Pension Plan Only)
|
3.50
|
%
|
3.50
|
%
|
3.50%
|
3.50%
|
||||||||||
157
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
assumed healthcare cost trend rates for the postretirement plan
were:
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months
Ended
December
31,
|
Five
Months
Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Healthcare
Cost Trend Rate Assumed for Next Year
|
3.0%
|
3.0%
|
3.0%
|
3.0%
|
||||||||||||
|
Rate
to which the Cost Trend Rate is Assumed to Decline (Ultimate Trend
Rate)
|
3.0%
|
3.0%
|
3.0%
|
3.0%
|
||||||||||||
|
Year
the Rate Reaches the Ultimate Trend Rate
|
2007
|
2007
|
2006
|
2005
|
||||||||||||
(D)
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
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, 2007, 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, 2007, the following target asset allocation ranges
were in effect for our retiree medical and retiree life insurance plans
(Minimum/Target/Maximum): Cash – 0%/5%/15%; Fixed Income – 15%/25%/35% 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. Historically, our plans have allowed for up to 10% (15%
with asset appreciation) of the plans’ assets to be held in Kinder Morgan, Inc.
common stock. During the fourth quarter of 2006, all investments in Kinder
Morgan, Inc. common stock held by the plans were systematically liquidated at
the discretion of our independent fiduciary. As a result of the sale of these
assets, at December 31, 2006, the cash position in our pension plan was above
the maximum allocation (15.6% vs 5% maximum allocation) and the large cap equity
position (32.8%) was slightly above the minimum large cap allocation (30%) but
below the target allocation (40%). In the first quarter of 2007, the Committee
rebalanced the plans’ portfolios to be within the allocation ranges specified by
investment policies.
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 writing covered calls), 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.
(E)
Return on Plan Assets
For
the year ending December 31, 2007, our defined benefit pension plan yielded a
weighted-average rate of return of 8.61%, below the expected rate of return on
assets of 9.00%. Investment performance for a balanced fund comprised of a
similar mix
158
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
of
assets yielded a weighted-average return of 6.13%, so our plans exceeded the
performance of the benchmark balanced fund index. For the year ending December
31, 2007, our retiree medical and retiree life insurance plans yielded a
weighted-average rate of return of 6.44%, below the expected rate of return on
assets of 9.00%. Investment performance for a balanced fund comprised of a
similar mix of assets yielded a weighted-average return of 5.16%, so our plans
exceeded the performance of the benchmark balanced fund index.
At
December 31, 2007, our pension plan assets consisted of 69.5% equity, 27.3%
fixed income and 3.2% cash and cash equivalents, and our retiree medical and
retiree life insurance plan assets consisted of 66.7% equity, 28.9% fixed income
and 4.4% 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, 2007
would be approximately 9.6% to 9.8% if investments were made in the broad
indexes. Therefore, we arrived at an overall expected return of 9% for purposes
of making the required calculations.
Kinder
Morgan Energy Partners
Kinder
Morgan Canada Inc. and Trans Mountain Pipeline Inc. (as general partners 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.
Our combined net periodic benefit costs for these Trans Mountain pension and
postretirement benefit plans for the seven months ended December 31, 2007 and
the five months ended May 31, 2007 was approximately $1.9 million and $1.3
million, respectively. As of December 31, 2007, we estimate our overall net
periodic pension and postretirement benefit costs for these plans for the year
2008 will be approximately $3.1 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. We expect to contribute
approximately $2.6 million to these benefit plans in 2008. Prior to the sale of
Trans Mountain to Kinder Morgan Energy Partners on April 18, 2008 (refer to Note
1(I)), the pension plans of Trans Mountain were part of the Terasen pension
plans. Refer to the following discussion on the Terasen pension plans for
2006.
In
connection with Kinder Morgan Energy Partners’ acquisition of SFPP, L.P.,
referred to in this report as SFPP, and Kinder Morgan Bulk Terminals, Inc. in
1998, Kinder Morgan Energy Partners acquired certain liabilities for pension and
postretirement benefits. Kinder Morgan Energy Partners provides medical and life
insurance benefits to current employees, their covered dependents and
beneficiaries of SFPP and Kinder Morgan Bulk Terminals. Kinder Morgan Energy
Partners also provides the same benefits to former salaried employees of SFPP.
Additionally, Kinder Morgan Energy Partners will continue to fund these costs
for those employees currently in the plan during their retirement years. SFPP’s
postretirement benefit plan is frozen, and no additional participants may join
the plan. The noncontributory defined benefit pension plan covering the former
employees of Kinder Morgan Bulk Terminals is the Knight Inc. Retirement Plan.
The benefits under this plan are based primarily upon years of service and final
average pensionable earnings; however, benefit accruals were frozen as of
December 31, 1998.
The
net periodic benefit cost for the SFPP postretirement benefit plan were credits
of $0.1 million, $0.1 million and $0.3 million for the seven months ended
December 31, 2007, the five months ended May 31, 2007 and the year ended
December 31, 2006, respectively. The credits resulted in increases to income,
largely due to amortizations of an actuarial gain and a negative prior service
cost. As of December 31, 2007, we estimate no overall net periodic
postretirement benefit cost for the SFPP postretirement benefit plan for the
year 2008, however, this estimate could change if a future significant event
would require a remeasurement of liabilities. In addition, we expect to
contribute approximately $0.4 million to this postretirement benefit plan in
2008.
As
of December 31, 2007 and 2006, the recorded value of Kinder Morgan Energy
Partners’ pension and postretirement benefit obligations for these plans was a
combined $37.5 million and $28.4 million, respectively.
Multiemployer
Plans
As
a result of acquiring several terminal operations, primarily the 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 contributes 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 totaled $2.5 million, $4.2 million and $6.3 million for the five
months ended May 31, 2007, the seven months ended December 31, 2007 and the year
ended December 31, 2006, respectively.
159
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Terasen
Prior
to the sale of Terasen Inc. and Terasen Pipelines (Corridor) Inc. on May 17,
2007 and June 15, 2007, respectively, (see Note 7) we were a sponsor of pension
plans for eligible employees. Our expense for the Terasen Inc. and Corridor
pension and other postretirement benefits plans for the period from January 1 to
May 15, 2007 was $3.7 million. After the sale of Terasen and Corridor we no
longer had expenses or obligations related to these pension and other
postretirement plans. The Terasen and Corridor plans included registered defined
benefit pension plans, supplemental unfunded arrangements, which provide pension
benefits in excess of statutory limits, and defined contributory plans. We also
provided postretirement benefits other than pensions for retired employees. The
following is a summary of each type of plan:
(A)
Description of Plans
Defined
Benefit Plans
Retirement
benefits under the defined benefit plans are based on employees’ years of
credited service and remuneration. Company contributions to the plan were based
upon independent actuarial valuations. The most recent actuarial valuations of
the defined benefit pension plans for funding purposes were at December 31, 2005
and December 31, 2004.
Defined
Contribution Plan
Effective
in 2000 for Terasen Gas and 2003 for petroleum transportation operations, all
new non-union employees became members of defined contribution pension plans.
Company contributions to the plan were based upon employee age and pensionable
earnings for employees of the natural gas distribution operations and
pensionable earnings for employees of the petroleum transportation
operation.
Supplemental
Plans
Certain
employees were eligible to receive supplemental benefits under both the defined
benefit and defined contribution plans. The supplemental plans provided pension
benefits in excess of Canadian statutory limits. The supplemental plans were
unfunded and were secured by letters of credit. Beginning in 2006, we capped
eligible compensation for Canada-based employees at C$250,000 per
year.
Other
Postretirement Benefits
We
provided retired employees with other postretirement benefits that included,
depending on circumstances, supplemental health, dental and life insurance
coverage. Postretirement benefits were unfunded and annual expense was recorded
on an accrual basis based on independent actuarial determinations, considering
among other factors, health care cost escalation. The most recent actuarial
valuations were completed as of December 31, 2005.
(B)
Actuarial Valuations
The
financial positions of the employee defined benefit pension plans and
postretirement benefit plans are presented in aggregate in the tables
below.
Net
periodic pension and postretirement costs include the following
components:
|
Year
Ended
December
31, 2006
|
Month
Ended
December
31, 2005
|
||||||||||||||
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
||||||||||||
|
(In
millions)
|
|||||||||||||||
|
Service
Cost
|
$
|
7.7
|
$
|
1.5
|
$
|
0.7
|
$
|
0.1
|
|||||||
|
Interest
Cost
|
14.8
|
3.6
|
1.2
|
0.3
|
|||||||||||
|
Expected
Return on Assets
|
(17.4
|
)
|
-
|
(1.6
|
)
|
-
|
|||||||||
|
Expense
Load
|
0.1
|
0.1
|
-
|
-
|
|||||||||||
|
Actuarial
Loss
|
0.2
|
-
|
-
|
-
|
|||||||||||
|
Special
Termination Benefits
|
0.4
|
-
|
-
|
-
|
|||||||||||
|
Net
Periodic Pension Benefit Cost
|
5.8
|
5.2
|
0.3
|
0.4
|
|||||||||||
|
Defined
Contribution Cost
|
0.1
|
-
|
0.2
|
-
|
|||||||||||
|
Total
Benefit Expense
|
$
|
5.9
|
$
|
5.2
|
$
|
0.5
|
$
|
0.4
|
|||||||
160
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The
following table sets forth the reconciliation of the beginning and ending
balances of the pension and postretirement benefit obligation:
|
Year
Ended
December
31, 2006
|
|||||||
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
||||||
|
(In
millions)
|
|||||||
|
Benefit
Obligation at Beginning of Period
|
$
|
296.1
|
$
|
70.5
|
|||
|
Change
in Foreign Exchange Rates
|
(0.6
|
)
|
(0.2
|
)
|
|||
|
Service
Cost
|
7.7
|
1.5
|
|||||
|
Interest
Cost
|
14.8
|
3.6
|
|||||
|
Change
in Discount Rate
|
-
|
-
|
|||||
|
Actuarial
Loss
|
11.5
|
3.0
|
|||||
|
Contributions
by Members
|
2.9
|
-
|
|||||
|
Special
Termination Benefits
|
0.4
|
-
|
|||||
|
Benefits
Paid
|
(15.3
|
)
|
(1.5
|
)
|
|||
|
Benefit
Obligation at End of Period
|
$
|
317.5
|
$
|
76.9
|
|||
The
accumulated pension benefit obligation through December 31, 2006 was $267.0
million.
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:
|
Year
Ended
December
31, 2006
|
|||||||
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
||||||
|
(In
millions)
|
|||||||
|
Fair
Value of Plan Assets at Beginning of Period
|
$
|
256.7
|
$
|
-
|
|||
|
Change
in Foreign Exchange Rates
|
(0.5
|
)
|
-
|
||||
|
Actual
Return on Plan Assets During the Period
|
35.9
|
-
|
|||||
|
Contributions
by Employer
|
7.6
|
1.6
|
|||||
|
Contributions
by Members
|
2.9
|
-
|
|||||
|
Expense
Load
|
(0.1
|
)
|
(0.1
|
)
|
|||
|
Benefits
Paid During the Period
|
(15.3
|
)
|
(1.5
|
)
|
|||
|
Fair
Value of Plan Assets at End of Year
|
287.2
|
-
|
|||||
|
Benefit
Obligation at End of Year
|
(317.5
|
)
|
(76.9
|
)
|
|||
|
Funded
Status at End of Year
|
$
|
(30.3
|
)
|
$
|
(76.9
|
)
|
|
Amounts
recognized in the consolidated balance sheets after application of SFAS No. 158
are as follows:
|
December
31, 2006
|
|||||||
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
||||||
|
(In
millions)
|
|||||||
|
Non-current
Assets
|
$
|
10.2
|
$
|
-
|
|||
|
Non-current
Liabilities
|
(40.5
|
)
|
(76.9
|
)
|
|||
|
$
|
(30.3
|
)
|
$
|
(76.9
|
)
|
||
Amounts
in “Accumulated Other Comprehensive Loss” in the accompanying Consolidated
Balance Sheet consist of:
|
December
31, 2006
|
|||||||
|
Pension
Benefit
Plans
|
Postretirement
Benefit
Plans
|
||||||
|
(In
millions)
|
|||||||
|
Net
Loss
|
$
|
2.2
|
$
|
5.4
|
|||
|
Prior
Service Cost (Credit)1
|
-
|
-
|
|||||
|
$
|
2.2
|
$
|
5.4
|
||||
__________
|
1
|
Net
prior service credit for the pension benefit plan was less than $0.1
million at December 31, 2006.
|
161
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
|
(C)
Actuarial Assumptions
|
The
assumptions used to determine benefit obligations for the pension and
postretirement benefit plans were:
|
December
31,
|
|||
|
2006
|
2005
|
||
|
Discount
Rate
|
5.00%
|
5.00%
|
|
|
Expected
Long-term Return on Assets
|
7.25%
|
7.50%
|
|
|
Rate
of Compensation Increase (Pension Plan Only)1
|
3.84%
|
3.50%
|
|
__________
|
1
|
Rate
of compensation increase is for the next five years. Thereafter, the rate
decreases to 3.50%.
|
The
assumptions used to determine net periodic benefit cost for the pension and
postretirement benefits were:
|
Year
Ended
December
31,
|
Month
Ended
December
31,
|
||
|
2006
|
2005
|
||
|
Discount
Rate
|
5.00%
|
5.25%
|
|
|
Expected
Long-term Return on Assets
|
7.25%
|
7.50%
|
|
|
Rate
of Compensation Increase (Pension Plan Only)
|
3.84%
|
3.50%
|
The
assumed healthcare cost trend rates for the postretirement plan
were:
|
December
31,
|
|||
|
2006
|
2005
|
||
|
Healthcare
Cost Trend Rate Assumed for Next Year
|
10.0%
|
7.0%
|
|
|
Rate
to which the Cost Trend Rate is Assumed to Decline (Ultimate Trend
Rate)
|
5.0%
|
5.0%
|
|
|
Year
the Rate Reaches the Ultimate Trend Rate
|
2011
|
2008
|
|
13.
Share-based Compensation
Knight
Inc.
Effective
January 1, 2006, we implemented Statement of Financial Accounting Standards
(“SFAS”) No. 123R (revised 2004), Share-Based Payment (“SFAS
No. 123R”). This
Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”), and requires companies to expense the
value of employee stock options and similar awards. Because we used the
fair-value method of accounting for stock-based compensation for pro forma
disclosure under SFAS No. 123, we applied SFAS No. 123R using the modified
prospective method. Under this transition method, compensation cost is
recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS No. 123
for pro forma disclosures.
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 related to the
accelerated vesting of these awards.
Stock
options issued in the periods presented below were under the following plans:
The 1992 Non-Qualified Stock Option Plan for Non-Employee Directors (which plan
has expired), the 1994 Kinder Morgan, Inc. Long-term Incentive Plan (which plan
has expired), the Kinder Morgan, Inc. Amended and Restated 1999 Stock Plan and
the Non-Employee Directors Stock Awards Plan. The 1994 plan provided for, and
the 1999 plan and the Non-Employee Directors Stock Awards Plan provided for the
issuance of restricted stock. There were also two employee stock purchase plans,
one for U.S. employees and one for Canada-based employees.
Over
the years, the 1999 Stock Plan had been amended to increase shares available to
grant, to allow for granting of restricted shares, and effective January 18,
2006 had been amended to allow for the granting of restricted stock units to
employees residing outside the United States. We stopped granting stock options
after July 2004 and replaced option grants with grants of restricted stock and
restricted stock units to fewer people and in smaller amounts. Our restricted
stock and restricted stock unit grants generally had either a three-year or
five-year cliff vesting.
162
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
For
the five months ended May 31, 2007 and the year ended December 31, 2006, we
recognized stock option expense of $0.8 million and $5.0 million,
respectively.
During
2006 and 2005 we made restricted common stock grants to employees of 10,000 and
223,940 shares, respectively. These grants were valued at $1.0 million and $20.2
million, respectively, based on the closing market price of our common stock on
either the date of grant or the measurement date, if different. Restricted stock
grants made to employees vest over three and five year periods. During 2006 and
2005, we made restricted common stock grants to our non-employee directors of
17,600 and 15,750, respectively. These grants were valued at $1.7 million and
$1.1 million, respectively. All of the restricted stock grants made to
non-employee directors vested during a six-month period. Expense related to
restricted stock grants was recognized on a straight-line basis over the
respective vesting periods. During the five months ended May 31, 2007 and the
years ended December 31, 2006 and 2005, we amortized $5.0 million, $14.9 million
and $8.2 million, respectively, related to restricted stock grants.
During
2006, we made restricted stock unit grants of 61,800 units. These grants were
valued at $6.0 million, based on the closing market price of our common stock on
either the date of grant or the measurement date, if different. During the five
months ended May 31, 2007 and the year ended December 31, 2006, we amortized
$1.6 million and $3.4 million, respectively, related to restricted stock unit
grants.
A
summary of the status of our restricted stock and restricted stock unit plans at
May 31, 2007 and December 31, 2006, and changes during the period then ended is
presented in the table below:
|
Predecessor
Company
|
|||||||||||||
|
Five
Months Ended
May 31, 20071
|
Year
Ended
December
31, 2006
|
||||||||||||
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||
|
(Dollars
in millions)
|
|||||||||||||
|
Outstanding
at Beginning of Period
|
812,240
|
$
|
55.6
|
880,310
|
$
|
56.6
|
|||||||
|
Granted
|
-
|
-
|
89,400
|
8.7
|
|||||||||
|
Reinstated
|
-
|
-
|
50,000
|
2.7
|
|||||||||
|
Vested
|
(59,117
|
)
|
(4.8
|
)
|
(193,620
|
)
|
(11.3
|
)
|
|||||
|
Forfeited
|
(12,016
|
)
|
(1.0
|
)
|
(13,850
|
)
|
(1.1
|
)
|
|||||
|
Outstanding
at End of Period
|
741,107
|
$
|
49.8
|
812,240
|
$
|
55.6
|
|||||||
|
Intrinsic
Value of Restricted Stock Vested
During the Period
|
$
|
3.6
|
$
|
19.2
|
|||||||||
___________
|
1
|
As
discussed above, all remaining restricted stock at the end of the period
became fully vested and was exercised upon the closing of the Going
Private transaction.
|
163
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
A
summary of the status of our stock option plans at May 31, 2007, December 31,
2006 and 2005, and changes during the periods then ended is presented in the
table and narrative below:
|
Predecessor
Company
|
||||||||||||||||||||
|
Five
Months Ended
|
Year
Ended December 31,
|
|||||||||||||||||||
|
May 31, 20071
|
2006
|
2005
|
||||||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||
|
Outstanding
at Beginning of Period
|
2,604,217
|
$
|
46.02
|
3,421,849
|
$
|
45.21
|
5,026,436
|
$
|
44.18
|
|||||||||||
|
Granted
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
|||||||||||
|
Exercised
|
(160,838
|
)
|
$
|
44.67
|
(618,746
|
)
|
$
|
44.82
|
(1,505,399
|
)
|
$
|
41.48
|
||||||||
|
Forfeited
|
(35,975
|
)
|
$
|
50.10
|
(198,886
|
)
|
$
|
41.95
|
(99,188
|
)
|
$
|
50.48
|
||||||||
|
Outstanding
at End of Period
|
2,407,404
|
$
|
46.06
|
2,604,217
|
$
|
46.02
|
3,421,849
|
$
|
45.21
|
|||||||||||
|
Exercisable
at End of Period
|
2,183,379
|
$
|
44.55
|
2,310,392
|
$
|
44.49
|
2,260,059
|
$
|
41.01
|
|||||||||||
|
Weighted-Average
Fair Value of Options Granted
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||||
|
Aggregate
Intrinsic Value of Options Exercisable at End of Period (in
millions)
|
$
|
142.0
|
$
|
147.9
|
||||||||||||||||
|
Intrinsic
Value of Options Exercised During the Period (In millions)
|
$
|
9.9
|
$
|
34.1
|
||||||||||||||||
|
Cash
Received from Exercise of Options During the Period (In
millions)
|
$
|
7.2
|
$
|
27.7
|
||||||||||||||||
____________
|
1
|
As
discussed above, all remaining stock options at the end of the period
became fully vested and were exercised upon the closing of the Going
Private transaction.
|
|
Predecessor
Company
|
||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||
|
Price
Range
|
Number
Outstanding
|
Wtd.
Avg. Exercise
Price
|
Wtd.
Avg. Remaining Contractual Life
|
Number
Exercisable
|
Wtd.
Avg. Exercise
Price
|
|||||||
|
$00.00
- $23.81
|
358,280
|
$
|
23.81
|
2.35
years
|
358,280
|
$
|
23.81
|
|||||
|
$24.75
- $43.10
|
505,674
|
$
|
35.99
|
4.02
years
|
505,474
|
$
|
35.99
|
|||||
|
$49.00
- $53.20
|
585,278
|
$
|
50.76
|
3.74
years
|
585,078
|
$
|
50.76
|
|||||
|
$53.60
- $60.18
|
663,097
|
$
|
55.00
|
3.75
years
|
663,072
|
$
|
55.00
|
|||||
|
$60.79
- $61.40
|
295,075
|
$
|
60.91
|
4.52
years
|
71,475
|
$
|
61.30
|
|||||
|
2,407,404
|
$
|
46.06
|
3.69
years
|
2,183,379
|
$
|
44.55
|
||||||
Prior
to the Going Private transaction, we could sell up to 2,400,000 shares of common
stock to eligible employees under the employee stock purchase plan. Employees
purchased shares through voluntary payroll deductions. Through 2004, shares were
purchased quarterly at a 15% discount from the closing price of the common stock
on the last trading day of each calendar quarter. Beginning with the March 31,
2005 quarterly purchase, the discount was reduced to 5%, thus making the
employee stock purchase plan a non-compensatory plan under SFAS No. 123R.
Employees purchased 7,605 shares, 36,772 shares and 45,541 shares for the five
months ended May 31, 2007 and the years ended December 31, 2006 and 2005,
respectively. We also had a Foreign Subsidiary Employees Stock Purchase Plan for
our employees working in Canada. This plan mirrored the Employee Stock Purchase
Plan for our United States employees. Employees were eligible to participate in
the program beginning April 1, 2006. Employees purchased 545 shares and 2,098
shares during the five months ended May 31, 2007 and the year ended December 31,
2006.
Kinder
Morgan Energy Partners
Kinder
Morgan Energy Partners accounts for common unit options granted under its common
unit option plan according to the provisions of SFAS No. 123R (revised 2004),
“Share-Based Payment”, which became effective January 1, 2006. However, there
have been no common unit options granted or any other share-based payment awards
made since May 2000; and as of December 31, 2005, all outstanding options to
purchase common units were fully vested. Therefore, the adoption of this
Statement did not have an effect on its consolidated financial statements due to
the fact that the end of the requisite
164
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
service
period has been reached for any compensation cost resulting from share-based
payments made under its common unit option plan.
Kinder
Morgan Energy Partners has three common unit-based compensation plans: A common
unit option plan, the Directors’ Unit Appreciation Rights Plan and the Kinder
Morgan Energy Partners, L.P. Common Unit Compensation Plan.
The
common unit option plan was established in 1998. The plan was authorized to
grant up to 500,000 options to key personnel and terminates in March, 2008. The
options granted generally have a term of seven years, vest 40% on the first
anniversary of the date of grant and 20% on each of the next three
anniversaries, and have exercise prices equal to the market price of the common
units at the grant date. No grants have been made under this plan since May
2000. During 2006, 4,200 options to purchase common units were cancelled or
forfeited and 21,100 options to purchase common units were exercised at an
average price of $19.67 per unit. The common units underlying these options had
an average fair market value of $46.43 per unit. As of December 31, 2006 and
2007, there were no outstanding options under this plan.
The
Directors’ Unit Appreciation Rights Plan was established on April 1, 2003.
Pursuant to this plan, each of Kinder Morgan Management’s three non-employee
directors was eligible to receive common unit appreciation rights. 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. All unit appreciation rights
granted vest on the six-month anniversary of the date of grant and have a
ten-year term. A total of 52,500 unit appreciation rights were granted in 2003
and 2004. During 2007, 7,500 unit appreciation rights were exercised by one
director at an aggregate fair value of $53.00 per unit. No unit appreciation
rights were exercised during 2006. As of December 31, 2007, 45,000
unit appreciation rights had been granted, vested and remained outstanding. In
2005, this plan was replaced with the Kinder Morgan Energy Partners, L.P. Common
Unit Compensation Plan for Non-Employee Directors, discussed
following.
The
Kinder Morgan Energy Partners, L.P. Common Unit Compensation Plan 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
expected to include an annual retainer 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 17,780 common units were issued to non-employee directors
in 2005, 2006 and 2007 as a result of their elections to receive common units in
lieu of cash compensation.
14.
Commitments and Contingent Liabilities
(A)
Operating Leases and Purchase Obligations
Expenses
incurred under operating leases were $43.8 million for the seven months ended
December 31, 2007, $32.2 million for the five months ended May 31, 2007, $53.5
million in 2006 and $21.6 million in 2005, of which $0.1 million in the seven
months ended December 31, 2007, $1.2 million in the five months ended May 31,
2007, $3.1 million in 2006 and $1.9 million in 2005, respectively, were
associated with our discontinued operations. The principal reasons for the
increased expense in 2006 compared to 2005 is due to our implementation of EITF
No. 04-5, which requires us to include Kinder Morgan Energy Partners and its
consolidated subsidiaries as consolidated subsidiaries in our consolidated
financial statements effective January 1, 2006 and the inclusion of Terasen’s
operating leases. We acquired Terasen effective November 30, 2005 (see Note 4
for information regarding this acquisition) and sold a majority of its assets in
May and June of 2007 (see Note 7 for information regarding the divestitures).
Future minimum commitments under major operating leases as of December 31, 2007
are as follows:
|
Year
|
Operating
Leases1
|
|||
|
2008
|
$
|
57.9
|
||
|
2009
|
49.4
|
|||
|
2010
|
46.4
|
|||
|
2011
|
42.5
|
|||
|
2012
|
39.1
|
|||
|
Thereafter
|
439.3
|
|||
|
Total
|
$
|
674.6
|
||
__________
165
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
1
|
Approximately
$2.3 million, $0.3 million, $0.3 million, $0.3 million, $0.3 million and
$2.2 million in 2008, 2009, 2010, 2011, 2012 and thereafter, respectively,
is attributable to operating lease obligations associated with our NGPL
business segment classified as held for
sale.
|
We
have not reduced our total minimum payments for future minimum sublease rentals,
aggregating approximately $6.5 million. The remaining terms on our operating
leases range from one to 61 years.
(B)
Capital Leases
Our
capital leases are not material on a cumulative basis or in any
year.
Amortization
of assets recorded under capital leases is included with depreciation expense.
The components of “Property, Plant and Equipment, Net” recorded under capital
leases are as follows (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
December
31, 2007
|
December 31, 20061
|
|||||||||||
|
Property,
Plant and
Equipment
|
$
|
2.2
|
$
|
22.6
|
||||||||
|
Less:
Accumulated Amortization
|
(0.3
|
)
|
(15.3
|
)
|
||||||||
|
$
|
1.9
|
$
|
7.3
|
|||||||||
__________
|
1
|
Approximately
$18.5 million of property, plant and equipment and $12.3 million of
accumulated amortization are associated with our discontinued
operations.
|
(C)
Guarantee
As
a result of our December 1999 sale of assets to ONEOK, ONEOK became primarily
obligated for the lease of the Bushton gas processing facility. We remain
secondarily liable for the lease, which had a remaining minimum obligation of
approximately $103.0 million at December 31, 2007, with payments that average
approximately $23 million per year through 2012.
(D)
Capital Expenditures Budget
Approximately
$259.1.million of our consolidated capital expenditure budget for 2008 had been
committed for the purchase of plant and equipment at December 31,
2007.
(E)
Commitments for Incremental Investment
We
could be obligated (i) based on operational performance of the equipment at the
Jackson, Michigan power generation facility to invest up to an additional $3 to
$8 million per year for the next 12 years and (ii) based on cash flows generated
by the facility, to invest up to an additional $25 million beginning in 2018, in
each case in the form of an incremental preferred interest.
(F)
Contingent Debt
Cortez
Pipeline Company Debt
Pursuant
to a certain Throughput and Deficiency Agreement, the partners of Cortez
Pipeline Company (Kinder Morgan CO2 Company,
L.P. – 50% partner; a subsidiary of Exxon Mobil Corporation – 37% partner; and
Cortez Vickers Pipeline Company – 13% partner) are required, on a several,
proportional percentage ownership basis, to contribute capital to Cortez
Pipeline Company in the event of a cash deficiency. Furthermore, due to Kinder
Morgan Energy Partners’ indirect ownership of Cortez Pipeline Company through
Kinder Morgan CO2 Company,
L.P., Kinder Morgan Energy Partners severally guarantees 50% of the debt of
Cortez Capital Corporation, a wholly owned subsidiary of Cortez Pipeline
Company.
As
of December 31, 2007, the debt facilities of Cortez Capital Corporation
consisted of (i) $64.3 million of Series D notes due May 15, 2013; (ii) a $125
million short-term commercial paper program; and (iii) a $125 million five-year
committed revolving credit facility due December 22, 2009 (to support the
above-mentioned $125 million commercial paper program). As of December 31, 2007,
Cortez Capital Corporation had $93.0 million of commercial paper outstanding
with an average interest rate of approximately 5.66%, the average interest rate
on the Series D notes was 7.14%, and there were no borrowings under the credit
facility.
166
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
With
respect to Cortez’s Series D notes, Shell Oil Company shares our 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 and JP Morgan Chase issued a letter of credit on Kinder
Morgan Energy Partners’ behalf in December 2006 in the amount of $37.5 million
to secure its indemnification obligations to Shell for 50% of the $75.0 million
in principal amount of Series D notes outstanding as of December 31,
2006.
Red
Cedar Gathering Company Debt
Red
Cedar Gathering Company was the obligor on $55 million in aggregate principal
amount of senior notes due October 31, 2010. The senior notes are collateralized
by a first priority lien on the ownership interests, including Kinder Morgan
Energy Partners’ 49% ownership interest, in Red Cedar Gathering Company. The
senior notes are also guaranteed by Kinder Morgan Energy Partners and the other
owner of Red Cedar Gathering Company jointly and severally. As of December 31,
2006, $31.4 million in principal amount of notes were outstanding.
In
March 2007, Red Cedar refinanced the outstanding balance of its existing senior
notes through a private placement of $100 million in principal amount of ten
year fixed rate notes. As a result of Red Cedar Gathering Company’s retirement
of the remaining $31.4 million outstanding principal amount of its senior notes,
Kinder Morgan Energy Partners is no longer contingently liable for any Red Cedar
Gathering Company debt.
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, 2007, this letter of credit had a face amount of
$22.5 million.
Rockies
Express Pipeline LLC Debt
Pursuant
to certain guaranty agreements, all three member owners of West2East Pipeline
LLC (which owns all of the member interests in Rockies Express Pipeline LLC)
have agreed to guarantee, severally in the same proportion as their percentage
ownership of the member interests in West2East Pipeline LLC, borrowings under
Rockies Express Pipeline LLC’s (i) $2.0 billion five-year, unsecured revolving
credit facility due April 28, 2011; (ii) $2.0 billion commercial paper program;
and (iii) $600 million in principal amount of floating rate senior notes due
August 20, 2009. The three member owners and their respective ownership
interests consist of the following: Kinder Morgan Energy Partners’ subsidiary
Kinder Morgan W2E Pipeline LLC – 51%, a subsidiary of Sempra Energy – 25%, and a
subsidiary of ConocoPhillips – 24%.
Borrowings
under the Rockies Express Pipeline LLC commercial paper program are primarily
used to finance the construction of the Rockies Express interstate natural gas
pipeline and to pay related expenses. The credit facility, which can be amended
to allow for borrowings up to $2.5 billion, supports borrowings under the
commercial paper program, and borrowings under the commercial paper program
reduce the borrowings allowed under the credit facility.
On
September 20, 2007, Rockies Express Pipeline LLC issued $600 million in
principal amount of senior unsecured floating rate notes. The notes have a
maturity date of August 20, 2009, and interest on these notes is paid and
computed quarterly on an interest rate of three-month LIBOR plus a spread. Upon
issuance of the notes, Rockies Express Pipeline LLC entered into two
floating-to-fixed interest rate swap agreements having a combined notional
principal amount of $600 million and a maturity date of August 20,
2009.
In
addition to the $600 million in senior notes, as of December 31, 2007, Rockies
Express Pipeline LLC had $1,625.4 million of commercial paper outstanding with a
weighted average interest rate of approximately 5.50%, and there were no
borrowings under its five-year credit facility. Accordingly, as of December 31,
2007, Kinder Morgan Energy Partners’ contingent share of Rockies Express
Pipeline LLC’s debt was $1,135.0 million (51% of total borrowings).
Midcontinent
Express Pipeline LLC Letters of Credit
Midcontinent
Express Pipeline LLC has a $197 million reimbursement agreement dated September
4, 2007, with a syndicate of financial institutions with JPMorgan Chase Bank,
N.A. as the administrative agent. The reimbursement agreement can be used for
the issuance of letters of credit to support the construction of the
Midcontinent Express Pipeline and includes covenants and requires payments of
fees that are common in such arrangements. Kinder Morgan Energy Partners and
Energy Transfer Partners, L.P. have agreed to guarantee borrowings under the
reimbursement agreement in the same proportion as the
167
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
associated
percentage ownership of their member interests. At December 31, 2007,
there were two letters of credit outstanding totaling $195.4 million supporting
the construction of the Midcontinent Express Pipeline.
(G)
Standby Letters of Credit
Letters
of credit totaling $815.6 million outstanding at December 31, 2007 consisted of
the following: (i) four letters of credit, totaling $323.0 million, supporting
our hedging of commodity risk, (ii) a $100 million letter of credit that
supports certain proceedings with the California Public Utilities commission
involving refined products tariff charges on the intrastate common carrier
operations of Kinder Morgan Energy Partners’ Pacific operations’ pipelines in
the State of California, (iii) a combined $58.3 million in ten letters of credit
supporting Kinder Morgan Energy Partners’ Trans Mountain pipeline system
operations, (iv) a $52.1 million letter of credit supporting our Canadian
pipeline operations (v) a $37.5 million letter of credit supporting Kinder
Morgan Energy Partners’ indemnification obligations on the Series D note
borrowings of Cortez Capital Corporation, (vi) Kinder Morgan Energy Partners’
$30.3 million guarantee under letters of credit totaling $45.5 million
supporting its International Marine Terminals Partnership Plaquemines, Louisiana
Port, Harbor, and Terminal Revenue Bonds, (vii) a $25.3 million letter of credit
supporting Kinder Morgan Energy Partners’ Kinder Morgan Liquids Terminals LLC
New Jersey Economic Development Revenue Bonds, (viii) a $24.1 million letter of
credit supporting Kinder Morgan Energy Partners’ Kinder Morgan Operating L.P.
“B” tax-exempt bonds, (ix) a $22.5 million letter of credit supporting Nassau
County, Florida Ocean Highway and Port Authority tax-exempt bonds, (x) four
letters of credit, totaling $21.4 million, required under provisions of our
property and casualty, worker’s compensation and general liability insurance
policies, (xi) a $19.9 million letter of credit supporting the construction of
Kinder Morgan Energy Partners’ Kinder Morgan Louisiana Pipeline, (xii) a $15.3
million letter of credit to fund the Debt Service Reserve Account required under
the Express System’s trust indenture, (xiii) a $15.5 million letter of credit
supporting Kinder Morgan Energy Partners’ pipeline and terminal operations in
Canada, (xiv) two letters of credit totaling $20.3 million letter of credit
supporting the subordination of operating fees payable to us for operation of
the Jackson, Michigan power generation facility to payments due under the
operating lease of the facilities and (xv) 14 letters of credit, totaling $34.9
million supporting various Company activities.
(H)
Other Obligations
Other
obligations are discussed in Note 7.
|
|
15.
Business Segment Information
|
Due
to our implementation of EITF No. 04-5, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights (see Note
1(B)), we include Kinder Morgan Energy Partners and its consolidated
subsidiaries as consolidated subsidiaries in our consolidated financial
statements, and we include the business segments of Kinder Morgan Energy
Partners in our business segment information, effective January 1,
2006.
In
accordance with the manner in which we manage our businesses, including the
allocation of capital and evaluation of business segment performance, we report
our operations in the following segments: (1) Natural Gas Pipeline Company of
America and certain affiliates, referred to as Natural Gas Pipeline Company of
America or NGPL, a major interstate natural gas pipeline and storage system; (2)
Power, the ownership and operation of natural gas-fired electric generation
facilities; (3) Express Pipeline System, the ownership of a one-third interest
in a crude pipeline system accounted for under the equity method; (4) 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; (5) Natural Gas Pipelines
– KMP, the ownership and operation of major interstate and intrastate natural
gas pipeline and storage systems; (6) CO2 – KMP, the
production, transportation and marketing of carbon dioxide (“CO2”) to oil
fields that use CO2 to
increase production of oil plus ownership interests in and/or operation of oil
fields in West Texas and the ownership and operation of a crude oil pipeline
system in West Texas; (7) Terminals – KMP, the ownership and/or operation of
liquids and bulk terminal facilities and rail transloading and materials
handling facilities located throughout the United States and Canada; and (8)
Trans Mountain – KMP, the ownership and operation of a pipeline system, plus
associated product terminals, that transport crude oil and refined products from
Edmonton, Alberta, Canada to marketing terminals and refineries in British
Columbia, Canada and the State of Washington, U.S.A.
On
December 10, 2007, we entered into a definitive agreement to sell an 80%
ownership interest in our NGPL business segment to Myria. The sale was closed on
February 15, 2008 (see Note 1(M)). We will continue to operate NGPL’s assets
pursuant to a 15-year operating agreement. In succeeding periods, the NGPL
segment will be reported as an equity investment, as discussed further
below.
In
November 2007, we signed a definitive agreement to sell our interests in three
natural gas-fired power plants in Colorado to Bear Stearns. The sale was
effective January 1, 2008.
168
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
On
October 5, 2007, Kinder Morgan Energy Partners announced that it had completed
the sale of the North System and also its 50% ownership interest in the
Heartland Pipeline Company to ONEOK Partners, L.P. for approximately $298.6
million in cash. In prior periods, the North System and the equity
investment in the Heartland Pipeline were reported in the Products Pipelines –
KMP business segment.
On
April 30, 2007, Kinder Morgan, Inc. sold the Trans Mountain pipeline system to
Kinder Morgan Energy Partners for approximately $550 million. The transaction
was approved by the independent members of our board of directors and those of
Kinder Morgan Management following the receipt, by each board, of separate
fairness opinions from different investment banks. In prior periods, the Trans
Mountain pipeline system was reported in the Kinder Morgan Canada business
segment. Due to the inclusion of Kinder Morgan Energy Partners and its
subsidiaries in our consolidated financial statements resulting from the
implementation of EITF 04-5 (see Note 1(B)), we accounted for this transaction
as a transfer of net assets between entities under common control as prescribed
by SFAS No. 141, Business Combinations, which
is similar to the pooling-of-interests method of accounting. Therefore,
following Kinder Morgan Energy Partners’ acquisition of Trans Mountain from us,
Kinder Morgan Energy Partners recognized the Trans Mountain assets and
liabilities acquired at our carrying amounts (historical cost) at the date of
transfer. As discussed in Note 6, based on an evaluation of the fair value of
the Trans Mountain pipeline system, an estimated goodwill impairment charge of
approximately $377.1 million was recorded in the first quarter of
2007.
In
March 2007, we completed the sale of our U.S. retail natural gas distribution
and related operations to GE Energy Financial Services, a subsidiary of General
Electric Company, and Alinda Investments LLC. In prior periods, we referred to
these operations as the Kinder Morgan Retail business segment.
On
March 5, 2007, we entered into a definitive agreement to sell Terasen Pipelines
(Corridor) Inc. to Inter Pipeline Fund, a Canada-based company. This transaction
closed on June 15, 2007 (see Note 7). As a result of the sale of Corridor and
the transfer of Trans Mountain to Kinder Morgan Energy Partners, the business
segment referred to in prior filings as Kinder Morgan Canada is no longer
reported. The results of Trans Mountain are now reported in the business segment
referred to herein as Trans Mountain – KMP. The results of the Express Pipeline
system, which also were reported in the Kinder Morgan Canada business segment in
previous periods, are now reported in the segment referred to as
“Express.”
In
February 2007, we entered into a definitive agreement, which closed on May 17,
2007 (see Note 7), to sell Terasen Inc. to Fortis, Inc., a Canada-based company
with investments in regulated distribution utilities. Execution of this sale
agreement constituted a subsequent event of the type that, under Generally
Accepted Accounting Principles, required us to consider the market value
indicated by the definitive sales agreement in our 2006 goodwill impairment
evaluation. Accordingly, based on the fair values of these reporting unit(s)
derived principally from this definitive sales agreement, an estimated goodwill
impairment charge of approximately $650.5 million was recorded in the 2006
period.
On
November 30, 2005, we completed the acquisition of Terasen (see Note 4) and,
accordingly, Terasen’s results of operations were included in our consolidated
results of operations beginning on that date.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 80% of the assets and liabilities
associated with the NGPL business segment transaction are included in our
Consolidated Balance Sheet at December 31, 2007 in the captions “Current Assets:
Assets Held for Sale,” “Assets Held for Sale, Non-current,” “Current
Liabilities: Liabilities Held for Sale” and “Other Liabilities and Deferred
Credits: Liabilities Held for Sale, Non-current” with the remaining 20% included
in the caption “Investments.” The financial results of Terasen Gas, Corridor,
Kinder Morgan Retail, the North System and the equity investment in the
Heartland Pipeline Company have been reclassified to discontinued operations for
all periods presented. See Note 7 for additional information regarding
discontinued operations.
The
accounting policies we apply in the generation of business segment earnings are
generally the same as those applied to our consolidated operations and described
in Note 1, 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 (sometimes referred to in this report
as EBDA) in relation to the level of capital employed. Beginning in 2007, the
segment earnings measure was changed from segment earnings to segment earnings
before DD&A for segments not also segments of Kinder Morgan Energy Partners.
This change was made to conform our disclosure to the internal reporting we use
as a result of the Going Private transaction.
169
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
This
segment measure change has been reflected in the prior periods shown in this
document in order to achieve comparability. 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.
NGPL’s
principal delivery market area encompasses the states of Illinois, Indiana and
Iowa and secondary markets in portions of Wisconsin, Nebraska, Kansas, Missouri
and Arkansas. NGPL is the largest transporter of natural gas to the Chicago,
Illinois area, its largest market. During 2007, approximately 39% of NGPL’s
transportation represented deliveries to this market. NGPL’s storage capacity is
largely located near its transportation delivery markets, effectively serving
the same customer base. NGPL has a number of individually significant customers,
including local gas distribution companies in the greater Chicago area and major
natural gas marketers. During 2007, approximately 50% of its operating revenues
from tariff services were attributable to its eight largest
customers.
Prior
to our January 1, 2008 sale (see Note 19), Power’s principal market was
represented by the local electric utilities in Colorado, which purchase the
power output from its generation facilities. Due to the adoption of FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, the results of operations of our Triton Power affiliates are
included in our consolidated operating results and in the results of our Power
segment beginning with the first quarter of 2004. Although the results of Triton
have an impact on the total operating revenues and expenses of the Power
business segment, after taking into account the associated minority interests,
the consolidation of Triton had no effect on Power’s segment earnings. During
2007, approximately 68% of Power’s operating revenues were for operating the
Jackson, Michigan Power facility, 21% were electric sales revenues from XCEL
Energy’s Public Service Company of Colorado under a long-term contract, and the
remaining 11% were primarily for operating the Ft. Lupton, Colorado power
facility and a gas-fired power facility in Snyder, Texas that began operations
during the second quarter of 2005 and provides electricity to Kinder Morgan
Energy Partners’ SACROC operations.
Express
Pipelines System owns a one-third interest in the Express Pipeline System, a
crude oil pipeline system, which investment we account for under the equity
method, and certain related entities.
Products
Pipelines – KMP consists of approximately 8,300 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.
Natural
Gas Pipelines – KMP consists of approximately 14,700 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.
CO2 – KMP
produces, markets and transports, through approximately 1,300 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.
Terminals
– KMP consists of approximately 108 owned or operated liquids and bulk terminal
facilities and more than 45 rail transloading and materials handling
facilities located throughout the United States and portions of Canada, that
together transload, store and deliver a wide variety of bulk, petroleum,
petrochemical and other liquids products for customers across the United States
and Canada.
Trans
Mountains – KMP consists of over 700 miles of common carrier pipelines,
originating at Edmonton, Alberta, for the transportation of crude oil and
refined petroleum to the interior of British Colombia and to marketing terminals
and refineries located in the greater Vancouver, British Columbia area and Puget
Sound in Washington State; plus five associated product terminals.
Our
business activities expose us to credit risk with respect to collection of
accounts receivable. In order to mitigate that risk, we routinely monitor the
credit status of our existing and potential customers. When customers’ credit
ratings do not meet our requirements for the extension of unsupported credit, we
obtain cash prepayments or letters of credit. Note 1(F) provides information on
the amount of prepayments we have received.
During
2007, 2006 and 2005, we did not have revenues from any single customer that
exceeded 10% of our consolidated operating revenues.
170
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Financial
information by segment follows (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Segment
Earnings before Depreciation, Depletion, Amortization and Amortization of
Excess Cost of Equity Investments:
|
||||||||||||||||
|
NGPL
|
$
|
422.8
|
$
|
267.4
|
$
|
603.5
|
$
|
534.8
|
||||||||
|
Power
|
13.4
|
8.9
|
23.2
|
16.5
|
||||||||||||
|
Express
|
14.4
|
5.4
|
17.2
|
2.0
|
||||||||||||
|
Products
Pipelines – KMP1
|
162.5
|
224.4
|
467.9
|
-
|
||||||||||||
|
Natural
Gas Pipelines – KMP1
|
373.3
|
228.5
|
574.8
|
-
|
||||||||||||
|
CO2 –
KMP1
|
433.0
|
210.0
|
488.2
|
-
|
||||||||||||
|
Terminals
– KMP1
|
243.7
|
172.3
|
408.1
|
-
|
||||||||||||
|
Trans
Mountain – KMP1
|
43.8
|
(337.4
|
)
|
76.5
|
-
|
|||||||||||
|
Total
Segment Earnings Before DD&A
|
1,706.9
|
779.5
|
2,659.4
|
553.3
|
||||||||||||
|
Depreciation,
Depletion and Amortization
|
(472.3
|
)
|
(261.0
|
)
|
(531.4
|
)
|
(104.6
|
)
|
||||||||
|
Amortization
of Excess Cost of Equity Investments
|
(3.4
|
)
|
(2.4
|
)
|
(5.6
|
)
|
-
|
|||||||||
|
Earnings
from Investment in Kinder Morgan Energy Partners2
|
-
|
-
|
-
|
605.4
|
||||||||||||
|
Other
|
0.3
|
2.9
|
8.2
|
6.5
|
||||||||||||
|
Interest
and Corporate Expenses, Net3, 4,
5,
|
(799.6
|
)
|
(631.8
|
)
|
(1,273.3
|
)
|
(209.3
|
)
|
||||||||
|
Add
Back Income Taxes Included in Segments Above1
|
44.0
|
15.6
|
29.0
|
-
|
||||||||||||
|
Income
from Continuing Operations Before Income Taxes
|
$
|
475.9
|
$
|
(97.2
|
)
|
$
|
886.3
|
$
|
851.3
|
|||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Revenues
from External Customers
|
||||||||||||||||
|
NGPL
|
$
|
752.4
|
$
|
424.5
|
$
|
1,114.4
|
$
|
947.3
|
||||||||
|
Power
|
40.2
|
19.9
|
60.0
|
54.2
|
||||||||||||
|
Products
Pipelines – KMP
|
471.4
|
331.9
|
732.5
|
-
|
||||||||||||
|
Natural
Gas Pipelines – KMP
|
3,825.9
|
2,637.6
|
6,558.4
|
-
|
||||||||||||
|
CO2 –
KMP
|
605.9
|
324.2
|
736.5
|
-
|
||||||||||||
|
Terminals
– KMP
|
598.8
|
364.2
|
864.1
|
-
|
||||||||||||
|
Trans
Mountain – KMP
|
98.0
|
62.8
|
137.8
|
-
|
||||||||||||
|
Other6
|
2.1
|
-
|
4.9
|
24.1
|
||||||||||||
|
Total
Revenues
|
$
|
6,394.7
|
$
|
4,165.1
|
$
|
10,208.6
|
$
|
1,025.6
|
||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Intersegment
Revenues
|
||||||||||||||||
|
NGPL
|
$
|
4.8
|
$
|
2.0
|
$
|
3.6
|
$
|
-
|
||||||||
|
Natural
Gas Pipelines – KMP
|
-
|
3.0
|
19.3
|
-
|
||||||||||||
|
Terminals
– KMP
|
0.4
|
0.3
|
0.7
|
-
|
||||||||||||
|
Total
Intersegment
Revenues
|
$
|
5.2
|
$
|
5.3
|
$
|
23.6
|
$
|
-
|
||||||||
171
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Depreciation,
Depletion and Amortization
|
||||||||||||||||
|
NGPL
|
$
|
42.3
|
$
|
45.3
|
$
|
104.5
|
$
|
99.6
|
||||||||
|
Power
|
0.2
|
(4.2
|
)
|
2.1
|
3.3
|
|||||||||||
|
Products
Pipelines – KMP
|
58.1
|
33.6
|
74.0
|
-
|
||||||||||||
|
Natural
Gas Pipelines – KMP
|
52.3
|
26.8
|
65.4
|
-
|
||||||||||||
|
CO2 –
KMP
|
243.5
|
116.3
|
190.9
|
-
|
||||||||||||
|
Terminals
– KMP
|
62.1
|
34.4
|
74.6
|
-
|
||||||||||||
|
Trans
Mountain – KMP
|
13.3
|
8.2
|
19.0
|
-
|
||||||||||||
|
Other
|
0.5
|
0.6
|
0.9
|
1.7
|
||||||||||||
|
Total
Consolidated Depreciation, Depletion and Amortization
|
$
|
472.3
|
$
|
261.0
|
$
|
531.4
|
$
|
104.6
|
||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
2007
|
May
31, 2007
|
2006
|
2005
|
|||||||||||||
|
Capital
Expenditures
|
||||||||||||||||
|
NGPL
|
$
|
152.0
|
$
|
77.3
|
$
|
193.4
|
$
|
129.7
|
||||||||
|
Power
|
-
|
-
|
-
|
-
|
||||||||||||
|
Products
Pipelines – KMP
|
179.9
|
79.5
|
196.0
|
-
|
||||||||||||
|
Natural
Gas Pipelines – KMP
|
197.4
|
66.6
|
271.6
|
-
|
||||||||||||
|
CO2 –
KMP
|
249.2
|
133.3
|
283.0
|
-
|
||||||||||||
|
Terminals
– KMP
|
310.1
|
169.9
|
307.7
|
-
|
||||||||||||
|
Trans
Mountain – KMP
|
196.7
|
109.0
|
123.8
|
-
|
||||||||||||
|
Other
|
1.7
|
17.2
|
0.1
|
4.4
|
||||||||||||
|
Total
Consolidated Capital Expenditures
|
$
|
1,287.0
|
$
|
652.8
|
$
|
1,375.6
|
$
|
134.1
|
||||||||
|
Successor
Company
|
Predecessor
Company
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Assets
at December 317
|
||||||||||||
|
NGPL
|
$
|
720.0
|
$
|
5,728.9
|
$
|
5,597.8
|
||||||
|
Power
|
120.6
|
387.4
|
372.5
|
|||||||||
|
Express
|
404.3
|
449.7
|
431.9
|
|||||||||
|
Products
Pipelines – KMP
|
6,941.4
|
4,812.9
|
-
|
|||||||||
|
Natural
Gas Pipelines – KMP
|
8,439.8
|
3,796.6
|
-
|
|||||||||
|
CO2 –
KMP
|
3,919.2
|
1,875.6
|
-
|
|||||||||
|
Terminals
– KMP
|
4,643.3
|
2,564.1
|
-
|
|||||||||
|
Trans
Mountain – KMP
|
1,473.5
|
2,094.8
|
-
|
|||||||||
|
Total
segment assets
|
26,662.1
|
21,710.0
|
6,402.2
|
|||||||||
|
Investment
in Kinder Morgan Energy Partners
|
-
|
-
|
2,202.9
|
|||||||||
|
Goodwill7
|
-
|
-
|
2,781.0
|
|||||||||
|
Assets
Held for Sale
|
8,987.9
|
510.2
|
-
|
|||||||||
|
Other8
|
451.0
|
4,575.4
|
6,065.5
|
|||||||||
|
Total
Consolidated Assets
|
$
|
36,101.0
|
$
|
26,795.6
|
$
|
17,451.6
|
||||||
___________
|
1
|
Income
taxes of Kinder Morgan Energy Partners of $44.0 million, $15.6 million and
$29.0 million for the seven months ended December 31, 2007, the five
months ended May 31, 2007 and the twelve months ended December 31, 2006,
respectively, are included in segment
earnings
|
172
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
2
|
Equity
in Earnings of Kinder Morgan Energy Partners for 2005 includes a reduction
in pre-tax earnings of approximately $63.3 million ($40.3 million after
tax) resulting principally from the effects of certain regulatory,
environmental, litigation and inventory items on Kinder Morgan Energy
Partners’ earnings.
|
|
3
|
Includes
(i) general and administrative expense, (ii) interest expense, (iii)
minority interests and (iv) miscellaneous other income and expenses not
allocated to business segments.
|
|
4
|
Results
for 2006 include a reduction in pre-tax income of $22.3 million ($14.1
million after tax) resulting from non-cash charges to mark to market
certain interest rate swaps.
|
|
5
|
Results
for 2005 include (i) pre-tax gains of $78.5 million from the sale of
Kinder Morgan Management shares and (ii) a pre-tax charge of $15.0 million
for our contribution to the Kinder Morgan
Foundation.
|
|
6
|
Includes
revenues of $10.8 million from KM Insurance Ltd., our wholly owned
subsidiary that was formed during the second quarter of 2005 for the
purpose of providing insurance services to Knight Inc. and Kinder Morgan
Energy Partners. KM Insurance Ltd. was formed as a Class 2 Bermuda
insurance company, the sole business of which is to issue policies for
Knight Inc. and Kinder Morgan Energy Partners to secure the deductible
portion of our workers’ compensation, automobile liability and general
liability policies placed in the commercial insurance market. Due to our
adoption of EITF 04-5 (see Note 1(B)), effective January 1, 2006 the
results of operations of Kinder Morgan Energy Partners are included in our
consolidated results of operations and, consequently, all 2006 revenues of
KM Insurance Ltd. have been eliminated in
consolidation.
|
|
7
|
For
2007 and 2006, segment assets include goodwill allocated to the
segments.
|
|
8
|
Includes
assets of discontinued operations, cash, restricted deposits, market value
of derivative instruments (including interest rate swaps) and
miscellaneous corporate assets (such as information technology and
telecommunications equipment) not allocated to individual
segments.
|
|
|
Geographic
Information
|
Prior
to 2005, all but an insignificant amount of our assets and operations were
located in the continental United States. Upon our acquisition of Terasen on
November 30, 2005, we obtained significant assets and operations in Canada.
However, that percent has declined in 2007 relative to 2006 with the sale of two
significant portions of our Canadian assets during the year. Following is
geographic information regarding the revenues and long-lived assets of our
business segments. Revenues from Products Pipeline – KMP, Natural Gas Pipelines
– KMP, CO2 – KMP,
Terminals – KMP and Trans Mountain – KMP include only the revenues subsequent to
our adoption of EITF 04-5, effective January 1, 2006 (see Note
1(B)).
Revenues from External
Customers
|
Successor
Company
|
|||||||||||
|
Seven
Months Ended December 31, 2007
|
|||||||||||
|
United
States
|
Canada
|
Mexico
and
Other1
|
Total
|
||||||||
|
(In
millions)
|
|||||||||||
|
NGPL
|
$
|
752.4
|
$
|
-
|
$
|
-
|
$
|
752.4
|
|||
|
Power
|
40.2
|
-
|
-
|
40.2
|
|||||||
|
Products
Pipelines – KMP
|
449.8
|
21.6
|
-
|
471.4
|
|||||||
|
Natural
Gas Pipelines – KMP
|
3,817.7
|
-
|
8.2
|
3,825.9
|
|||||||
|
CO2 –
KMP
|
605.9
|
-
|
605.9
|
||||||||
|
Terminals
– KMP
|
566.4
|
29.1
|
3.3
|
598.8
|
|||||||
|
Trans
Mountain
|
7.3
|
90.7
|
-
|
98.0
|
|||||||
|
Other
|
-
|
2.1
|
-
|
2.1
|
|||||||
|
$
|
6,239.7
|
$
|
143.5
|
$
|
11.5
|
$
|
6,394.7
|
||||
|
Predecessor
Company
|
|||||||||||
|
Five
Months Ended May 31, 2007
|
|||||||||||
|
United
States
|
Canada
|
Mexico and Other1
|
Total
|
||||||||
|
(In
millions)
|
|||||||||||
|
NGPL
|
$
|
424.5
|
$
|
-
|
$
|
-
|
$
|
424.5
|
|||
|
Power
|
19.9
|
-
|
-
|
19.9
|
|||||||
|
Products
Pipelines – KMP
|
319.7
|
12.2
|
-
|
331.9
|
|||||||
|
Natural
Gas Pipelines – KMP
|
2,631.8
|
-
|
5.8
|
2,637.6
|
|||||||
|
CO2 – KMP
|
324.2
|
-
|
-
|
324.2
|
|||||||
|
Terminals – KMP
|
362.0
|
-
|
2.2
|
364.2
|
|||||||
|
Trans
Mountain
|
4.5
|
58.3
|
-
|
62.8
|
|||||||
|
$
|
4,086.6
|
$
|
70.5
|
$
|
8.0
|
$
|
4,165.1
|
||||
173
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
Predecessor
Company
|
|||||||||||
|
Year
Ended December 31, 2006
|
|||||||||||
|
United
States
|
Canada
|
Mexico and Other1
|
Total
|
||||||||
|
(In
millions)
|
|||||||||||
|
NGPL
|
$
|
1,114.4
|
$
|
-
|
$
|
-
|
$
|
1,114.4
|
|||
|
Power
|
60.0
|
-
|
-
|
60.0
|
|||||||
|
Products
Pipelines – KMP
|
720.8
|
11.7
|
-
|
732.5
|
|||||||
|
Natural Gas Pipelines – KMP
|
6,544.3
|
-
|
14.1
|
6,558.4
|
|||||||
|
CO2 – KMP
|
736.5
|
-
|
-
|
736.5
|
|||||||
|
Terminals – KMP
|
858.7
|
-
|
5.4
|
864.1
|
|||||||
|
Trans Mountain
|
11.2
|
126.6
|
-
|
137.8
|
|||||||
|
Other
|
-
|
4.9
|
-
|
4.9
|
|||||||
|
$
|
10,045.9
|
$
|
143.2
|
$
|
19.5
|
$
|
10,208.6
|
||||
|
Predecessor
Company
|
|||||||||||
|
Year
Ended December 31, 2005
|
|||||||||||
|
United
States
|
Canada
|
Mexico and Other1
|
Total
|
||||||||
|
(In
millions)
|
|||||||||||
|
NGPL
|
$
|
947.3
|
$
|
-
|
$
|
-
|
$
|
947.3
|
|||
|
Power
|
54.2
|
-
|
-
|
54.2
|
|||||||
|
Other
|
0.9
|
12.4
|
10.8
|
24.1
|
|||||||
|
$
|
1,002.4
|
$
|
12.4
|
$
|
10.8
|
$
|
1,025.6
|
||||
Long-lived
Assets2
|
Successor
Company
|
||||||||||||
|
At
December 31, 2007
|
||||||||||||
|
United
States
|
Canada
|
Mexico and Other1
|
Total
|
|||||||||
|
(In
millions)
|
||||||||||||
|
NGPL
|
$
|
720.0
|
$
|
-
|
$
|
-
|
$
|
720.0
|
||||
|
Power
|
95.4
|
-
|
-
|
95.4
|
||||||||
|
Express
|
281.5
|
120.6
|
-
|
402.1
|
||||||||
|
Products
Pipelines – KMP
|
4,552.0
|
109.5
|
-
|
4,661.5
|
||||||||
|
Natural
Gas Pipelines – KMP
|
4,513.6
|
-
|
82.7
|
4,596.3
|
||||||||
|
CO2 – KMP
|
2,656.5
|
-
|
-
|
2,656.5
|
||||||||
|
Terminals – KMP
|
2,533.7
|
196.1
|
5.5
|
2,735.3
|
||||||||
|
Trans Mountain – KMP
|
17.7
|
1,128.3
|
-
|
1,146.0
|
||||||||
|
Assets Held for Sale
|
418.2
|
-
|
-
|
418.2
|
||||||||
|
Other
|
263.3
|
11.3
|
-
|
274.6
|
||||||||
|
$
|
16,051.9
|
$
|
1,565.8
|
$
|
88.2
|
$
|
17,705.9
|
|||||
174
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
Predecessor
Company
|
||||||||||||
|
At
December 31, 2006
|
||||||||||||
|
United
States
|
Canada3
|
Mexico and Other1
|
Total
|
|||||||||
|
(In
millions)
|
||||||||||||
|
NGPL
|
$
|
5,558.2
|
$
|
-
|
$
|
-
|
$
|
5,558.2
|
||||
|
Power
|
346.4
|
-
|
-
|
346.4
|
||||||||
|
Express
|
314.8
|
134.9
|
-
|
449.7
|
||||||||
|
Products
Pipelines – KMP
|
3,712.1
|
47.3
|
-
|
3,759.4
|
||||||||
|
Natural
Gas Pipelines – KMP
|
2,712.7
|
-
|
84.3
|
2,797.0
|
||||||||
|
CO2 –
KMP
|
1,653.1
|
-
|
-
|
1,653.1
|
||||||||
|
Terminals
– KMP
|
1,820.5
|
33.2
|
8.3
|
1,862.0
|
||||||||
|
Trans
Mountain – KMP
|
11.3
|
1,417.6
|
-
|
1,428.9
|
||||||||
|
Assets
Held for Sale
|
397.9
|
-
|
24.4
|
422.3
|
||||||||
|
Other
|
252.7
|
2,972.8
|
-
|
3,225.5
|
||||||||
|
$
|
16,779.7
|
$
|
4,605.8
|
$
|
117.0
|
$
|
21,502.5
|
|||||
_________
|
1
|
Terminals
– KMP includes revenues of $3.3 million, $2.2 million and $5.4 million for
the seven months ended December 31, 2007, the five months ended May 31,
2007 and the twelve months ended December 31, 2006, respectively, and
long-lived assets of $5.5 million and 8.3 million at December 31, 2007 and
2006, respectively, attributable to operations in the Netherlands. Other
includes revenues of $10.8 million for the twelve months ended December
31, 2005 attributable to KM Insurance
Ltd.
|
|
2
|
Long-lived
assets exclude goodwill and other intangibles,
net.
|
|
3
|
The
decrease in Canada-based “Long-lived Assets – Other” is the result of the
sale of our Canada-based retail natural gas distribution operations (see
Note 7).
|
16. 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, 2007, 2006 and 2005, the application of the indexing methodology
did not significantly affect tariff rates on our interstate petroleum products
pipelines.
FERC
Order No. 2004/690
Since
November 2003, the FERC issued Orders No. 2004, 2004-A, 2004-B, 2004-C, and
2004-D, adopting new Standards of Conduct as applied to natural gas pipelines.
The primary change from existing regulation was to make such standards
applicable to an interstate natural gas pipeline’s interaction with many more
affiliates (referred to as “energy affiliates”). The Standards of Conduct
required, among other things, separate staffing of interstate pipelines and
their energy affiliates (but support functions and senior management at the
central corporate level may be shared) and strict limitations on communications
from an interstate pipeline to an energy affiliate.
However,
on November 17, 2006, the United States Court of Appeals for the District of
Columbia Circuit, in Docket No. 04-1183, vacated FERC Orders 2004, 2004-A,
2004-B, 2004-C, and 2004-D as applied to natural gas pipelines, and remanded
these same orders back to the FERC.
On
January 9, 2007, the FERC issued an Interim Rule, effective January 9, 2007, in
response to the court’s action. In the Interim Rule, the FERC readopted the
Standards of Conduct, but revised or clarified with respect to issues which had
been appealed to the court. Specifically, the following changes were
made:
|
|
·
|
the
Standards of Conduct apply only to the relationship between interstate gas
transmission pipelines and their marketing affiliates, not their energy
affiliates;
|
|
|
·
|
all
risk management personnel can be
shared;
|
|
|
·
|
the
requirement to post discretionary tariff actions was eliminated (but
interstate gas pipelines must still maintain a log of discretionary tariff
waivers);
|
175
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
|
·
|
lawyers
providing legal advice may be shared employees;
and
|
|
|
·
|
new
interstate gas transmission pipelines are not subject to the Standards of
Conduct until they commence
service.
|
The
FERC clarified that all exemptions and waivers issued under Order No. 2004
remain in effect. On January 18, 2007, the FERC issued a notice of proposed
rulemaking seeking comments regarding whether or not the Interim Rule should be
made permanent for natural gas transmission providers (“January 18 NOPR”). On
March 21, 2007, the FERC issued an Order on Clarification and Rehearing of the
Interim Rule that granted clarification that the Standards of Conduct only apply
to natural gas transmission providers that are affiliated with a marketing or
brokering entity that conducts transportation transactions on such gas
transmission provider’s pipeline, i.e., “marketing affiliates.”
On
March 21, 2008, as part of an effort to undertake a broader review of the
existing Standards of Conduct, the FERC issued a new notice of proposed
rulemaking revamping the Standards of Conduct in order to make compliance and
enforcement easier, rather than issuing a Final Rule on the January 18 NOPR. The
intent of this action is to return to the core principles of the original
Standards of Conduct, which established a functional separation between
transmission and merchant personnel for natural gas and electric transmission
providers. The new NOPR is made up of three rules: (i) independent functioning
of transmission function employees from marketing function employees, (ii) the
no-conduit rule prohibiting the passing and receipt of non-public transmission
information and (iii) the transparency rule to detect undue discrimination.
Comments are due within 45 days of publication of the proposed rules in the
federal register.
Notice
of Inquiry – Financial Reporting
On
February 15, 2007, the FERC issued a notice of inquiry seeking comment on the
need for changes or revisions to the FERC’s reporting requirements contained in
the financial forms for gas and oil pipelines and electric utilities. Initial
comments were filed by numerous parties on March 27, 2007, and reply comments
were filed on April 27, 2007.
On
September 20, 2007, the FERC issued for public comment in Docket No. RM07-9 a
proposed rule which would revise its financial forms to require that additional
information be reported by natural gas companies. The proposed rule would
require, among other things, that natural gas companies: (i) submit additional
revenue information, including revenue from shipper-supplied gas; (ii) identify
the costs associated with affiliate transactions; and (iii) provide additional
information on incremental facilities and on discounted and negotiated rates.
The FERC proposes an effective date of January 1, 2008, which means that forms
reflecting the new requirements for 2008 would be filed in early 2009. Comments
on the proposed rule were filed by numerous parties on November 13,
2007.
On
March 21, 2008 the FERC issued a Final Rule regarding changes to the Form 2, 2-A
and 3-Q. The revisions were designed to enhance the forms’ usefulness by
updating them to reflect current market and cost information relevant to
interstate pipelines and their customers. The rule is effective January 1, 2008
with the filing of the revised Form 3-Q beginning with the first quarter of
2009. The revised Form 2 and 2-A for calendar year 2008 material would be filed
by April 30, 2009.
Notice
of Inquiry – Fuel Retention Practices
On
September 20, 2007, the FERC issued a Notice of Inquiry seeking comment on
whether it should change its current policy and prescribe a uniform method for
all interstate gas pipelines to use in recovering fuel gas and gas lost and
unaccounted for. The Notice of Inquiry included numerous questions regarding
fuel recovery issues and the effects of fixed fuel percentages as compared with
tracking provisions. Comments on the Notice of Inquiry were filed by numerous
parties on November 30, 2007.
Notice
of Proposed Rulemaking – Promotion of a More Efficient Capacity Release
Market
On
November 15, 2007, the FERC issued a notice of proposed rulemaking in Docket No.
RM 08-1-000 regarding proposed modifications to its Part 284 regulations
concerning the release of firm capacity by shippers on interstate natural gas
pipelines. The FERC proposes to remove, on a permanent basis, the rate ceiling
on capacity release transactions of one year or less. Additionally, the FERC
proposes to exempt capacity releases made as part of an asset management
arrangement from the prohibition on tying and from the bidding requirements of
section 284.8. Initial comments were filed by numerous parties on January 25,
2008.
Notice
of Proposed Rulemaking – Natural Gas Price Transparency
On
April 19, 2007, the FERC issued a notice of proposed rulemaking in Docket Nos.
RM07-10-000 and AD06-11-000 regarding price transparency provisions of Section
23 of the Natural Gas Act and the Energy Policy Act. In the notice, the FERC
proposes to revise its regulations to (i) require that intrastate pipelines post
daily the capacities of, and volumes flowing through, their major receipt and
delivery points and mainline segments in order to make available the information
to track daily flows of natural gas throughout the United States; and (ii)
require that buyers and sellers of more than a de minimis
176
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
volume
of natural gas report annual numbers and volumes of relevant transactions to the
FERC in order to make possible an estimate of the size of the physical U.S.
natural gas market, assess the importance of the use of index pricing in that
market, and determine the size of the fixed-price trading market that produces
the information. The FERC believes these revisions to its regulations will
facilitate price transparency in markets for the sale or transportation of
physical natural gas in interstate commerce. Initial comments were filed on July
11, 2007 and reply comments were filed on August 23, 2007. In addition, the FERC
conducted an informal workshop in this proceeding on July 24, 2007, to discuss
implementation and other technical issues associated with the proposals set
forth in the NOPR.
On
December 26, 2007, the FERC issued Order No. 704 in this docket implementing
only the annual reporting provisions of the NOPR with minimal changes to the
original proposal. The order becomes effective February 4, 2008. The initial
report is due May 1, 2009 for calendar year 2008. Subsequent reports are due by
May 1 of each year for the previous calendar year. Order No. 704 will require
most, if not all, Kinder Morgan natural gas pipelines to report annual volumes
of relevant transactions to the FERC.
In
addition, on December 21, 2007, the FERC issued a new notice of proposed
rulemaking in Docket No. RM08-2-000 regarding the daily posting provisions that
were contained in Docket Nos. RM07-10-000 and AD06-11-000. The new NOPR proposes
to exempt from the daily posting requirements those non-interstate pipelines
that (i) flow less than 10 million MMBtus of natural gas per year, (ii) fall
entirely upstream of a processing plant, and (iii) deliver more than ninety-five
percent (95%) of the natural gas volumes they flow directly to end-users.
However, the new NOPR expands the proposal to require that both interstate and
non-exempt non-interstate pipelines post daily the capacities of, volumes
scheduled at, and actual volumes flowing through, their major receipt and
delivery points and mainline segments. Initial comments were filed by numerous
parties on March 13, 2008 and reply comments are due April 14, 2008. A Technical
Conference is scheduled for April 3, 2008.
Notice
of Proposed Rulemaking - Rural Onshore Low Stress Hazardous Liquids
Pipelines
On
September 6, 2006, the PHMSA published a notice of proposed rulemaking (PHMSA 71
FR 52504) that proposed to extend certain threat-focused pipeline safety
regulations to rural onshore low-stress hazardous liquid pipelines within a
prescribed buffer of previously defined U.S. states. Low-stress hazardous liquid
pipelines, except those in populated areas or that cross commercially navigable
waterways, have not been subject to the safety regulations in PHMSA 49 CFR Part
195.1. According to the PHMSA, unusually sensitive areas are areas requiring
extra protection because of the presence of sole-source drinking water
resources, endangered species, or other ecological resources that could be
adversely affected by accidents or leaks occurring on hazardous liquid
pipelines.
The
notice proposed to define a category of “regulated rural onshore low-stress
lines” (rural lines operating at or below 20% of specified minimum yield
strength, with a diameter of eight and five-eighths inches or greater, located
in or within a quarter-mile of a U.S. state) and to require operators of these
lines to comply with a threat-focused set of requirements in Part 195 that
already apply to other hazardous liquid pipelines. The proposed safety
requirements addressed the most common threats—corrosion and third-party
damage—to the integrity of these rural lines. The proposal intended to provide
additional integrity protection, to avoid significant adverse environmental
consequences, and to improve public confidence in the safety of unregulated
low-stress lines.
Since
the new notice is a proposed rulemaking in which the PHMSA will consider initial
and reply comments from industry participants, it is not clear what impact the
final rule will have on the business of our intrastate and interstate liquids
pipeline companies.
Natural
Gas Pipeline Expansion Filings
Kinder
Morgan Interstate Gas Transmission Pipeline
On
August 6, 2007, Kinder Morgan Interstate Gas Transmission LLC filed, in FERC
Docket CP07-430, for regulatory approval to construct and operate a 41-mile, $29
million natural gas pipeline from the Cheyenne Hub to markets in and around
Greeley, Colorado. When completed, the Colorado Lateral will provide firm
transportation of up to 55 million cubic feet per day to a local utility under
long-term contract. The FERC issued a draft environmental assessment on the
project on January 11, 2008, and comments on the project were received February
11, 2008. On February 21, 2008, the FERC granted the certification application.
Public Service Company of Colorado, a competitor serving markets off the
Colorado Lateral, reported that it had filed a complaint before the State of
Colorado Public Utilities Commission against Atmos, the anchor shipper on the
project. The Colorado Public Utilities Commission has set a hearing for April 8,
2008 on the complaint. Public Service Company of Colorado has requested the FERC
delay the issuance of approvals to Kinder Morgan Interstate Gas Transmission
LLC, pending the outcome of the complaint proceeding.
177
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
On
December 21, 2007, Kinder Morgan Interstate Gas Transmission LLC filed, in
Docket CP 08-44, for approval to expand its system in Nebraska to serve
incremental ethanol and industrial load. The application is pending before the
FERC until March 10, 2008, at which time the project will be approved if no
protests are filed.
TransColorado
Pipeline
On
April 19, 2007, the FERC issued an order approving TransColorado Gas
Transmission Company LLC’s application for authorization to construct and
operate certain facilities comprising its proposed “Blanco-Meeker Expansion
Project.” This project provides for the transportation of up to approximately
250 million cubic feet per day of natural gas from the Blanco Hub area in San
Juan County, New Mexico through TransColorado’s existing interstate pipeline for
delivery to the Rockies Express Pipeline at an existing point of interconnection
located in the Meeker Hub in Rio Blanco County, Colorado. Construction commenced
on May 9, 2007, and the project was completed and placed in service on January
1, 2008.
Kinder
Morgan Illinois Pipeline
On
September 14, 2006, in FERC Docket No. CP06-455, Kinder Morgan Illinois Pipeline
LLC filed seeking a certificate from the FERC to acquire long-term lease
capacity on NGPL and build facilities to supply transportation service for
Peoples Gas Light and Coke Co., who has signed a 10-year agreement for all the
capacity. Also on September 14, 2006, in FERC Docket No. CP06-454, NGPL
requested authorization to abandon, by long-term operating lease, 360,000 Dth
per day to Kinder Morgan Illinois Pipeline LLC. On July 22, 2007, the FERC
issued an order that granted the abandonment of capacity by NGPL to Kinder
Morgan Illinois Pipeline as well as authorized the construction and operation of
the proposed project by Kinder Morgan Illinois Pipeline. The $18 million
project, which has a capacity of 360,000 Dth per day, was placed in service in
December 2007.
Kinder
Morgan Louisiana Pipeline
On
September 8, 2006, in FERC Docket No. CP06-449-000, Kinder Morgan Energy
Partners filed an application with the FERC requesting approval to construct and
operate the Kinder Morgan Louisiana Pipeline. The natural gas pipeline will
extend approximately 135 miles from Cheniere’s Sabine Pass liquefied natural gas
terminal in Cameron Parish, Louisiana, to various delivery points in Louisiana
and will provide interconnects with many other natural gas pipelines, including
NPGL. The project is supported by fully subscribed capacity and long-term customer
commitments with Chevron and Total. The entire project cost is approximately
$510 million and it is expected to be in service by January 1, 2009. Also on September 8,
2006, in FERC Docket No. CP06-448, NGPL requested authorization to abandon, by
long-term operating lease, 200,000 Dth per day of firm capacity to Kinder Morgan
Louisiana Pipeline LLC in Cameron Parish, Louisiana, where NGPL will
interconnect with the project.
On
March 15, 2007, the FERC issued a preliminary determination that the
authorizations requested, subject to some minor modifications, will be in the
public interest. This order does not consider or evaluate any of the
environmental issues in this proceeding. On April 19, 2007, the FERC issued the
final Environmental Impact Statement, which addressed the potential
environmental effects of the construction and operation of the Kinder Morgan
Louisiana Pipeline. The final EIS was prepared to satisfy the requirements of
the National Environmental Policy Act. It concluded that approval of the Kinder
Morgan Louisiana Pipeline project would have limited adverse environmental
impacts. On June 22, 2007, the FERC issued an order granting construction and
operation of the project. Kinder Morgan Louisiana Pipeline officially accepted
the order on July 10, 2007.
NGPL
Louisiana Line
On
October 10, 2006, in FERC Docket No. CP07-3, NGPL filed seeking approval to
expand its Louisiana Line by 200,000 Dth/day. This $88 million project is
supported by five-year agreements that fully subscribe the additional capacity.
On July 2, 2007, the FERC issued an order granting construction and operation of
the requested facilities. NGPL accepted the order on July 6, 2007. This
expansion was placed in service during the first quarter of 2008.
See
Note 1(K) Other
Investments, for information regarding natural gas pipeline expansion
filings for our equity investees, Rockies Express Pipeline LLC and Midcontinent
Express Pipeline LLC.
17. Litigation,
Environmental and Other Contingencies
Below
is a brief description of our ongoing material legal proceedings, including any
material developments that occurred in such proceedings during 2007. This note
also contains a description of any material legal proceeding initiated during
2007 in which we are involved.
178
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Federal
Energy Regulatory Commission Proceedings
Kinder
Morgan Energy Partners’ SFPP, L.P. and CALNEV Pipe Line LLC subsidiaries are
involved in proceedings before the FERC. SFPP is the subsidiary limited
partnership that owns Kinder Morgan Energy Partners’ Pacific operations. CALNEV
Pipe Line LLC and related terminals was acquired from GATX Corporation and is
not part of the Pacific operations. The tariffs and rates charged by SFPP and
CALNEV are subject to numerous ongoing proceedings at the FERC, including
shippers’ complaints and protests regarding interstate rates on these pipeline
systems. In general, these complaints allege the rates and tariffs charged by
SFPP and CALNEV are not just and reasonable.
As
to SFPP, the issues involved in these proceedings include, among others: (i)
whether certain of Kinder Morgan Energy Partners’ Pacific operations’ rates are
“grandfathered” under the Energy Policy Act of 1992, referred to in this note as
EPAct 1992, and therefore deemed to be just and reasonable; (ii) whether
“substantially changed circumstances” have occurred with respect to any
grandfathered rates such that those rates could be challenged; (iii) whether
indexed rate increases may become effective without investigation; (iv) the
capital structure to be used in computing the “starting rate base” of Kinder
Morgan Energy Partners’ Pacific operations; (v) the level of income tax
allowance that Kinder Morgan Energy Partners’ Pacific operations may include in
its rates; and (vi) the recovery of civil and regulatory litigation expenses and
certain pipeline reconditioning and environmental costs incurred by Kinder
Morgan Energy Partners’ Pacific operations.
In
May 2005, the FERC issued a statement of general policy stating it will permit
pipelines to include in cost of service a tax allowance to reflect actual or
potential tax liability on their public utility income attributable to all
partnership or limited liability company interests, if the ultimate owner of the
interest has an actual or potential income tax liability on such income. Whether
a pipeline’s owners have such actual or potential income tax liability will be
reviewed by the FERC on a case-by-case basis. Although the new policy is
generally favorable for pipelines that are organized as pass-through entities,
it still entails rate risk due to the case-by-case review requirement. The new
tax allowance policy and the FERC’s application of that policy to Kinder Morgan
Energy Partners’ Pacific operations were appealed to the United States Court of
Appeals for the District of Columbia Circuit, referred to in this note as the
D.C. Court.
On
May 29, 2007, the D.C. Court issued an opinion upholding the FERC’s tax
allowance policy. Because the extent to which an interstate oil pipeline is
entitled to an income tax allowance is subject to a case-by-case review at the
FERC, the level of income tax allowance to which SFPP will ultimately be
entitled is not certain. The D.C. Court’s May 29 decision also upheld the FERC’s
determination that a rate is no longer subject to grandfathering protection
under EPAct 1992 when there has been a substantial change in the overall rate of
return of the pipeline, rather than in one cost element. Further, the D.C. Court
declined to consider arguments that there were errors in the FERC’s method for
determining substantial change, finding that the parties had not first raised
such allegations with the FERC. On July 13, 2007, SFPP filed a petition for
rehearing with the D.C. Court, arguing that SFPP did raise allegations with the
FERC respecting these calculation errors. The D.C. Court denied rehearing of the
May 29, 2007 decision on August 20, 2007, and the decision is now
final.
In
this note, we refer to SFPP, L.P. as SFPP; CALNEV Pipe Line LLC as Calnev;
Chevron Products Company as Chevron; Navajo Refining Company, L.P. as Navajo;
ARCO Products Company as ARCO; BP West Coast Products, LLC as BP WCP; Texaco
Refining and Marketing Inc. as Texaco; Western Refining Company, L.P. as Western
Refining; Mobil Oil Corporation as Mobil; ExxonMobil Oil Corporation as
ExxonMobil; Tosco Corporation as Tosco; ConocoPhillips Company as
ConocoPhillips; Ultramar Diamond Shamrock Corporation as Ultramar; Valero Energy
Corporation as Valero; Valero Marketing and Supply Company as Valero Marketing;
and America West Airlines, Inc., Continental Airlines, Inc., Northwest Airlines,
Inc., Southwest Airlines Co. and US Airways, Inc., collectively, as the Airline
Complainants.
Following
is a listing of certain active FERC proceedings pertaining to Kinder Morgan
Energy Partners’ Pacific operations:
|
·
|
FERC
Docket No. OR92-8, et
al.—Complainants/Protestants: Chevron; Navajo; ARCO; BP WCP;
Western Refining; ExxonMobil; Tosco; and Texaco (Ultramar is an
intervenor)—Defendant: SFPP
|
|
|
Consolidated
proceeding involving shipper complaints against certain East Line and West
Line rates. All five issues (and others) described four paragraphs above
are involved in these proceedings. Portions of this proceeding were
appealed (and re-appealed) to the D.C. Court and remanded to the FERC. BP
WCP, Chevron, and ExxonMobil requested a hearing before the FERC on
remanded grandfathering and income tax allowance issues. The FERC issued
an Order on Rehearing, Remand, Compliance, and Tariff Filings on December
26, 2007, which denied the requests for a hearing, affirmed the income tax
allowance policy and further clarified the implementation of that policy,
and required SFPP to file a compliance
filing;
|
|
·
|
FERC
Docket Nos. OR92-8-028,
et al.—Complainants/Protestants:
BP WCP; ExxonMobil; Chevron; ConocoPhillips; and Ultramar—Defendant:
SFPP
|
179
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
|
Proceeding
involving shipper complaints against SFPP’s Watson Station rates. A
settlement was reached for April 1, 1999 forward; whether SFPP owes
reparations for shipments prior to that date is still before the
FERC;
|
|
·
|
FERC
Docket No. OR96-2, et
al.—Complainants/Protestants: All Shippers except Chevron (which is
an intervenor)—Defendant: SFPP
|
|
|
Consolidated
proceeding involving shipper complaints against all SFPP rates. All five
issues (and others) described four paragraphs above are involved in these
proceedings. Portions of this proceeding were appealed (and re-appealed)
to the D.C. Court and remanded to the FERC. The FERC issued an Order on
Rehearing, Remand, Compliance, and Tariff Filings on December 26, 2007,
which denied the requests for a hearing, affirmed the income tax allowance
policy and further clarified the implementation of that policy, and
required SFPP to file a compliance
filing;
|
|
·
|
FERC
Docket Nos. OR02-4 and OR03-5—Complainants/Protestant: Chevron—Defendant:
SFPP
|
|
|
Chevron
initiated proceeding to permit Chevron to become complainant in OR96-2.
Appealed to the D.C. Court and held in abeyance pending final disposition
of the OR96-2 proceedings;
|
|
·
|
FERC
Docket No. OR04-3—Complainants/Protestants: America West Airlines;
Southwest Airlines; Northwest Airlines; and Continental
Airlines—Defendant: SFPP
|
|
|
Complaint
alleges that West Line and Watson Station rates are unjust and
unreasonable. Watson Station issues severed and consolidated into a
proceeding focused only on Watson-related issues. The FERC has set the
complaints against the West Line rates for hearing but denied the request
to consolidate the dockets with the ongoing proceedings involving SFPP’s
North and Oregon Line rates;
|
|
·
|
FERC
Docket Nos. OR03-5, OR05-4 and OR05-5—Complainants/Protestants: BP WCP;
ExxonMobil; and ConocoPhillips (other shippers intervened)—Defendant:
SFPP
|
|
|
Complaints
allege that SFPP’s interstate rates are not just and reasonable. The FERC
has set the complaints against the West and East Line rates for hearing,
but denied the request to consolidate the dockets with the ongoing
proceedings involving SFPP’s North and Oregon Line
rates;
|
|
·
|
FERC
Docket No. OR03-5-001—Complainants/Protestants: BP WCP; ExxonMobil; and
ConocoPhillips (other shippers intervened)—Defendant:
SFPP
|
|
|
The
FERC severed the portions of the complaints in Docket Nos. OR03-5, OR05-4,
and OR05-5 regarding SFPP’s North and Oregon Line rates into a separate
proceeding in Docket No. OR03-5-001, which has been set for
hearing;
|
|
·
|
FERC
Docket No. OR07-1—Complainant/Protestant: Tesoro—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s North Line rates are not just and reasonable.
Complaint held in abeyance pending resolution at the D.C. Court of, among
other things, income tax allowance and grandfathering issues. The D.C.
Court issued an opinion on these issues on May 29, 2007, upholding the
FERC’s income tax allowance policy;
|
|
·
|
FERC
Docket No. OR07-2—Complainant/Protestant: Tesoro—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s West Line rates are not just and reasonable. Complaint
held in abeyance pending resolution at the D.C. Court of, among other
things, income tax allowance and grandfathering issues. The D.C. Court
issued an opinion on these issues on May 29, 2007, upholding the FERC’s
income tax allowance policy. A request that the FERC set the complaint for
hearing – which SFPP opposed – is pending before the
FERC;
|
|
·
|
FERC
Docket No. OR07-3—Complainants/Protestants: BP WCP; Chevron; ExxonMobil;
Tesoro; and Valero Marketing—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s North Line indexed rate increase was not just and
reasonable. The FERC has dismissed the complaint and denied rehearing the
dismissal. Petitions for review filed by BP WCP and ExxonMobil at the D.C.
Court;
|
|
·
|
FERC
Docket No. OR07-4—Complainants/Protestants: BP WCP; Chevron; and
ExxonMobil—Defendants: SFPP; Kinder Morgan G.P., Inc.; and Knight
Inc.
|
|
|
Complaint
alleges that SFPP’s rates are not just and reasonable. Complaint held in
abeyance pending resolution at the D.C. Court of, among other things,
income tax allowance and grandfathering issues. The D.C. Court issued an
opinion on these issues on May 29, 2007, upholding the FERC’s income tax
allowance policy;
|
|
·
|
FERC
Docket Nos. OR07-5 and OR07-7 (consolidated)—Complainants/Protestants:
ExxonMobil and Tesoro—Defendants: Calnev; Kinder Morgan G.P., Inc.; and
Knight Inc.
|
|
|
Complaints
allege that none of Calnev’s current rates are just or reasonable. In
light of the D.C. Court’s May 29, 2007 ruling, on July 19, 2007, the FERC,
among other things, dismissed with prejudice the complaints against Kinder
Morgan G.P. Inc. and Knight Inc. and allowed complainants to file amended
complaints. ExxonMobil filed a request for rehearing of the dismissal of
the complaints against Kinder Morgan G.P., Inc. and Knight Inc., which is
currently pending before the FERC. The FERC has not acted on the amended
complaints;
|
180
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Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
·
|
FERC
Docket No. OR07-6—Complainant/Protestant: ConocoPhillips—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s North Line indexed rate increase was not just and
reasonable. The FERC has dismissed the complaint and denied rehearing the
dismissal. The FERC had consolidated this case with OR07-3 and issued
orders that applied to both OR07-3 and OR07-6. Although the FERC orders in
these dockets have been appealed by certain of the complainants in OR07-3,
they have not been appealed by ConocoPhillips in
OR07-6;
|
|
·
|
FERC
Docket No. OR07-8 (consolidated with Docket No.
OR07-11)—Complainant/Protestant: BP WCP—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s 2005 indexed rate increase was not just and
reasonable. On June 6, 2007, the FERC dismissed challenges to SFPP’s
underlying rate but held in abeyance the portion of the Complaint
addressing SFPP’s July 1, 2005 index-based rate increases. SFPP requested
rehearing on July 6, 2007, which the FERC denied. On February 13, 2008,
the FERC set this complaint for hearing, but referred it to settlement
negotiations;
|
|
·
|
FERC
Docket No. OR07-9—Complainant/Protestant: BP WCP—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s ultra low sulphur diesel (ULSD) recovery fee violates
the filed rate doctrine and that, in any event, the recovery fee is unjust
and unreasonable. On July 6, 2007, the FERC dismissed the complaint. BP
WCP requested a rehearing, which the FERC denied. A petition for review
was filed by BP WCP. The FERC’s motion to dismiss or hold the case in
abeyance is pending;
|
|
·
|
FERC
Docket No. OR07-10—Complainants/Protestants: BP WCP; ConocoPhillips;
Valero; and ExxonMobil—Defendant:
Calnev
|
|
|
Calnev
filed a petition with the FERC on May 14, 2007, requesting that the FERC
issue a declaratory order approving Calnev’s proposed rate methodology and
granting other relief with respect to a substantial proposed expansion of
Calnev’s mainline pipeline system. On July 20, 2007, the FERC granted
Calnev’s petition for declaratory
order;
|
|
·
|
FERC
Docket No. OR07-11 (consolidated with Docket No.
OR07-8)—Complainant/Protestant: ExxonMobil—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s 2005 indexed rate increase was not just and
reasonable. On February 13, 2008, the FERC set this complaint for hearing,
but referred it to settlement negotiations. It is now consolidated with
the complaint in Docket No. OR07-8;
|
|
·
|
FERC
Docket No. OR07-14—Complainants/Protestants: BP WCP and
Chevron—Defendants: SFPP; Calnev; Operating Limited Partnership “D”;
Kinder Morgan Energy Partners, L.P.; Kinder Morgan Management LLC; Kinder
Morgan G.P., Inc.; Knight Inc.; and Knight Holdco,
LLC
|
|
|
Complaint
alleges violations of the Interstate Commerce Act and the FERC’s cash
management regulations, seeks review of the FERC Form 6 annual reports of
SFPP and Calnev, and again requests interim refunds and reparations. The
FERC dismissed the complaint;
|
|
·
|
FERC
Docket No. OR07-16—Complainant/Protestant: Tesoro—Defendant:
Calnev
|
|
|
Complaint
challenges Calnev’s 2005, 2006, and 2007 indexing adjustments. The FERC
dismissed the complaint. A petition for review was filed by
Tesoro. A scheduling order for briefs and oral argument has not yet been
issued by the D.C. Court;
|
|
·
|
FERC
Docket No. OR07-18—Complainants/Protestants: Airline Complainants;
Chevron; and Valero Marketing—Defendant:
Calnev
|
|
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. In December 2007, the
FERC issued an order accepting and holding in abeyance the portion of the
complaint against the non-grandfathered portion of Calnev’s rates. The
order also gave complainants 45 days to amend their complaint against the
grandfathered portion of Calnev’s rates in light of clarifications
provided in the FERC’s order;
|
|
·
|
FERC
Docket No. OR07-19—Complainant/Protestant: ConocoPhillips—Defendant:
Calnev
|
|
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. In December 2007, the
FERC issued an order accepting and holding in abeyance the portion of the
complaint against the non-grandfathered portion of Calnev’s rates. The
order also gave complainants 45 days to amend their complaint against the
grandfathered portion of Calnev’s rates in light of clarifications
provided in the FERC’s order;
|
|
·
|
FERC
Docket No. OR07-20—Complainant/Protestant: BP WCP—Defendant:
SFPP
|
|
|
Complaint
alleges that SFPP’s 2007 indexed rate increase was not just and
reasonable. In December 2007, the FERC dismissed the complaint.
Complainant filed a request for rehearing which is currently pending
before the FERC. In February 2008, the FERC accepted a joint offer of
settlement that dismisses, with prejudice, the East Line index rate
portion of the complaint in
OR07-20;
|
181
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Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
·
|
FERC
Docket No. OR07-22—Complainant/Protestant: BP WCP—Defendant:
Calnev
|
|
|
Complaint
alleges that Calnev’s rates are unjust and unreasonable and that none of
Calnev’s rates are grandfathered under EPAct 1992. In December 2007, the
FERC issued an order giving complainant 45 days to amend its complaint in
light of guidance provided by the
FERC;
|
|
·
|
FERC
Docket No. IS05-230 (North Line rate case)—Complainants/Protestants:
Shippers—Defendant: SFPP
|
|
|
SFPP
filed to increase North Line rates to reflect increased costs due to
installation of new pipe between Concord and Sacramento, California.
Various shippers protested. An administrative law judge decision is
pending before the FERC on exceptions. On August 31, 2007, BP WCP and
ExxonMobil filed a motion to reopen the record on the issue of SFPP’s
appropriate rate of return on equity, which SFPP answered on September 18,
2007. The FERC has yet to issue an order on shipper’s
motion;
|
|
·
|
FERC
Docket No. IS05-327—Complainants/Protestants: Shippers—Defendant:
SFPP
|
|
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s
indexing methodology. Various shippers protested, but the FERC determined
that the tariff filings were consistent with its regulations. The D.C.
Court dismissed a petition for review, citing a lack of jurisdiction to
review a decision by the FERC not to order an
investigation;
|
|
·
|
FERC
Docket No. IS06-283 (East Line rate case)—Complainants/Protestants:
Shippers—Defendant: SFPP
|
|
|
SFPP
filed to increase East Line rates to reflect increased costs due to
installation of new pipe between El Paso, Texas and Tucson, Arizona.
Various shippers protested. In November 2007, the parties submitted a
joint offer of settlement which was certified to the FERC in December
2007. In February 2008, the FERC accepted the joint offer of settlement
which, among other things, resolved all protests and complaints related to
the East Line Phase I Expansion
Tariff;
|
|
·
|
FERC
Docket No. IS06-296—Complainant/Protestant: ExxonMobil—Defendant:
Calnev
|
|
|
Calnev
sought to increase its interstate rates pursuant to the FERC’s indexing
methodology. ExxonMobil filed a protest respecting Calnev’s indexing
adjustments. This proceeding is currently held in abeyance pending ongoing
settlement discussions. Calnev has also filed a motion to dismiss or to
hold the investigation in abeyance, which is pending before the FERC.
Calnev and ExxonMobil have reached an agreement in principle to settle
this and other dockets;
|
|
·
|
FERC
Docket No. IS06-356—Complainants/Protestants: Shippers—Defendant:
SFPP
|
|
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s
indexing methodology. Various shippers protested, but the FERC found the
tariff filings consistent with its regulations. The FERC has rescinded the
index increase for the East Line rates, and SFPP has requested rehearing.
The D.C. Court dismissed a petition for review, citing the rehearing
request pending before the FERC. On September 20, 2007, the FERC denied
SFPP’s request for rehearing. In November 2007, all parties submitted a
joint offer of settlement. In February 2008, the FERC accepted the joint
offer of settlement which, among other things, resolved all protests and
complaints related to the East Line 2006 Index
Tariff;
|
|
·
|
FERC
Docket No. IS07-137 (ULSD surcharge)—Complainants/Protestants:
Shippers—Defendant: SFPP
|
|
|
SFPP
filed tariffs to include a per barrel ULSD recovery fee and a surcharge
for ULSD-related litigation costs on diesel products. Various shippers
protested. Tariffs related to ULSD recovery fee accepted subject to refund
and proceeding is being held in abeyance pending resolution of other
proceedings involving SFPP. SFPP rescinded the ULSD litigation surcharge
in compliance with a FERC order. Request for rehearing filed by Chevron
and Tesoro. Request for rehearing filed by Chevron and Tesoro. The FERC
ultimately denied rehearing in an order issued on November 13,
2007;
|
|
·
|
FERC
Docket No. IS07-229—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: SFPP
|
|
|
SFPP
filed to increase certain rates on its pipelines pursuant to the FERC’s
indexing methodology. Two shippers filed protests. The FERC found the
tariff filings consistent with its regulations, but suspended the
increased rates subject to refund pending challenges to SFPP’s underlying
rates. In November 2007, all parties submitted a joint offer of
settlement. In February 2008, the FERC accepted the joint offer of
settlement which, among other things, resolved all protests and complaints
related to the East Line 2007 Index
Tariff;
|
|
·
|
FERC
Docket No. IS07-234—Complainants/Protestants: BP WCP and
ExxonMobil—Defendant: Calnev
|
|
|
Calnev
filed to increase certain rates on its pipeline pursuant to the FERC’s
indexing methodology. Two shippers protested. The FERC found the tariff
filings consistent with its regulations, but suspended the increased rates
subject to refund pending challenges to SFPP’s underlying rates. Calnev
and ExxonMobil have reached an agreement in principle to settle this and
other dockets;
|
|
·
|
FERC
Docket No. IS08-28—Complainants/Protestants: ConocoPhillips; Chevron; BP
WCP; ExxonMobil; Southwest Airlines; Western; and Valero—Defendant:
SFPP
|
|
|
SFPP
filed to increase its East Line rates based on costs incurred related to
an expansion. Various shippers filed protests, which SFPP answered. The
FERC issued an order on November 29, 2007 accepting and suspending the
tariff subject to refund. The proceeding is being held in abeyance
pursuant to ongoing settlement negotiations;
and
|
182
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
|
·
|
Motions
to compel payment of interim damages (various
dockets)—Complainants/Protestants: Shippers—Defendants: SFPP; Kinder
Morgan G.P., Inc.; and Knight Inc.
|
|
|
Motions
seek payment of interim refunds or escrow of funds pending resolution of
various complaints and protests involving SFPP. The FERC denied shippers’
refund requests in an order issued on December 26, 2007 in Docket Nos.
OR92-8, et
al
|
In
2003, Kinder Morgan Energy Partners made aggregate payments of $44.9 million for
reparations and refunds pursuant to a FERC order related to Docket Nos. OR92-8
et al. In 2005, SFPP
received a FERC order in OR92-8 and OR96-2 that directed it to submit compliance
filings and revised tariffs. In accordance with the FERC’s December 2005 order
and its February 2006 order on rehearing, SFPP submitted a compliance filing to
the FERC in March 2006, and rate reductions were implemented on May 1, 2006.
Kinder Morgan Energy Partners estimates the impact of the rate reductions in
2007 was approximately $25 million, and Kinder Morgan Energy Partners estimates
that the actual, partial year impact on Kinder Morgan Energy Partners’ 2006
distributable cash flow was approximately $15.7 million. In addition, in
December 2005, Kinder Morgan Energy Partners recorded accruals of $105.0 million
for expenses attributable to an increase in its reserves related to its rate
case liability.
In
December 2007, as a follow-up to the March 2006 compliance filing, SFPP received
a FERC order that directed it to submit revised compliance filings and revised
tariffs. In conjunction with this order, Kinder Morgan Energy Partners’ other
FERC and CPUC rate cases, and other unrelated litigation matters, Kinder Morgan
Energy Partners increased its litigation reserves by $140.0 million in the
fourth quarter of 2007. We assume that, with respect to Kinder Morgan Energy
Partners’ SFPP litigation reserves, any additional reparations and accrued
interest thereon will be paid no earlier than the fourth quarter of 2008. SFPP
filed the revised compliance filings on February 26, 2008, and implemented new
rates on March 1, 2008. We estimate that the impact of the new rates on Kinder
Morgan Energy Partners’ 2008 budget will be less than $3.0 million.
In
general, if the shippers are successful in proving their claims, they are
entitled to reparations or refunds of any excess tariffs or rates paid during
the two-year period prior to the filing of their complaint, and Kinder Morgan
Energy Partners’ Pacific operations may be required to reduce the amount of its
tariffs or rates for particular services. These proceedings tend to be
protracted, with decisions of the FERC often appealed to the federal courts.
Based on our review of these FERC proceedings, we estimate that shippers are
seeking approximately $290 million in reparation and refund payments and
approximately $45 million in additional annual rate reductions.
California
Public Utilities Commission Proceedings
On
April 7, 1997, ARCO, Mobil and Texaco filed a complaint against SFPP with the
California Public Utilities Commission, referred to in this note as the CPUC.
The complaint challenges rates charged by SFPP for intrastate transportation of
refined petroleum products through its pipeline system in the state of
California and requests prospective rate adjustments.
In
October 2002, the CPUC issued a resolution, referred to in this note as the
Power Surcharge Resolution, approving a 2001 request by SFPP to raise its
California rates to reflect increased power costs. The resolution approving the
requested rate increase also required SFPP to submit cost data for 2001, 2002,
and 2003, and to assist the CPUC in determining whether SFPP’s overall rates for
California intrastate transportation services are reasonable. The resolution
reserves the right to require refunds, from the date of issuance of the
resolution, to the extent the CPUC’s analysis of cost data to be submitted by
SFPP demonstrates that SFPP’s California jurisdictional rates are unreasonable
in any fashion.
On
December 26, 2006, Tesoro filed a complaint challenging the reasonableness of
SFPP’s intrastate rates for the three-year period from December 2003 through
December 2006 and requesting approximately $8 million in reparations. As a
result of previous SFPP rate filings and related protests, the rates that are
the subject of the Tesoro complaint are being collected subject to
refund.
SFPP
also has various, pending ratemaking matters before the CPUC that are unrelated
to the above-referenced complaints and the Power Surcharge Resolution. Protests
to these rate increase applications have been filed by various shippers. As a
consequence of the protests, the related rate increases are being collected
subject to refund.
All
of the above matters have been consolidated and assigned to a single
administrative law judge. At the time of this report, it is unknown when a
decision from the CPUC regarding the CPUC complaints and the Power Surcharge
Resolution will be received. No schedule has been established for hearing and
resolution of the consolidated proceedings other than the 1997 CPUC complaint
and the Power Surcharge Resolution. Based on our review of these CPUC
proceedings, we estimate that shippers are seeking approximately $100 million in
reparation and refund payments and approximately $35 million in annual rate
reductions.
183
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Carbon
Dioxide Litigation
Shores
and First State Bank of Denton Lawsuits
Kinder
Morgan CO2 Company,
L.P. (referred to in this note as Kinder Morgan CO2), Kinder
Morgan G.P., Inc., and Cortez Pipeline Company were among the named defendants
in Shores, et al. v. Mobil Oil Corp., et al., No. GC-99-01184 (Statutory Probate
Court, Denton County, Texas filed December 22, 1999) and First State Bank of
Denton, et al. v. Mobil Oil Corp., et al., No. 8552-01 (Statutory Probate Court,
Denton County, Texas filed March 29, 2001). These cases were originally filed as
class actions on behalf of classes of overriding royalty interest owners
(Shores) and royalty interest owners (Bank of Denton) for damages relating to
alleged underpayment of royalties on carbon dioxide produced from the McElmo
Dome Unit. On February 22, 2005, the trial judge dismissed both cases for lack
of jurisdiction. Some of the individual plaintiffs in these cases re-filed their
claims in new lawsuits (discussed below).
Armor/Reddy
Lawsuit
On
May 13, 2004, William Armor filed a case alleging the same claims for
underpayment of royalties on carbon dioxide produced from the McElmo Dome Unit
against Kinder Morgan CO2, Kinder
Morgan G.P., Inc., and Cortez Pipeline Company among others. Armor v. Shell Oil Company, et
al, No. 04-03559 (14th Judicial District Court, Dallas County, Texas
filed May 13, 2004).
On
May 20, 2005, Josephine Orr Reddy and Eastwood Capital, Ltd. filed a case in
Dallas state district court alleging the same claims for underpayment of
royalties. Reddy and Eastwood
Capital, Ltd. v. Shell Oil Company, et al., No. 05-5021 (193rd Judicial
District Court, Dallas County, Texas filed May 20, 2005). The defendants
included Kinder Morgan CO2 and Kinder
Morgan Energy Partners, L.P. On June 23, 2005, the plaintiff in the Armor
lawsuit filed a motion to transfer and consolidate the Reddy lawsuit with the
Armor lawsuit. On June 28, 2005, the court in the Armor lawsuit ordered that the
Reddy lawsuit be transferred and consolidated into the Armor lawsuit.
Effective
March 5, 2007, the parties executed a final settlement agreement which provides
for the dismissal of the lawsuit and the plaintiffs’ claims with prejudice to
being refiled. On June 12, 2007, the Dallas state district court signed its
order dismissing the case and all claims with
prejudice.
Gerald
O. Bailey et al. v. Shell Oil Co. et al/Southern District of Texas
Lawsuit
Kinder
Morgan CO2, Kinder
Morgan Energy Partners, L.P. and Cortez Pipeline Company are among the
defendants in a proceeding in the federal courts for the southern district of
Texas. Gerald O. Bailey et al.
v. Shell Oil Company et al., (Civil Action Nos. 05-1029 and 05-1829 in
the U.S. District Court for the Southern District of Texas—consolidated by Order
dated July 18, 2005). The plaintiffs are asserting claims for the underpayment
of royalties on carbon dioxide produced from the McElmo Dome unit. The
plaintiffs assert claims for fraud/fraudulent inducement, real estate fraud,
negligent misrepresentation, breach of fiduciary and agency duties, breach of
contract and covenants, violation of the Colorado Unfair Practices Act, civil
theft under Colorado law, conspiracy, unjust enrichment, and open account.
Plaintiffs Gerald O. Bailey, Harry Ptasynski, and W.L. Gray & Co. have also
asserted claims as private relators under the False Claims Act and for violation
of federal and Colorado antitrust laws. The plaintiffs seek actual damages,
treble damages, punitive damages, a constructive trust and accounting, and
declaratory relief. The defendants have filed motions for summary judgment on
all claims. No trial date has been set.
Effective
March 5, 2007, all defendants and plaintiffs Bridwell Oil Company, the Alicia
Bowdle Trust, and the Estate of Margaret Bridwell Bowdle executed a final
settlement agreement which provides for the dismissal of these plaintiffs’
claims with prejudice to being refiled. On June 10, 2007, the Houston federal
district court entered an order of partial dismissal by which the claims by and
against the settling plaintiffs were dismissed with prejudice. The claims
asserted by Bailey, Ptasynski, and Gray are not included within the settlement
or the order of partial dismissal.
Ptasynski
Colorado Federal District Court Lawsuit
On
April 7, 2006, Harry Ptasynski, one of the plaintiffs in the Bailey action
discussed above, filed suit against Kinder Morgan G.P., Inc. in Colorado federal
district court. Harry Ptasynski v. Kinder Morgan G.P., Inc., No. 06-CV-00651
(LTB) (U.S. District Court for the District of Colorado). Ptasynski, who holds
an overriding royalty interest at McElmo Dome, asserted claims for civil
conspiracy, violation of the Colorado Organized Crime Control Act, violation of
Colorado antitrust laws, violation of the Colorado Unfair Practices Act, breach
of fiduciary duty and confidential relationship, violation of the Colorado
Payment of Proceeds Act, fraudulent concealment, breach of contract and implied
duties to market and good faith and fair dealing, and civil theft and
conversion. Ptasynski sought actual damages, treble damages, forfeiture,
disgorgement, and declaratory and injunctive relief. The Colorado court
transferred the case to Houston federal district court, and Ptasynski
voluntarily dismissed the case on May 19, 2006. Ptasynski also filed an appeal
in the Tenth Circuit seeking to overturn the Colorado court’s order transferring
the case to Houston federal district court. Harry Ptasynski v. Kinder Morgan
G.P., Inc.,
184
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
No.
06-1231 (10th Cir.). Briefing in the appeal was completed on November 27, 2006.
On April 4, 2007, the Tenth Circuit Court of Appeals dismissed the appeal as
moot in light of Ptasynksi’s voluntary dismissal of the case.
Bridwell
Oil Company Wichita County Lawsuit
On
March 1, 2004, Bridwell Oil Company, one of the named plaintiffs in the above
described Bailey action, filed a new matter in which it asserted claims that are
virtually identical to the claims it asserted in the Bailey lawsuit. Bridwell
Oil Co. v. Shell Oil Co. et al., No. 160,199-B (78th Judicial District Court,
Wichita County, Texas filed March 1, 2004). The defendants in this action
include, among others, Kinder Morgan CO2, Kinder
Morgan Energy Partners, L.P., and Cortez Pipeline Company. This case was abated
pending resolution of the Bailey action discussed above.
Effective
March 5, 2007, the parties executed a final settlement agreement which provides
for the dismissal of the lawsuit and the plaintiffs’ claims with prejudice to
being refiled. On June 14, 2007, the Wichita County state district court signed
its order dismissing the case and all claims with
prejudice.
CO2 Claims
Arbitration
Cortez
Pipeline Company and Kinder Morgan CO2, successor
to Shell CO2 Company,
Ltd., were among the named defendants in CO2 Committee,
Inc. v. Shell Oil Co., et al., an arbitration initiated on November 28, 2005.
The arbitration arose from a dispute over a class action settlement agreement
which became final on July 7, 2003 and disposed of five lawsuits formerly
pending in the U.S. District Court, District of Colorado. The plaintiffs in such
lawsuits primarily included overriding royalty interest owners, royalty interest
owners, and small share working interest owners who alleged underpayment of
royalties and other payments on carbon dioxide produced from the McElmo Dome
Unit. The settlement imposed certain future obligations on the defendants in the
underlying litigation. The plaintiff in the arbitration is an entity that was
formed as part of the settlement for the purpose of monitoring compliance with
the obligations imposed by the settlement agreement. The plaintiff alleged that,
in calculating royalty and other payments, defendants used a transportation
expense in excess of what is allowed by the settlement agreement, thereby
causing alleged underpayments of approximately $12 million. The plaintiff also
alleged that Cortez Pipeline Company should have used certain funds to further
reduce its debt, which, in turn, would have allegedly increased the value of
royalty and other payments by approximately $0.5 million. Defendants denied that
there was any breach of the settlement agreement. On August 7, 2006, the
arbitration panel issued its opinion finding that defendants did not breach the
settlement agreement. On October 25, 2006, the defendants filed an application
to confirm the arbitration decision in New Mexico federal district court. On
June 21, 2007, the New Mexico federal district court entered final judgment
confirming the August 7, 2006 arbitration decision.
On
October 2, 2007, the plaintiff initiated a second arbitration (CO2 Committee,
Inc. v. Shell CO2 Company,
Ltd., aka Kinder Morgan CO2 Company,
L.P., et al.) against Cortez Pipeline Company, Kinder Morgan CO2 and a
Mobil entity. The second arbitration asserts claims similar to those asserted in
the first arbitration. On October 11, 2007, the defendants filed a Complaint for
Declaratory Judgment and Injunctive Relief in federal district court in New
Mexico. The Complaint seeks dismissal of the second arbitration on the basis of
res judicata. In November 2007, the plaintiff in the arbitration moved to
dismiss the defendants’ Complaint on the grounds that the issues presented
should be decided by a panel in a second arbitration. In December 2007, the
defendants in the arbitration filed a motion seeking summary judgment on their
Complaint and dismissal of the second arbitration. No hearing date has been
set.
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. This Notice, and the MMS’ position that Kinder Morgan
CO2
has violated certain reporting obligations, relates to a disagreement between
the MMS and Kinder Morgan CO2 concerning
the approved transportation allowance to be used in valuing McElmo Dome carbon
dioxide for purposes of calculating federal royalties. The Notice of
Noncompliance and Civil Penalty assesses a civil penalty of approximately $2.2
million as of December 15, 2006 (based on a penalty of $500.00 per day for each
of 17 alleged violations) for Kinder Morgan CO2’s alleged
submission of false, inaccurate, or misleading information relating to the
transportation allowance, and federal royalties for CO2 produced
at McElmo Dome, during the period from June 2005 through October 2006. The MMS
contends that false, inaccurate, or misleading information was submitted in the
17 monthly Form 2014s containing remittance advice reflecting the royalty
payments for the referenced period because they reflected Kinder Morgan CO2’s use of
the Cortez Pipeline tariff as the transportation allowance. The MMS claims that
the Cortez Pipeline tariff is not the proper transportation allowance and that
Kinder Morgan CO2 should
have used its “reasonable actual costs” calculated in accordance with certain
federal product valuation regulations as amended effective June 1, 2005. The MMS
stated that civil penalties will continue to accrue at the same rate until the
alleged violations are corrected.
The
MMS set a due date of January 20, 2007 for Kinder Morgan CO2’s payment
of the approximately $2.2 million in civil penalties, with interest to accrue
daily on that amount in the event payment is not made by such date. Kinder
Morgan CO2
has
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not
paid the penalty. On January 2, 2007, Kinder Morgan CO2 submitted
a response to the Notice of Noncompliance and Civil Penalty challenging the
assessment in the Office of Hearings and Appeals of the Department of the
Interior. On February 1, 2007, Kinder Morgan CO2 filed a
petition to stay the accrual of penalties until the dispute is resolved. On
February 22, 2007, an administrative law judge of the U.S. Department of the
Interior issued an order denying Kinder Morgan CO2’s petition
to stay the accrual of penalties. A hearing on the Notice of Noncompliance and
Civil Penalty was originally set for December 10, 2007. In November 2007, the
MMS and Kinder Morgan CO2 filed a
joint motion to vacate the hearing date and stay the accrual of additional
penalties to allow the parties to discuss settlement. In November 2007, the
administrative law judge granted the joint motion, stayed accrual of additional
penalties for the period from November 6, 2007 to February 18, 2008, and reset
the hearing date to March 24, 2008. The parties conducted settlement conferences
on February 4, 2008 and February 12, 2008.
Kinder
Morgan CO2 disputes
the Notice of Noncompliance and Civil Penalty and believes that it has
meritorious defenses. Kinder Morgan CO2 contends
that use of the Cortez pipeline tariff as the transportation allowance for
purposes of calculating federal royalties was approved by the MMS in 1984. This
approval was later affirmed as open-ended by the Interior Board of Land Appeals
in the 1990s. Accordingly, Kinder Morgan CO2 has stated
to the MMS that its use of the Cortez tariff as the approved federal
transportation allowance is authorized and proper. Kinder Morgan CO2 also
disputes the allegation that it has knowingly or willfully submitted false,
inaccurate, or misleading information to the MMS. Kinder Morgan CO2’s use of
the Cortez Pipeline tariff as the approved federal transportation allowance has
been the subject of extensive discussion between the parties. The MMS was, and
is, fully apprised of that fact and of the royalty valuation and payment process
followed by Kinder Morgan CO2 generally.
MMS
Order to Report and Pay
On
March 20, 2007, Kinder Morgan CO2 received
an “Order to Report and Pay” from the Minerals Management Service. The MMS
contends that Kinder Morgan CO2 has
over-reported transportation allowances and underpaid royalties in the amount of
approximately $4.6 million for the period from January 1, 2005 through December
31, 2006 as a result of its use of the Cortez pipeline tariff as the
transportation allowance in calculating federal royalties. As noted in the
discussion of the Notice of Noncompliance and Civil Penalty proceeding, the MMS
claims that the Cortez Pipeline tariff is not the proper transportation
allowance and that Kinder Morgan CO2 must use
its “reasonable actual costs” calculated in accordance with certain federal
product valuation regulations. The MMS set a due date of April 13, 2007 for
Kinder Morgan CO2’s payment
of the $4.6 million in claimed additional royalties, with possible late payment
charges and civil penalties for failure to pay the assessed amount. Kinder
Morgan CO2 has not
paid the $4.6 million, and on April 19, 2007, it submitted a notice of appeal
and statement of reasons in response to the Order to Report and Pay, challenging
the Order and appealing it to the Director of the MMS in accordance with 30 CFR
290.100, et seq. Also on April 19, 2007, Kinder Morgan CO2 submitted
a petition to suspend compliance with the Order to Report and Pay pending the
appeal. The MMS granted Kinder Morgan CO2’s petition
to suspend, and approved self-bonding on June 12, 2007. Kinder Morgan CO2 filed a
supplemental statement of reasons in support of its appeal of the Order to
Report and Pay on June 15, 2007.
In
addition to the March 2007 Order to Report and Pay, in April 2007, Kinder Morgan
CO2
received an “Audit Issue Letter” sent by the Colorado Department of Revenue on
behalf of the U.S. Department of the Interior. In the letter, the Department of
Revenue states that Kinder Morgan CO2 has
over-reported transportation allowances and underpaid royalties (due to the use
of the Cortez pipeline tariff as the transportation allowance for purposes of
federal royalties) in the amount of $8.5 million for the period from April 2000
through December 2004. Kinder Morgan CO2 responded
to the letter in May 2007, outlining its position why use of the Cortez
tariff-based transportation allowance is proper. On August 8, 2007, Kinder
Morgan CO2 received
an “Order to Report and Pay Additional Royalties” from the MMS. As alleged in
the Colorado Audit Issue Letter, the MMS contends that Kinder Morgan CO2 has
over-reported transportation allowances and underpaid royalties in the amount of
approximately $8.5 million for the period from April 2000 through December 2004.
The MMS’s claims underlying the August 2007 Order to Report and Pay are similar
to those at issue in the March 2007 Order to Report and Pay. On September 7,
2007, Kinder Morgan CO2 submitted
a notice of appeal and statement of reasons in response to the August 2007 Order
to Report and Pay, challenging the Order and appealing it to the Director of the
MMS in accordance with 30 CFR 290.100, et seq. Also on September 7, 2007, Kinder
Morgan CO2 submitted
a petition to suspend compliance with the Order to Report and Pay pending the
appeal. The MMS granted Kinder Morgan CO2’s petition
to suspend, and approved self-bonding on September 11, 2007.
The
MMS and Kinder Morgan CO2 have
agreed to stay the March 2007 and August 2007 Order to Report and Pay
proceedings to allow the parties to discuss settlement. The parties conducted
settlement conferences on February 4, 2008 and February 12, 2008.
Kinder
Morgan CO2 disputes
both the March and August 2007 Orders to Report and Pay and the Colorado
Department of Revenue Audit Issue Letter, and as noted above, it contends that
use of the Cortez pipeline tariff as the transportation allowance for purposes
of calculating federal royalties was approved by the MMS in 1984 and was
affirmed as open-ended by
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the
Interior Board of Land Appeals in the 1990s. The appeals to the MMS Director of
the Orders to Report and Pay do not provide for an oral hearing. No further
submission or briefing deadlines have been set.
J.
Casper Heimann, Pecos Slope Royalty Trust and Rio Petro LTD, individually and on
behalf of all other private royalty and overriding royalty owners in the Bravo
Dome Carbon Dioxide Unit, New Mexico similarly situated v. Kinder Morgan CO2 Company,
L.P., No. 04-26-CL (8th Judicial District Court, Union County New
Mexico)
This
case involves a purported class action against Kinder Morgan CO2 alleging
that it has failed to pay the full royalty and overriding royalty (“royalty
interests”) on the true and proper settlement value of compressed carbon dioxide
produced from the Bravo Dome Unit during the period beginning January 1, 2000.
The complaint purports to assert claims for violation of the New Mexico Unfair
Practices Act, constructive fraud, breach of contract and of the covenant of
good faith and fair dealing, breach of the implied covenant to market, and
claims for an accounting, unjust enrichment, and injunctive relief. The
purported class is comprised of current and former owners, during the period
January 2000 to the present, who have private property royalty interests
burdening the oil and gas leases held by the defendant, excluding the
Commissioner of Public Lands, the United States of America, and those private
royalty interests that are not unitized as part of the Bravo Dome Unit. The
plaintiffs allege that they were members of a class previously certified as a
class action by the United States District Court for the District of New Mexico
in the matter Doris Feerer, et al. v. Amoco Production Company, et al., USDC
N.M. Civ. No. 95-0012 (the “Feerer Class Action”). Plaintiffs allege that Kinder
Morgan CO2’s method
of paying royalty interests is contrary to the settlement of the Feerer Class
Action. Kinder Morgan CO2 filed a
motion to compel arbitration of this matter pursuant to the arbitration
provisions contained in the Feerer Class Action settlement agreement, which
motion was denied. Kinder Morgan CO2 appealed
this decision to the New Mexico Court of Appeals, which affirmed the decision of
the trial court. The New Mexico Supreme Court granted further review in October
2006, and after hearing oral argument, the New Mexico Supreme Court quashed its
prior order granting review. In August 2007, Kinder Morgan CO2 filed a
petition for writ of certiorari with the United States Supreme Court seeking
further review. The Petition was denied in December 2007. The case is now
proceeding in the trial court as a certified class action and the case is set
for trial in September 2008.
In
addition to the matters listed above, audits and administrative inquiries
concerning Kinder Morgan CO2’s payments
on carbon dioxide produced from the McElmo Dome and Bravo Dome Units are
currently ongoing. These audits and inquiries involve federal agencies and the
states of Colorado and New Mexico.
Commercial
Litigation Matters
Union
Pacific Railroad Company Easements
SFPP
and Union Pacific Railroad Company (the successor to Southern Pacific
Transportation Company and referred to in this note as UPRR) are engaged in a
proceeding to determine the extent, if any, to which the rent payable by SFPP
for the use of pipeline easements on rights-of-way held by UPRR should be
adjusted pursuant to existing contractual arrangements for the ten-year period
beginning January 1, 2004 (Union Pacific Railroad Company vs.
Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D”,
Kinder Morgan G.P., Inc., et al., Superior Court of the State of
California for the County of Los Angeles, filed July 28, 2004). In February
2007, a trial began to determine the amount payable for easements on UPRR
rights-of-way. The trial is ongoing and is expected to conclude in the second
quarter of 2008.
SFPP
and UPRR are also engaged in multiple disputes over the circumstances under
which SFPP must pay for a relocation of its pipeline within the UPRR right of
way and the safety standards that govern relocations. SFPP believes that it must
pay for relocation of the pipeline only when so required by the railroad’s
common carrier operations, and in doing so, it need only comply with standards
set forth in the federal Pipeline Safety Act in conducting relocations. In July
2006, a trial before a judge regarding the circumstances under which SFPP must
pay for relocations concluded, and the judge determined that SFPP must pay for
any relocations resulting from any legitimate business purpose of the UPRR. SFPP
has appealed this decision. In addition, UPRR contends that it has complete
discretion to cause the pipeline to be relocated at SFPP’s expense at any time
and for any reason, and that SFPP must comply with the more expensive American
Railway Engineering and Maintenance-of-Way standards. Each party is seeking
declaratory relief with respect to its positions regarding
relocations.
It
is difficult to quantify the effects of the outcome of these cases on SFPP
because SFPP does not know UPRR’s plans for projects or other activities that
would cause pipeline relocations. Even if SFPP is successful in advancing its
positions, significant relocations for which SFPP must nonetheless bear the
expense (i.e. for railroad purposes, with the standards in the federal Pipeline
Safety Act applying) would have an adverse effect on our financial position and
results of operations. These effects would be even greater in the event SFPP is
unsuccessful in one or more of these litigations.
United
States of America, ex rel., Jack J. Grynberg v. K N Energy (Civil Action No.
97-D-1233, filed in the U.S. District Court, District of Colorado).
This
multi-district litigation proceeding involves four lawsuits filed in 1997
against numerous Kinder Morgan companies. These suits were filed pursuant to the
federal False Claims Act and allege underpayment of royalties due to
mismeasurement
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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 District of
Wyoming.
In
May 2005, a Special Master appointed in this litigation found that because there
was a prior public disclosure of the allegations and that Grynberg was not an
original source, the Court lacked subject matter jurisdiction. As a result, the
Special Master recommended that the Court dismiss all the Kinder Morgan
defendants. In October 2006, the United States District Court for the District
of Wyoming upheld the dismissal of each case against the Kinder Morgan
defendants on jurisdictional grounds. Grynberg has appealed this Order to the
Tenth Circuit Court of Appeals. A procedural schedule has been issued and
briefing before the Court of Appeals will be completed in the spring of 2008.
The oral argument is expected to take place in September 2008.
Prior
to the dismissal order on jurisdictional grounds, the Kinder Morgan defendants
filed Motions to Dismiss and for Sanctions alleging that Grynberg filed his
Complaint without evidentiary support and for an improper purpose. On January 8,
2007, after the dismissal order, the Kinder Morgan defendants also filed a
Motion for Attorney Fees under the False Claim Act. On April 24, 2007 the Court
held a hearing on the Motions to Dismiss and for Sanctions and the Requests for
Attorney Fees. A decision is still pending on the Motions to Dismiss and for
Sanctions and the Requests for Attorney Fees.
Weldon
Johnson and Guy Sparks, individually and as Representative of Others Similarly
Situated v. Centerpoint Energy, Inc. et. al., No. 04-327-2 (Circuit Court,
Miller County Arkansas).
On
October 8, 2004, plaintiffs filed the above-captioned matter against numerous
defendants including Kinder Morgan Texas Pipeline L.P.; Kinder Morgan Energy
Partners, L.P.; Kinder Morgan G.P., Inc.; KM Texas Pipeline, L.P.; Kinder Morgan
Texas Pipeline G.P., Inc.; Kinder Morgan Tejas Pipeline G.P., Inc.; Kinder
Morgan Tejas Pipeline, L.P.; Gulf Energy Marketing, LLC; Tejas Gas, LLC; and
MidCon Corp. (the “Kinder Morgan defendants”). The complaint purports to bring a
class action on behalf of those who purchased natural gas from the CenterPoint
defendants from October 1, 1994 to the date of class certification.
The
complaint alleges that CenterPoint Energy, Inc., by and through its affiliates,
has artificially inflated the price charged to residential consumers for natural
gas that it allegedly purchased from the non-CenterPoint defendants, including
the Kinder Morgan defendants. The complaint further alleges that in exchange for
CenterPoint’s purchase of such natural gas at above market prices, the
non-CenterPoint defendants, including the Kinder Morgan defendants, sell natural
gas to CenterPoint’s non-regulated affiliates at prices substantially below
market, which in turn sells such natural gas to commercial and industrial
consumers and gas marketers at market price. The complaint purports to assert
claims for fraud, unlawful enrichment and civil conspiracy against all of the
defendants, and seeks relief in the form of actual, exemplary and punitive
damages, interest, and attorneys’ fees. On June 8, 2007, the Arkansas Supreme
Court held that the Arkansas Public Service Commission has exclusive
jurisdiction over any Arkansas plaintiffs’ claims that consumers were
overcharged for gas in Arkansas and mandated that any such claims be dismissed
from this lawsuit. On February 14, 2008, the Arkansas Supreme Court clarified
its previously issued order and mandated that the trial court dismiss the
lawsuit in its entirety. Based on the information available to date and our
preliminary investigation, the Kinder Morgan defendants believe that the claims
against them are without merit and intend to defend against them
vigorously.
Federal
Investigation at Cora and Grand Rivers Coal Facilities
On
June 22, 2005, Kinder Morgan Energy Partners announced that the Federal Bureau
of Investigation was conducting an investigation related to its coal terminal
facilities located in Rockwood, Illinois and Grand Rivers, Kentucky. The
investigation involved certain coal sales from its Cora, Illinois and Grand
Rivers, Kentucky coal terminals that occurred from 1997 through 2001. During
this time period, Kinder Morgan Energy Partners sold excess coal from these two
terminals for its own account, generating less than $15 million in total net
sales. Excess coal is the weight gain that results from moisture absorption into
existing coal during transit or storage and from scale inaccuracies, which are
typical in the industry. During the years 1997 through 1999, Kinder Morgan
Energy Partners collected, and, from 1997 through 2001, Kinder Morgan Energy
Partners subsequently sold, excess coal for its own account, as Kinder Morgan
Energy Partners believed it was entitled to do under then-existing customer
contracts. Kinder Morgan Energy Partners conducted an internal investigation of
the allegations and discovered no evidence of wrongdoing or improper activities
at these two terminals.
In
the fourth quarter of 2007, Kinder Morgan Energy Partners reached a civil
settlement with the U.S. Attorney’s office for the Southern District of Illinois
pursuant to which Kinder Morgan Energy Partners paid approximately $25 million,
in aggregate, to the Tennessee Valley Authority and other customers of the Cora
and Grand Rivers terminals from 1997 through 1999. Kinder Morgan Energy Partners
made no admission or acknowledgment of improper conduct as part of the
settlement, and while Kinder Morgan Energy Partners continues to believe that
its actions at its terminals were appropriate, Kinder Morgan Energy Partners
determined that a civil resolution of the matter would be in its best interest.
The settlement has been finalized, and Kinder Morgan Energy Partners recorded a
$25 million increase in expense in the third quarter of 2007 associated with the
settlement of this liability.
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Queen
City Railcar Litigation
On
August 28, 2005, a railcar containing the chemical styrene began leaking styrene
gas in Cincinnati, Ohio while en route to Kinder Morgan Energy Partners’ Queen
City Terminal. The railcar was sent by the Westlake Chemical Corporation from
Louisiana, transported by Indiana & Ohio Railway, and consigned to Westlake
at its dedicated storage tank at Queen City Terminals, Inc., a subsidiary of
Kinder Morgan Bulk Terminals, Inc. The railcar leak resulted in the evacuation
of many residents and the alleged temporary closure of several businesses in the
Cincinnati area. A class action complaint and a suit filed by the City of
Cincinnati arising out of this accident have been settled. However, one member
of the settlement class, the Estate of George W. Dameron, opted out of the
settlement, and the Adminstratrix of the Dameron Estate filed a wrongful death
lawsuit on November 15, 2006 in the Hamilton County Court of Common Pleas, Case
No. A0609990. The complaint, which is asserted against each of the defendants
involved in the class action suit, alleges that styrene exposure caused the
death of Mr. Dameron. Without admitting fault or liability, the parties have
reached a settlement in principle of the Dameron Suit.
As
part of the settlement of the class action claims, the non-Kinder Morgan Energy
Partners defendants have agreed to settle remaining claims asserted by
businesses and will obtain a release of such claims favoring all defendants,
including Kinder Morgan Energy Partners and its affiliates, subject to the
retention by all defendants of their claims against each other for contribution
and indemnity. Kinder Morgan Energy Partners expects that a claim will be
asserted by other defendants against Kinder Morgan Energy Partners seeking
contribution or indemnity for any settlements funded exclusively by other
defendants, and Kinder Morgan Energy Partners expects to vigorously defend
against any such claims.
Leukemia
Cluster Litigation
Richard
Jernee, et al v. Kinder Morgan Energy Partners, et al, No. CV03-03482 (Second
Judicial District Court, State of Nevada, County of Washoe)
(“Jernee”).
Floyd
Sands, et al v. Kinder Morgan Energy Partners, et al, No. CV03-05326 (Second
Judicial District Court, State of Nevada, County of Washoe)
(“Sands”).
On
May 30, 2003, plaintiffs, individually and on behalf of Adam Jernee, filed a
civil action in the Nevada State trial court against Kinder Morgan Energy
Partners and several Kinder Morgan related entities and individuals and
additional unrelated defendants. Plaintiffs in the Jernee matter claim that
defendants negligently and intentionally failed to inspect, repair and replace
unidentified segments of their pipeline and facilities, allowing “harmful
substances and emissions and gases” to damage “the environment and health of
human beings.” Plaintiffs claim that “Adam Jernee’s death was caused by leukemia
that, in turn, is believed to be due to exposure to industrial chemicals and
toxins.” Plaintiffs purport to assert claims for wrongful death, premises
liability, negligence, negligence per se, intentional infliction of emotional
distress, negligent infliction of emotional distress, assault and battery,
nuisance, fraud, strict liability (ultra hazardous acts), and aiding and
abetting, and seek unspecified special, general and punitive damages. On August
28, 2003, a separate group of plaintiffs, represented by the counsel for the
plaintiffs in the Jernee matter, individually and on behalf of Stephanie Suzanne
Sands, filed a civil action in the Nevada State trial court against the same
defendants and alleging the same claims as in the Jernee case with respect to
Stephanie Suzanne Sands. The Jernee case has been consolidated for pretrial
purposes with the Sands case. In May 2006, the court granted defendants’ motions
to dismiss as to the counts purporting to assert claims for fraud, but denied
defendants’ motions to dismiss as to the remaining counts, as well as
defendants’ motions to strike portions of the complaint. Defendant Kennametal,
Inc. has filed a third-party complaint naming the United States and the United
States Navy (the “United States”) as additional defendants. In response, the
United States removed the case to the United States District Court for the
District of Nevada and filed a motion to dismiss the third-party complaint.
Plaintiff has also filed a motion to dismiss the United States and/or to remand
the case back to state court. By order dated September 25, 2007, the United
States District Court granted the motion to dismiss the United States from the
case and remanded the Jernee and Sands cases back to the Second Judicial
District Court, State of Nevada, County of Washoe. The cases will now proceed in
the State Court. Based on the information available to date, our own preliminary
investigation, and the positive results of investigations conducted by State and
Federal agencies, we believe that the remaining claims against Kinder Morgan
Energy Partners in these matters are without merit and intend to defend against
them vigorously.
Pipeline
Integrity and Releases
From
time to time, our pipelines experience leaks and ruptures. These leaks and
ruptures may cause explosions, fire, damage to the environment, damage to
property and/or personal injury or death. In connection with these incidents, we
may be sued for damages caused by an alleged failure to properly mark the
locations of our pipelines and/or to properly maintain our pipelines. Depending
upon the facts and circumstances of a particular incident, state and federal
regulatory authorities may seek civil and/or criminal fines and
penalties.
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We
believe that we conduct our operations in accordance with applicable law. We
seek to cooperate with state and federal regulatory authorities in connection
with the clean up of the environment caused by such leaks and ruptures and with
any investigations as to the facts and circumstances surrounding the
incidents.
Kleberg County, Texas Gas Pipeline
Rupture
On
February 12, 2008, Kinder Morgan Energy Partners’ Kinder Morgan Texas Pipeline
incurred a failure on its 16-inch diameter natural gas pipeline in a remote area
in Kleberg County, Texas, which resulted in an explosion and fire. The incident
caused some property damage, however no serious physical injuries have been
reported to date. Kinder Morgan Texas Pipeline notified appropriate regulatory
agencies and is currently investigating the cause of the rupture.
Harrison
County Texas Pipeline Rupture
On
May 13, 2005, NGPL experienced a rupture on its 36-inch diameter Gulf Coast #3
natural gas pipeline in Harrison County, Texas. The pipeline rupture resulted in
an explosion and fire that severely damaged the Harrison County Power Project
plant (“HCCP”), an adjacent power plant. In addition, local residents within an
approximate one-mile radius were evacuated by local authorities until the site
was secured. On October 24, 2006, suit was filed under Cause No. 06-1030 in the
71st
Judicial District Court of Harrison County, Texas against NGPL and us by
Plaintiffs, Entergy Power Ventures, L.P., Northeast Texas Electric Cooperative,
Inc., East Texas Electric Cooperative, Inc. and Arkansas Electric Cooperative
Corporation, owners and interest holders in the HCCP. The suit asserted claims
of breach of contract, negligence, gross negligence, and trespass, and sought to
recover for property damage and for losses due to business interruption. On
January 29, 2008, the parties engaged in mediation and agreed to settle all
claims. The costs and fees associated with the litigation and the sums due under
the settlement in excess of our $1 million retained liability will be funded by
our insurers.
Walnut
Creek, California Pipeline Rupture
On
November 9, 2004, excavation equipment operated by Mountain Cascade, Inc., a
third-party contractor on a water main installation project hired by East Bay
Municipal Utility District, struck and ruptured an underground petroleum
pipeline owned and operated by SFPP in Walnut Creek, California. An explosion
occurred immediately following the rupture that resulted in five fatalities and
several injuries to employees or contractors of Mountain Cascade, Inc. The
explosion and fire also caused property damage.
In
May 2005, the California Division of Occupational Safety and Health (“CalOSHA”)
issued two civil citations against Kinder Morgan Energy Partners relating to
this incident assessing civil fines of approximately $0.1 million based upon its
alleged failure to mark the location of the pipeline properly prior to the
excavation of the site by the contractor. In June 2005, the Office of the
California State Fire Marshal, Pipeline Safety Division, referred to in this
report as the CSFM, issued a notice of violation against Kinder Morgan Energy
Partners which also alleged that it did not properly mark the location of the
pipeline in violation of state and federal regulations. The CSFM assessed a
proposed civil penalty of $0.5 million. The location of the incident was
not SFPP’s work site, nor did SFPP have any direct involvement in the water
main replacement project. We believe that SFPP acted in accordance with
applicable law and regulations, and further that according to California law,
excavators, such as the contractor on the project, must take the necessary
steps (including excavating with hand tools) to confirm the exact location of a
pipeline before using any power operated or power driven excavation equipment.
Accordingly, we disagree with certain of the findings of CalOSHA and the CSFM,
and SFPP has appealed the civil penalties while, at the same time, is continuing
to work cooperatively with CalOSHA and the CSFM to resolve these
matters.
On
September 21, 2007, KMGP Services Company, Inc., our subsidiary, entered into a
plea agreement and civil settlement with the District Attorney of Contra Costa
County pertaining to this accident. Under the terms of the plea agreement, KMGP
Services Company, Inc. agreed to plead no contest to six counts of violating the
California Labor Code. While initially constituted as felonies under the
California Labor Code, the plea agreement contemplates that following the
successful completion of an independent audit of Kinder Morgan Energy Partners’
right-of-way protection policies and practices (likely in approximately one
year), we may move to reduce the felony counts to misdemeanors. Pursuant to the
plea agreement and civil settlement, in October 2007, we paid approximately $15
million.
As
a result of the accident, nineteen separate lawsuits were filed. The majority of
the cases were personal injury and wrongful death actions that alleged, among
other things, that SFPP/Kinder Morgan Energy Partners failed to properly field
mark the area where the accident occurred.
Following
court ordered mediation, the Kinder Morgan Energy Partners defendants have
settled with plaintiffs in all of the wrongful death cases and the personal
injury and property damages cases. These settlements either have become final by
order of the court or are awaiting court approval. The only civil cases which
remain pending at present are: (i) a cross-claim for contribution and indemnity
by an engineering company defendant against the Kinder Morgan defendants in
which the court has entered summary judgment in favor of the Kinder Morgan
defendants; and (ii) a challenge to the court-ordered allocation
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of
settlement proceeds in one of the court-approved wrongful death
settlements filed by a nonresident sibling in which the court has also granted
summary judgment in favor of the Kinder Morgan defendants. Both of these
judgments in favor of the Kinder Morgan defendants are subject to potential
appeal.
Additionally,
following this accident, Kinder Morgan Energy Partners reviewed and when
appropriate, revised its pipeline policies and procedures to improve safety.
Kinder Morgan Energy Partners has undertaken a number of actions to reduce
future third-party damage to its pipelines, including adding line riders and
locators, retaining third-party expertise, instituting enhanced line location
training and education of employees and contractors, and investing in additional
state-of-the-art line locating equipment. Kinder Morgan Energy Partners has also
committed to various procedural requirements pertaining to construction near its
pipelines.
Consent
Agreement Regarding Cordelia, Oakland and Donner Summit California
Releases
On
May 21, 2007, Kinder Morgan Energy Partners and SFPP entered into a Consent
Agreement with various governmental agencies to resolve civil claims relating to
the unintentional release of petroleum products during three pipeline incidents
in northern California. The releases occurred (i) in the Suisun Marsh area near
Cordelia in Solano County in April 2004, (ii) in Oakland in February 2005 and
(iii) near Donner Pass in April 2005. The agreement was reached with the United
States Environmental Protection Agency, referred to in this note as the EPA,
Department of the Interior, Department of Justice and the National Oceanic and
Atmospheric Administration, as well as the State of California Department of
Fish and Game, Office of Spill Prevention and Response, and the Regional Water
Quality Control Boards for the San Francisco and Lahontan regions. Under the
Consent Agreement, Kinder Morgan Energy Partners agreed to pay approximately
$3.8 million in civil penalties, $1.3 million in natural resource damages and
assessment costs and approximately $0.2 million in agency response and future
remediation monitoring costs. All of the civil penalties have been reserved for
as of December 31, 2007. In addition, Kinder Morgan Energy Partners agreed to
perform enhancements in its Pacific operations relative to its spill prevention,
response and reporting practices, the majority of which have already been
implemented.
The
Consent Agreement was filed with the United States District Court for the
Eastern District of California on May 29, 2007, and became effective July 26,
2007. Kinder Morgan Energy Partners has substantially completed remediation and
restoration activities in consultation with the appropriate state and federal
regulatory agencies at the location of each release.
EPA
Notice of Proposed Debarment
On
August 21, 2007, SFPP received a Notice of Proposed Debarment issued by the EPA.
Pursuant to the Notice, the Suspension and Debarment Division of the EPA is
proposing to debar SFPP from participation in future Federal contracts and
assistance activities for a period of three years. The purported basis for the
proposed debarment is SFPP’s April 2005 agreement with the California Attorney
General and the District Attorney of Solano County, California to settle
misdemeanor charges of the unintentional, non-negligent discharge of diesel
fuel, and the failure to provide timely notice of a threatened discharge to
appropriate state agencies, in connection with the April 28, 2004 spill of
diesel fuel into a marsh near Cordelia, California. SFPP believes that the
proposed debarment is factually and legally unwarranted and intends to contest
it. In addition, SFPP is currently engaged in discussions with the EPA to
attempt to resolve this matter. Based upon our discussion to date, we do not
believe that this matter will result in the debarment or suspension of
SFPP.
Baker,
California
In
November 2004, the CALNEV Pipeline experienced a failure from external damage
near Baker, California, resulting in a release of gasoline that affected
approximately two acres of land in the high desert administered by the U.S.
Bureau of Land Management. Remediation has been conducted and continues for
product in the soils. All agency requirements have been met and the site will be
closed upon completion of the soil remediation. The California Department of
Fish & Game has alleged a small natural resource damage claim that is
currently under review. CALNEV expects to work cooperatively with the Department
of Fish & Game to resolve this claim.
Henrico
County, Virginia
On
April 17, 2006, Plantation Pipe Line Company, which transports refined petroleum
products across the southeastern United States and which is 51.17% owned and
operated by Kinder Morgan Energy Partners, experienced a pipeline release of
turbine fuel from its 12-inch pipeline. The release occurred in a residential
area and impacted adjacent homes, yards and common areas, as well as a nearby
stream. The released product did not ignite and there were no deaths or
injuries. Plantation estimates the amount of product released to be
approximately 553 barrels. Immediately following the release, the pipeline was
shut down and emergency remediation activities were initiated. Remediation and
monitoring activities are ongoing under the supervision of the EPA and the
Virginia Department of Environmental Quality, referred to in this report as the
VDEQ. Following settlement negotiations and discussions with the VDEQ,
Plantation and the VDEQ entered into a Special Order on Consent under which
Plantation agreed to pay a civil penalty of approximately $0.7 million to the
VDEQ as well as reimburse the VDEQ for less than $0.1 million in expenses and
oversight costs to resolve the matter. Plantation satisfied $0.2 million
of
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the
civil penalty by completing a supplemental environmental project in the form of
a $0.2 million donation to the Henrico County Fire Department for the purchase
of hazardous material spill response equipment.
Dublin,
California
In
June 2006, the SFPP pipeline experienced a leak near Dublin, California,
resulting in a release of product that affected a limited area along a
recreation path. Kinder Morgan Energy Partners has completed remediation
activities and has petitioned the California Regional Water Quality Control
Board for closure. The cause of the release was outside force
damage.
Soda
Springs, California
In
August 2006, the SFPP pipeline experienced a failure near Soda Springs,
California, resulting in a release of product that affected a limited area along
Interstate Highway 80. Product impacts were primarily limited to soil in an area
between the pipeline and Interstate Highway 80. Remediation and monitoring
activities are ongoing under the supervision of the California Department of
Fish & Game and Nevada County. The cause of the release was determined to be
pinhole corrosion in an unpiggable 2-inch diameter bypass to the mainline valve.
The bypass was installed to allow pipeline maintenance activity. The bypass
piping was replaced at this location and all other similar designs on the
pipeline segment were excavated, evaluated and replaced as necessary to avoid
future risk of release. On January 30, 2008, Kinder Morgan Energy Partners
entered into a settlement agreement with Nevada County and the state of
California to resolve any outstanding civil penalties claims related to this
release for $75,000.
Rockies
Express Pipeline LLC Wyoming Construction Incident
On
November 11, 2006, a bulldozer operated by an employee of Associated Pipeline
Contractors, Inc, (a third-party contractor to Rockies Express Pipeline LLC,
referred to in this note as REX), struck an existing subsurface natural gas
pipeline owned by Wyoming Interstate Company, a subsidiary of El Paso Pipeline
Group. The pipeline was ruptured, resulting in an explosion and fire. The
incident occurred in a rural area approximately nine miles southwest of
Cheyenne, Wyoming. The incident resulted in one fatality (the operator of the
bulldozer) and there were no other reported injuries. The cause of the incident
is under investigation by the U.S. Department of Transportation Pipeline and
Hazardous Materials Safety Administration, referred to in this report as the
PHMSA. Kinder Morgan Energy Partners is cooperating with this agency.
Immediately following the incident, REX and El Paso Pipeline Group reached an
agreement on a set of additional enhanced safety protocols designed to prevent
the reoccurrence of such an incident.
In
September 2007, the family of the deceased bulldozer operator filed a wrongful
death action against Kinder Morgan Energy Partners, Rockies Express Pipeline LLC
and several other parties in the District Court of Harris County, Texas, 189
Judicial District, at case number 2007-57916. The plaintiffs seek unspecified
compensatory and exemplary damages plus interest, attorney’s fees and costs of
suit. Kinder Morgan Energy Partners has asserted contractual claims for complete
indemnification for any and all costs arising from this incident, including any
costs related to this lawsuit, against third parties and their insurers. The
parties are currently engaged in discovery. We do not expect the cost of any
settlement or eventual judgment, if any, to be material.
Charlotte,
North Carolina
On
November 27, 2006, the Plantation Pipeline experienced a release of
approximately 4,000 gallons of gasoline from a Plantation Pipe Line Company
block valve on a delivery line into a terminal owned by a third-party company.
Upon discovery of the release, Plantation immediately locked out the delivery of
gasoline through that pipe to prevent further releases. Product had flowed onto
the surface and into a nearby stream, which is a tributary of Paw Creek, and
resulted in loss of fish and other biota. Product recovery and remediation
efforts were implemented immediately, including removal of product from the
stream. The line was repaired and put back into service within a few days.
Remediation efforts are continuing under the direction of the North Carolina
Department of Environment and Natural Resources (the “NCDENR”), which issued a
Notice of Violation and Recommendation of Enforcement against Plantation on
January 8, 2007. Plantation continues to cooperate fully with the
NCDENR.
Although
Plantation does not believe that penalties are warranted, it is engaging in
settlement discussions with the EPA regarding a potential civil penalty for the
November 2006 release as part of broader settlement negotiations with the EPA
regarding this spill and two other historic releases from Plantation, including
a February 2003 release near Hull, Georgia. Plantation has reached an agreement
in principle with the Department of Justice and the EPA for all four releases
for approximately $0.7 million, plus some additional work to be performed to
prevent future releases. The parties are negotiating a consent decree. Although
it is not possible to predict the ultimate outcome, we believe, based on our
experiences to date, that the resolution of such items will not have a material
adverse impact on our business, financial position, results of operations or
cash flows.
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In
addition, in April 2007, during pipeline maintenance activities near Charlotte,
North Carolina, Plantation discovered the presence of historical soil
contamination near the pipeline, and reported the presence of impacted soils to
the NCDENR. Subsequently, Plantation contacted the owner of the property to
request access to the property to investigate the potential contamination. The
results of that investigation indicate that there is soil and groundwater
contamination which appears to be from an historical turbine fuel release. The
groundwater contamination is underneath at least two lots on which there is
current construction of single family homes as part of a new residential
development. Further investigation and remediation are being conducted under the
oversight of the NCDENR. Plantation is working with the owner of the property
and the builder of the residential subdivision to address any potential claims
that they may bring.
Barstow,
California
The
United States Department of Navy has alleged that historic releases of methyl
tertiary-butyl ether, referred to in this report as MTBE, from Calnev’s Barstow
terminal has (i) migrated underneath the Navy’s Marine Corps Logistics Base in
Barstow; (ii) impacted the Navy’s existing groundwater treatment system for
unrelated groundwater contamination not alleged to have been caused by Calnev,
and (iii) could affect the MCLB’s water supply system. Although
Calnev believes that it has certain meritorious defenses to the Navy’s
claims, we are working with the Navy to agree upon an Administrative Settlement
Agreement and Order on Consent for CERCLA Removal Action to reimburse the Navy
for $0.5 million in past response actions, plus perform other work to ensure
protection of the Navy’s existing treatment system and water
supply.
Oil
Spill Near Westridge Terminal, Burnaby, British Columbia
On
July 24, 2007, a third-party contractor installing a sewer line for the City of
Burnaby struck a crude oil pipeline segment included within Kinder Morgan Energy
Partners’ Trans Mountain pipeline system near its Westridge terminal in Burnaby,
BC, resulting in a release of approximately 1,400 barrels of crude oil. The
release impacted the surrounding neighborhood, several homes and nearby Burrard
Inlet. No injuries were reported. To address the release, Kinder Morgan Energy
Partners initiated a comprehensive emergency response in collaboration with,
among others, the City of Burnaby, the BC Ministry of Environment, the National
Energy Board, and the National Transportation Safety Board. Cleanup and
environmental remediation is continuing. The incident is currently under
investigation by Federal and Provincial agencies. We do not expect this matter
to have a material adverse impact on our financial position, results of
operations or cash flows.
On
December 20, 2007 Kinder Morgan Energy Partners initiated a lawsuit entitled
Trans Mountain Pipeline LP,
Trans Mountain Pipeline Inc. and Kinder Morgan Canada Inc. v. The City of
Burnaby, et al., Supreme Court of British Columbia, Vancouver Registry
No. S078716. The suit alleges that the City of Burnaby and its agents are liable
in damages including, but not limited to, all costs and expenses incurred by us
as a result of the rupture of the pipeline and subsequent release of crude
oil.
Although
no assurance can be given, we believe that we have meritorious defenses to all
pending pipeline integrity 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.
Environmental
Matters
Exxon
Mobil Corporation v. GATX Corporation, Kinder Morgan Liquids Terminals, Inc. and
ST Services, Inc.
On
April 23, 2003, Exxon Mobil Corporation filed a complaint in the Superior Court
of New Jersey, Gloucester County. Kinder Morgan Energy Partners filed its answer
to the complaint on June 27, 2003, in which it denied ExxonMobil’s claims and
allegations as well as included counterclaims against ExxonMobil. The lawsuit
relates to environmental remediation obligations at a Paulsboro, New Jersey
liquids terminal owned by ExxonMobil from the mid-1950s through November 1989,
by GATX Terminals Corp. from 1989 through September 2000 and later owned by ST
Services, Inc. Prior to selling the terminal to GATX Terminals, ExxonMobil
performed the environmental site assessment of the terminal required prior to
sale pursuant to state law. During the site assessment, ExxonMobil discovered
items that required remediation and the New Jersey Department of Environmental
Protection issued an order that required ExxonMobil to perform various
remediation activities to remove hydrocarbon contamination at the terminal.
ExxonMobil, we understand, is still remediating the site and has not been
removed as a responsible party from the state’s cleanup order; however,
ExxonMobil claims that the remediation continues because of GATX Terminals’
storage of a fuel additive, MTBE, at the terminal during GATX Terminals’
ownership of the terminal. When GATX Terminals sold the terminal to ST Services,
the parties indemnified one another for certain environmental matters. When GATX
Terminals was sold to Kinder Morgan Energy Partners, GATX Terminals’
indemnification obligations, if any, to ST Services may have passed to Kinder
Morgan Energy Partners. Consequently, at issue is any indemnification obligation
Kinder Morgan Energy Partners may owe to ST Services for environmental
remediation of MTBE at the terminal. The complaint seeks any and all damages
related to remediating MTBE at the terminal, and, according to the New Jersey
Spill Compensation and Control Act, treble damages may be available for actual
dollars
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incorrectly
spent by the successful party in the lawsuit for remediating MTBE at the
terminal. The parties are currently involved in mandatory mediation with respect
to the claims set out in the lawsuit.
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 Exxon Mobil
Corporation and GATX Terminals Corporation. The complaint was filed in
Gloucester County, New Jersey. The plaintiffs have not yet served the complaint
on either of the named defendants. The plaintiffs seek the costs and damages
that the plaintiffs allegedly have incurred or will incur as a result of the
discharge of pollutants and hazardous substances at the Paulsboro, New
Jersey facility. The costs and damages that the plaintiffs seek include damages
to natural resources. In addition, the plaintiffs seek an order compelling the
defendants to perform or fund the assessment and restoration of
those natural resource damages that are the result of the defendants’
actions. As in the case brought by Exxon Mobil against GATX Terminals
Corporation, the issue is whether the plaintiffs’ claims are within
the scope of the indemnity obligations GATX Terminals and therefore, Kinder
Morgan Liquids Terminals, owes to ST Services.
The City of Los Angeles v. Kinder
Morgan Energy Partners, L.P.; Kinder Morgan Liquids Terminals LLC; Kinder Morgan
Tank Storage Terminals LLC; Continental Oil Company; Chevron
Corporation, California
Superior Court, County of Los Angeles, Case
No. NC041463.
Kinder
Morgan Energy Partners and some of its subsidiaries are defendants in a lawsuit
filed in 2005 alleging claims for environmental cleanup costs and rent at the
former Los Angeles Marine Terminal in the Port of Los Angeles. Plaintiff alleges
that terminal cleanup costs could approach $18 million; however, we believe that
the cleanup costs should be substantially less and that cleanup costs must be
apportioned among all the parties to the litigation. Plaintiff also alleges that
it is owed approximately $2.8 million in past rent and an unspecified amount for
future rent. The judge bifurcated that rent issue from the causes of action
related to the cleanup costs and trial regarding the rent issue was set for
October 2007.
Plaintiff
and the Kinder Morgan defendants have since agreed to a settlement in principle
under which Kinder Morgan Energy Partners agreed to pay $3.2 million in
satisfaction of all past and future rent obligations. In the fourth quarter of
2007, Kinder Morgan Energy Partners finalized the settlement terms, filed with
the court for final approval, and paid the $3.2 million in satisfaction of all
past and future rent obligations.
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 the Complaint. On February 29, 2008, the
court issued an Order granting in part and denying in part defendants’ Motion to
Dismiss. The parties are currently engaging in discovery. Kinder Morgan Energy
Partners intends to vigorously defend against the claims asserted in the
complaint. This site has been, and currently is, under the regulatory oversight
and order of the California Regional Water Quality Control Board. We do not
expect the cost of any settlement and remediation to be material.
Portland
Harbor DOJ/EPA Investigation
The
United States Department of Justice and the EPA are continuing to investigate
potential criminal charges relating to an alleged instance of improper disposal
at sea of potash, which allegedly occurred at the request of or with the
knowledge of employees or third parties at a bulk terminal facility in Portland,
Oregon, which Kinder Morgan Energy Partners operates. Kinder Morgan Energy
Partners is fully cooperating with the investigation and are engaged in ongoing
discussions with the office of the United States Attorney for the District of
Oregon and the Department of Justice in an attempt to resolve this
matter.
Louisiana
Department of Environmental Quality Settlement
After
conducting a voluntary compliance self-audit, in April 2006, Kinder Morgan
Energy Partners voluntarily disclosed certain findings from the audit related to
compliance with environmental regulations and permits at its Harvey and St.
Gabriel Terminals to the Louisiana Department of Environmental Quality, referred
to in this report as the LDEQ. Following further discussion between the LDEQ and
Kinder Morgan Energy Partners, in August 2007, the LDEQ issued a Consolidated
Compliance Order and Notice of Potential Penalty for each of the two facilities.
Kinder Morgan Energy Partners and the LDEQ have reached agreement on a proposed
settlement agreement under which Kinder Morgan Energy Partners agrees to
finalize certain work that it has already undertaken to ensure compliance with
the environmental regulations at these two
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facilities
and to pay a penalty of $0.3 million. The proposed settlement agreement is
undergoing public comment pursuant to LDEQ regulations and then will be
finalized.
Polychlorinated
Biphenyls (“PCBs”)-related Requests
In
August 2007 and October 2007, NGPL and Knight Inc. received information requests
from the Illinois Attorney General’s Office and the EPA, respectively, regarding
the presence of PCBs in natural gas transmission lines in Illinois and Missouri.
We have responded to these requests. No proceeding or enforcement actions have
been initiated.
In
December 2007, a customer requested that NGPL reimburse it for its costs and
related expenses incurred in connection with the clean up of PCBs in the
customer’s system. NGPL is evaluating the request. If and to the extent NGPL
reimburses the customer, we do not currently expect that any such reimbursements
would have a material adverse effect on us.
Other
Environmental
We
are subject to environmental cleanup and enforcement actions from time to time.
In particular, the federal Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) generally imposes joint and several liability for
cleanup and enforcement costs on current or predecessor owners and operators of
a site, among others, without regard to fault or the legality of the original
conduct. Our operations are also subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe our
operations are in substantial compliance with applicable environmental law and
regulations, risks of additional costs and liabilities are inherent in pipeline,
terminal and carbon dioxide field and oil field operations, and there can be no
assurance that we will not incur significant costs and liabilities. Moreover, it
is possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder, and claims
for damages to property or persons resulting from our operations, could result
in substantial costs and liabilities to us.
We
are currently involved in several governmental proceedings involving air, water
and waste violations issued by various governmental authorities related to
compliance with environmental regulations. As we receive notices of
non-compliance, we negotiate and settle these matters. We do not believe that
these violations will have a material adverse affect on our
business.
We
are also currently involved in several governmental proceedings involving
groundwater and soil remediation efforts under administrative orders or related
state remediation programs issued by various regulatory authorities related to
compliance with environmental regulations associated with our assets. We have
established a reserve to address the costs associated with the
cleanup.
In
addition, we are involved with and have been identified as a potentially
responsible party in several federal and state superfund sites. Environmental
reserves have been established for those sites where our contribution is
probable and reasonably estimable. In addition, we are from time to time
involved in civil proceedings relating to damages alleged to have occurred as a
result of accidental leaks or spills of refined petroleum products, natural gas
liquids, natural gas and carbon dioxide. See “Pipeline Integrity and Releases,”
above for information with respect to ruptures and leaks from our
pipelines.
Although
it is not possible to predict the ultimate outcomes, we believe that the
resolution of the environmental matters set forth in this note will not have a
material adverse effect on our business, financial position, results of
operations or cash flows. However, we are not able to reasonably estimate when
the eventual settlements of these claims will occur and changing circumstances
could cause these matters to have a material adverse impact. As of December 31,
2007, we have accrued an environmental reserve of $102.6 million. In
addition, we have recorded a receivable of $38.0 million for expected cost
recoveries that have been deemed probable. We believe the establishment of this
environmental reserve is adequate such that the resolution of pending
environmental matters will not have a material adverse impact on our business,
cash flows, financial position or results of operation. As of December 31, 2006,
our environmental reserve totaled $77.8 million. Additionally, many factors may
change in the future affecting our reserve estimates, such as (i) regulatory
changes, (ii) groundwater and land use near our sites, and (iii) changes in
cleanup technology.
Litigation
Relating to Proposed Kinder Morgan, Inc. “Going Private”
Transaction
On
May 28, 2006, Richard D. Kinder, our Chairman and Chief Executive Officer,
together with other members of Kinder Morgan, Inc.’s management, co-founder Bill
Morgan, current board members Fayez Sarofim and Mike Morgan, and investment
partners Goldman Sachs Capital Partners, American International Group, Inc., The
Carlyle Group and Riverstone Holdings LLC, submitted a proposal to our Board of
Directors to acquire all of our outstanding common stock at a price of $100 per
share in cash. On August 28, 2006, Kinder Morgan, Inc. entered into a definitive
merger agreement with Knight Holdco LLC and Knight Acquisition Co. to effectuate
the transaction at a price of $107.50 per share in cash.
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Beginning
on May 29, 2006, 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, and several corporate
officers.
These
cases are as follows:
Harris
County, Texas
Cause
No. 2006-33011; Mary Crescente
v. Kinder Morgan, Inc., Richard D. Kinder, Edward H. Austin, Charles W. Battey,
Stewart A. Bliss, Ted A. Gardner, William J. Hybl, Michael C. Morgan, Edward
Randall III, Fayez S. Sarofim, H.A. True III, Douglas W.G. Whitehead, and James
M. Stanford; in the 164th
Judicial District Court, Harris County, Texas
Cause
No. 2006-39364; CWA/ITU
Negotiated Pension Plan, individually and on behalf of others similarly
situated v. Kinder Morgan, Inc., Richard D. Kinder, Edward H. Austin, Jr.,
William J. Hybl, Ted A. Gardner, Charles W. Battery, H.A. True, III, Fayez
Sarofim, James M. Stanford, Michael C. Morgan, Stewart A. Bliss, Edward Randall,
III, and Douglas W.G. Whitehead; in the 129th
Judicial District Court, Harris County, Texas
Cause
No. 2006-33015; Robert Kemp,
on behalf of himself and all other similarly situated v. Richard D. Kinder,
Edward H. Austin, Jr., William J. Hybl, Ted A. Gardner, Charles W. Battey, H.A.
True, III, Fayez Sarofim, James Stanford, Michael C. Morgan, Stewart A. Bliss,
Edward Randall III, Douglas W. G. Whitehead, Kinder Morgan, Inc., GS Capital
Partners V Fund, L.P., AIG Global Asset Management Holdings Corp., Carlyle
Partners IV, L.P., and Carlyle/Riverstone Energy Partners III, L.P.; in
the 113th
Judicial District Court, Harris County, Texas
Cause
No. 2006-34594; Dean Drulias
v. Kinder Morgan, Inc., Richard D. Kinder, Edward H. Austin, Jr., William J.
Hybl, Ted A. Gardner, Charles W. Battey, H.A. True III, Fayez S. Sarofim, James
Stanford, Michael C. Morgan, Stewart A. Bliss, Edward Randall III, Douglas W.G.
Whitehead, Goldman Sachs, American International Group, Inc., the Carlyle Group,
and Riverstone Holdings, LLC; in the 333rd
Judicial District Court, Harris County, Texas
Cause
No. 2006-40027; J. Robert
Wilson, On Behalf of Himself and All Others Similarly Situated v. Kinder
Morgan, Inc., Richard D. Kinder, Michael C. 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, Bill Morgan, Goldman Sachs Capital Partners, American International
Group, Inc., The Carlyle Group, Riverstone Holdings, L.L.C., C. Park Shaper,
Steven J. Kean, Scott E. Parker, and Tim Bradley; in the 270th
Judicial District Court, Harris County, Texas
Cause
No. 2006-33042; Sandra
Donnelly, On Behalf of Herself and All Others Similarly Situated v. Kinder
Morgan, Inc., Richard D. Kinder, Michael C. Morgan, Fayez S. 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, and Douglas W.G.
Whitehead; in the 61st
Judicial District Court, Harris County, Texas
Cause
No. 2006-34520; David Zeitz,
On Behalf of Himself and All Others Similarly Situated v. Richard D.
Kinder; in the 234th
Judicial District Court, Harris County, Texas
Cause
No. 2006-36184; Robert L.
Dunn, Trustee for the Dunn Marital Trust, and the Police & Fire
Retirement System of the City of Detroit v. Richard D. Kinder, Edward
H. Austin, Jr., William J. Hybl, Ted A. Gardner, Charles W. Battey, H.A. True,
III, Fayez Sarofim, James M. Stanford, Michael C. Morgan, Stewart A. Bliss,
Edward Randall III, and Douglas W.G. Whitehead; in the 127th
Judicial District Court, Harris County, Texas
By
order of the Court dated June 26, 2006, each of the above-listed cases have been
consolidated into the Crescente v. Kinder Morgan, Inc. et
al case; in the 164th
Judicial District Court, Harris County, Texas, which challenges the proposed
transaction as inadequate and unfair to Kinder Morgan’s public stockholders.
Seven of the eight original petitions consolidated into this lawsuit
raised virtually identical allegations. One of the eight original petitions
(Zeitz) challenges the
proposal as unfair to holders of the common units of Kinder Morgan Energy
Partners and/or listed shares of Kinder Morgan Management. 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’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 seek,
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.
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Shawnee
County, Kansas Cases
Cause
No. 06C 801; Michael Morter v.
Richard D. Kinder, Edward H. Austin, Jr., Charles W. Battey, Stewart A. Bliss,
Ted A. Gardner, William J. Hybl, Michael C. Morgan, Edward Randall, III, Fayez
S. Sarofim, H.A. True, III, and Kinder Morgan, Inc.; in the District
Court of Shawnee County, Kansas, Division 12
Cause
No. 06C 841; Teamsters Joint
Counsel No. 53 Pension Fund v. Richard D. Kinder, Edward H. Austin, Charles W.
Battey, Stewart A. Bliss, Ted A. Gardner, William J. Hybl, Michael C. Morgan,
Edward Randall, III, Fayez S. Sarofim, H.A. True, III, and Kinder Morgan,
Inc.; in the District Court of Shawnee County, Kansas, Division
12
Cause
No. 06C 813; Ronald Hodge,
Individually And On Behalf Of All Others Similarly Situated v.
Kinder Morgan, Inc., Richard D. Kinder, Edward H. Austin, Jr., William J. Hybl,
Ted A. Gardner, Charles W. Battery, H.A. True III, Fayez S. Sarofim, James M.
Stanford, Michael C. Morgan, Stewart A. Bliss, Edward Randall, III, and Douglas
W.G. Whitehead; in the District Court of Shawnee County, Kansas, Division
6
Cause
No. 06C-864; Robert Cohen,
Individually And On Behalf Of All Others Similarly Situated v.
Kinder Morgan, Inc., Richard D. Kinder, Edward H. Austin, Jr., William J. Hybl,
Ted A. Gardner, Charles W. Battery, H.A. True, III, Fayez Sarofim, James M.
Stanford, Michael C. Morgan, Stewart A. Bliss, Edward Randall, III, and Douglas
W.G. Whitehead; in the District Court of Shawnee County, Kansas, Division
6
Cause
No. 06C-853; Robert P.
Land, individually, and on behalf of all others similarly situated v.
Edward H. Austin, Jr., Charles W. Battey, Stewart A. Bliss, Ted A. Gardner,
William J. Hybl, Edward Randall, III, James M. Stanford, Fayez
Sarofim, H.A. True, III, Douglas W.G. Whitehead, Richard D. Kinder, Michael
C. Morgan, AIG Global Asset Management Holdings Corp., GS Capital Partners V
Fund, LP, The Carlyle Group LP, Riverstone Holdings LLC, Bill Morgan and Kinder
Morgan, Inc.; in the District Court of Shawnee County, Kansas, Division
6
Cause
No. 06C-854; Dr. Douglas
Geiger, individually, and on behalf of all others similarly
situated v. Edward H. Austin, Jr., Charles W. Battey, Stewart A. Bliss, Ted
A. Gardner, William J. Hybl, Edward Randall, III, James M. Stanford, Fayez
Sarofim, H.A. True, III, Douglas W.G. Whitehead, Richard D. Kinder, Michael C.
Morgan, AIG Global Asset Management Holding Corp., GS Capital Partners V Fund,
LP, The Carlyle Group LP, Riverstone Holdings LLC, Bill Morgan and Kinder
Morgan, Inc.; in the District Court of Shawnee County, Kansas, Division
6
Cause
No. 06C-837; John Bolton, On
Behalf of Himself and All Others Similarly Situated v. Kinder Morgan,
Inc., Richard D. Kinder, Michael C. 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, William V. Morgan, Goldman Sachs Capital Partners, American
International Group, Inc., The Carlyle Group, Riverstone Holdings LLC, C. Park
Shaper, Steven J. Kean, Scott E. Parker and Tim Bradley; in the District
Court of Shawnee County, Kansas, Division 6
By
order of the Court dated June 26, 2006, each of the above-listed Kansas cases
have been 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 1, 2006, the Court selected lead plaintiffs’ counsel in
the Kansas State Court proceedings. 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 seek, 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.
On
October 12, 2006, the District Court of Shawnee County, Kansas entered a
Memorandum Decision and Order in which it ordered the parties in both the Crescente v. Kinder Morgan, Inc. et
al case pending in Harris County Texas and the In Re Kinder Morgan, Inc.
Shareholder Litigation case pending in Shawnee County Kansas to confer
and to submit to the court recommendations for the “appointment of a Special
Master or a Panel of Special Masters 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.”
By
Order dated November 21, 2006, the Kansas District Court appointed the Honorable
Joseph T. Walsh to serve as Special Master for In Re Kinder Morgan, Inc.
Shareholder Litigation case pending in Kansas. By Order dated December 6,
2006, the Texas District Court also appointed the Honorable Joseph T. Walsh to
serve as Special Master in the Crescente v. Kinder Morgan, Inc. et
al. case pending in Texas for the purposes of considering any
applications for pretrial temporary injunctive relief. 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. Defendants’ answer to the
Third Amended Class Action Petition was filed in March 2007.
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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. The application was briefed by the parties
between December 4 – December 13, 2006, and oral argument was heard by Special
Master Walsh on December 14, 2006.
On
December 18, 2006, Special Master Walsh issued a Report and Recommendation
concluding, among other things, that “plaintiffs have failed to demonstrate the
probability of ultimate success on the merits of their claims in this joint
litigation.” Accordingly, the Special Master concluded that the plaintiffs were
“not entitled to injunctive relief to prevent the holding of the special meeting
of KMI shareholders scheduled for December 19, 2006.”
The
parties are currently engaged in consolidated discovery in these
matters.
In
addition to the above-described consolidated putative Class Action cases, we are
aware of two additional lawsuits that challenge either the proposal or the
merger agreement.
On
July 25, 2006 a civil action entitled David Dicrease, individually and on
behalf of all others similarly situated v. Joseph Listengart, Edward H. Austin,
Jr., Charles W. Battey, Stewart A. Bliss, Ted A. Gardner, William J. Hybl,
Michael C. Morgan, Edward Randall, III, Fayez Sarofim, James M. Stanford, H.A.
True, III, Douglas W.G. Whitehead, Richard D. Kinder, Kinder Morgan, Inc.,
Kinder Morgan Fiduciary Committee, John Does 1-30; Case 4:06-cv-02447,
was filed in the United States District Court for the Southern District of
Texas. This suit purports to be brought on behalf of the Kinder Morgan, Inc.
Savings Plan (the “Plan”) and a class comprised of all participants and
beneficiaries of the Plan, for alleged breaches of fiduciary duties allegedly
owed to the Plan and its participants by the defendants, in violation of the
Employee Retirement Income Security Act (“ERISA”). More specifically, the suit
asserts that defendants failed to prudently manage the Plan’s assets (Count I);
failed to appropriately monitor the Fiduciary Committee and provide it with
accurate information (Count II); failed to provide complete and accurate
information to the Plan’s participants and beneficiaries (Count III); failed to
avoid conflicts of interest (Count IV) and violated ERISA by engaging in a
prohibited transaction (Count V). The relief requested seeks to enjoin the
proposed transaction, damages allegedly incurred by the Plan and the
participants, recovery of any “unjust enrichment” obtained by the defendants,
and attorneys’ fees and costs.
On
January 8, 2007, the United States District Court granted plaintiffs’ motion to
dismiss the Dicrease case without prejudice, and the case was terminated on
January 8, 2007.
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’s senior officers and directors,
alleging that the proposal constituted a breach of fiduciary duties owed to
Kinder Morgan, Inc. Plaintiff also contends that the Sponsor Investors aided and
abetted the alleged breaches of fiduciary duty. Plaintiff seeks, among other
things, to enjoin the defendants from consummating the proposal, a declaration
that the proposal is unlawful and unenforceable, the imposition of a
constructive trust upon any benefits improperly received by the defendants, and
attorney’s fees. On November 20, 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, and oral argument was held on
January 18, 2008. On February 22, 2008, the court entered a Final Order granting
defendants’ motion in full, ordering that plaintiff, the City of Inkster
Policeman and Fireman Retirement System, take nothing on any and all of its
claims against any and all defendants.
Defendants
believe that the claims asserted in the litigations regarding the Going Private
transaction are legally and factually without merit and intend to vigorously
defend against them.
Express
Pipeline System – Oil Spill in Montgomery County, Missouri
On
September 6, 2007, the Platte Pipeline, a crude oil pipeline in which we
indirectly own a one-third interest and one of our subsidiaries operates, and
which comprises a portion of our Express Pipeline System business segment,
experienced a release of approximately 4,769 barrels of crude oil in a rural
area in Montgomery County, Missouri. The released product did not ignite and
there were no deaths or injuries. The pipeline was shut down, but was restarted
following the repair with a voluntary operating pressure restriction. The
majority of the released product was contained in a man-made pond. Clean up
efforts are ongoing under the regulations of the Missouri Department of Natural
Resources. On September 13, 2007, the PHMSA issued a Corrective Action Order
requiring us to take certain actions including the pressure reduction to which
we had already agreed. We have appealed that order and requested extensions of
time to complete certain of the required activities. Although the internal and
external investigations into the cause of the release are ongoing and no
assurances can be
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made,
based on available information, we believe that the ultimate resolution of this
matter with PHMSA and the impacted landowners will not have a material adverse
impact on our business, financial position or cash flows.
Other
We
are a defendant in various lawsuits arising from the day-to-day operations of
our businesses. Although no assurance can be given, we believe, based on our
experiences to date, that the ultimate resolution of such items will not have a
material adverse impact on our business, financial position, results of
operations or cash flows.
Additionally,
although it is not possible to predict the ultimate outcomes, we 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, 2007, and December 31,
2006, we have recorded a total reserve for legal fees, transportation rate cases
and other litigation liabilities in the amount of $249.4 million and $114.7
million, respectively. The reserve is primarily related to various claims from
lawsuits arising from Kinder Morgan Energy Partners’ Pacific operations’
pipeline transportation rates, and the recorded amount is based on both the
estimated amount associated with possible outcomes and probabilities of
occurrence associated with such outcomes. We regularly assess the likelihood of
adverse outcomes resulting from these claims in order to determine the adequacy
of our liability provision.
18.
Recent Accounting Pronouncements
On
September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement establishes a single definition of fair value and a framework for
measuring fair value in generally accepted accounting principles. SFAS No. 157
also expands disclosures about fair value measurements. The provisions of this
Statement apply to other accounting pronouncements that require or permit fair
value measurements. Accordingly, this Statement does not require any new fair
value measurements.
On
February 12, 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
Effective Date of FASB
Statement No. 157. This FSP delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).
The
remainder of SFAS No. 157 was adopted by us effective January 1, 2008. The
adoption of this Statement did not have an impact on our consolidated financial
statements since we already apply its basic concepts in measuring fair
values.
On
September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
Nos. 87, 88, 106 and 132(R). This Statement requires an employer to (i)
recognize the overfunded or underfunded status of a defined benefit pension plan
or postretirement benefit plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position (effective December 31, 2006
for us); (ii) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year and disclose certain
additional information (effective December 31, 2008 for us); and (iii) recognize
changes in the funded status of a plan in the year in which the changes occur
through comprehensive income.
For
us, the adoption of part (i) of SFAS No. 158 described above did not have a
material effect on our statement of financial position as of December 31, 2006.
For more information on our pensions and other postretirement benefit plans, and
our disclosures regarding the provisions of this Statement, see Note
12.
FIN 48
In
July 2006, the FASB issued Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which became effective
January 1, 2007. FIN 48 addressed the determination of how tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we must 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.
We
adopted the provisions of FIN 48 on January 1, 2007. The total amount of
unrecognized tax benefits as of the date of adoption was $63.1 million. We
recorded a $4.8 million decrease to the opening balance of retained earnings as
a result of the implementation of FIN 48.
Included
in the balance of unrecognized tax benefits at January 1, 2007, are $41.6
million of tax benefits that, if recognized, would affect the effective tax
rate.
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A
reconciliation of our gross unrecognized tax benefit for the year ended December
31, 2007 is as follows (in millions):
|
2007
|
|||
|
Balance
at January 1,
2007
|
$
|
63.1
|
|
|
Additions
based on current year tax positions
|
9.8
|
||
|
Additions
based on prior year tax positions
|
0.5
|
||
|
Reductions
based on settlements with taxing authority
|
(21.4
|
)
|
|
|
Reductions
due to lapse in statute of limitations
|
(2.7
|
)
|
|
|
Reductions
for tax positions related to prior year
|
(7.8
|
)
|
|
|
Balance
at December 31,
2007
|
$
|
41.5
|
|
Our
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense, and as of January 1, 2007, we had $13.6
million of accrued interest and no accrued penalties. As of December 31, 2007,
(i) we had $8.1 million of accrued interest and no accrued penalties; (ii) we
believe it is reasonably possible that our liability for unrecognized tax
benefits will decrease by $4.3 million during the next twelve months; and (iii)
we believe approximately $13.0 million of the
total $41.5 million
of unrecognized tax benefits on our consolidated balance sheet as of December
31, 2007 would affect our effective tax rate in future periods in the event
those unrecognized tax benefits were recognized. As a result of the Going
Private transaction, an adjustment was made to goodwill for unrecognized tax
benefits due to settlements with taxing authorities and a lapse in the statute
of limitations of the Predecessor Company for a total decrease of $22.3 million.
In the event unrecognized tax benefits of the Predecessor Company are recognized
by the Successor Company in a future period, a subsequent adjustment will be
made to goodwill and will not impact our effective tax rate.
We
are subject to taxation, and have tax years open to examination for the periods
1999 – 2007, in the United States, various states, Mexico and
Canada.
In
June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task
Force on EITF 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That is, Gross versus Net
Presentation). According to the provisions of EITF
06-3:
|
|
·
|
taxes
assessed by a governmental authority that are directly imposed on a
revenue-producing transaction between a seller and a customer may include,
but are not limited to, sales, use, value added, and some excise taxes;
and
|
|
|
·
|
that
the presentation of such taxes on either a gross (included in revenues and
costs) or a net (excluded from revenues) basis is an accounting policy
decision that should be disclosed pursuant to Accounting Principles Board
Opinion No. 22 (as amended), Disclosure of Accounting
Policies. In addition, for any such taxes that are reported on a
gross basis, a company should disclose the amounts of those taxes in
interim and annual financial statements for each period for which an
income statement is presented if those amounts are significant. The
disclosure of those taxes can be done on an aggregate
basis.
|
EITF
06-3 applies to financial reports for interim and annual reporting periods
beginning after December 15, 2006 (January 1, 2007 for us). The adoption of EITF
06-3 had no effect on our consolidated financial statements.
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This Statement provides companies with
an option to report selected financial assets and liabilities at fair value. The
Statement’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. The Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities.
SFAS
No. 159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the
effect of the company’s choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet.
The Statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157, discussed above, and SFAS No. 107 Disclosures about Fair Value of
Financial Instruments.
This
Statement was adopted by us effective January 1, 2008, at which time no
financial assets or liabilities, not previously required to be recorded at fair
value by other authoritative literature, were designated to be recorded at fair
value. As such, the adoption of this Statement did not have any impact on our
consolidated financial statements.
On
December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51. This
Statement changes the accounting and reporting for noncontrolling interests in
consolidated
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financial
statements. A noncontrolling interest, sometimes referred to as a minority
interest, is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent.
Specifically,
SFAS No. 160 establishes accounting and reporting standards that require (i) the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated balance sheet
within equity, but separate from the parent’s equity; (ii) the equity amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
income statement (consolidated net income and comprehensive income will be
determined without deducting minority interest, however, earnings-per-share
information will continue to be calculated on the basis of the net income
attributable to the parent’s shareholders); and (iii) changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently and similarly—as equity
transactions.
This
Statement is effective for fiscal years, and interim period within those fiscal
years, beginning on or after December 15, 2008 (January 1, 2009 for us). Early
adoption is not permitted. SFAS No. 160 shall be applied prospectively as of the
beginning of the fiscal year in which it is initially applied, except for its
presentation and disclosure requirements, which shall be applied retrospectively
for all periods presented. We are currently reviewing the effects of this
Statement.
On
December 4, 2007, the FASB issued SFAS 141(R) (revised 2007), Business Combinations.
Although this statement amends and replaces SFAS No. 141, it retains the
fundamental requirements in SFAS No. 141 that (i) the purchase method of
accounting be used for all business combinations; and (ii) an acquirer be
identified for each business combination. SFAS No. 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. This Statement applies to all transactions or other events in
which an entity (the acquirer) obtains control of one or more businesses (the
acquiree), including combinations achieved without the transfer of
consideration; however, this Statement does not apply to a combination between
entities or businesses under common control.
Significant
provisions of SFAS No. 141(R) concern principles and requirements for how an
acquirer (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination.
This
Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (January 1, 2009 for us). Early
adoption is not permitted. We are currently reviewing the effects of this
Statement.
On
March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. This Statement is an amendment to
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 161 requires
additional disclosures about an entity’s derivative and hedging
activities.
This
Statement expands the disclosure requirements of SFAS No. 133 by requiring
additional disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows.
This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008 (January 1, 2009 for us) with
early adoption permitted. We are currently reviewing the effects of this
Statement.
19.
Subsequent Events
In
March 2008, Kinder Morgan Energy Partners completed a public offering of
5,750,000 of its common units at a price of $57.70 per unit, including common
units sold pursuant to the underwriters’ over-allotment option, less commissions
and underwriting expenses. Kinder Morgan Energy Partners received net proceeds
of $324.2 million for the issuance of these common units, and used the proceeds
to reduce the borrowings under its commercial paper program.
On March
14, 2008, Kinder Morgan Energy Partners entered into a purchase and sale
agreement to sell its 25% interest in Thunder Creek Gas Services, LLC for
approximately $50 million. Subject to certain closing conditions, the sale is
expected to close in the second quarter of 2008.
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On February 29, 2008, Midcontinent Express Pipeline LLC, an equity method investee of Kinder Morgan Energy Partners, entered into a $1.4 billion credit agreement due February 28, 2011. The facility is with a syndicate of financial institutions with The Royal Bank of Scotland plc as the administrative agent. Borrowings under the credit agreement will be used to finance the construction of the Midcontinent Express Pipeline system and to pay related expenses.
On
February 21, 2008, we commenced a cash tender offer to purchase up to $1.6
billion of Knight Inc.’s outstanding debt securities. In March 2008, we paid
$1.6 billion in cash to repurchase $1.67 billion par value of debt securities.
Proceeds from the completed sale of an 80% ownership interest in our NGPL
business segment were used to fund this debt security purchase.
On
February 15, 2008, the entire outstanding balances of our senior secured credit
facility’s Tranche A and Tranche B term loans and amounts outstanding at that
time under our $1.0 billion revolving credit facility, on a combined basis
totaling approximately $4.6 billion, were paid off with proceeds from the
closing of the sale of an 80% ownership interest in our NGPL business
segment.
On
February 12, 2008, Kinder Morgan Energy Partners completed an additional public
offering of senior notes. Kinder Morgan Energy Partners issued a total of $900
million in principal amount of senior notes, consisting of $600 million of 5.95%
notes due February 15, 2018 and $300 million of 6.95% notes due January 15,
2038. Kinder Morgan Energy Partners received proceeds from the issuance of the
notes, after underwriting discounts and commissions, of approximately $894.1
million, and Kinder Morgan Energy Partners used the proceeds to reduce the
borrowings under its commercial paper program.
On
February 12, 2008, Kinder Morgan Energy Partners completed an offering of
1,080,000 of its common units at a price of $55.65 per unit in a privately
negotiated transaction. Kinder Morgan Energy Partners received net proceeds of
$60.1 million for the issuance of these 1,080,000 common units, and used the
proceeds to reduce the borrowings under its commercial paper
program.
On
November 20, 2007, we entered into a definitive agreement to sell our interests
in three natural gas-fired power plants in Colorado to Bear Stearns. The closing
of the sale occurred on January 25, 2008, effective January 1, 2008, and we
received net proceeds of $63.1 million.
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Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
KNIGHT
INC. AND SUBSIDIARIES
Quarterly
Operating Results for 2007
|
Predecessor
Company
|
Successor
Company
|
||||||||||||||||
|
Three
Months
Ended
|
Two
Months
Ended
|
One
Month
Ended
|
Three
Months Ended
|
||||||||||||||
|
March
31
|
May
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
(In
millions)
(Unaudited)
|
(In
millions)
(Unaudited)
|
||||||||||||||||
|
Operating
Revenues
|
$
|
2,444.4
|
$
|
1,720.7
|
$
|
936.9
|
$
|
2,609.0
|
$
|
2,848.8
|
|||||||
|
Gas
Purchases and Other Costs of Sales
|
1,452.5
|
1,037.9
|
557.2
|
1,482.8
|
1,616.6
|
||||||||||||
|
Other
Operating Expenses
|
968.0
|
501.9
|
220.5
|
683.2
|
791.6
|
||||||||||||
|
Operating
Income
|
23.9
|
180.9
|
159.2
|
443.0
|
440.6
|
||||||||||||
|
Other
Income and (Expenses)
|
(181.8
|
)
|
(120.2
|
)
|
(110.0
|
)
|
(278.3
|
)
|
(178.6
|
)
|
|||||||
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
(157.9
|
)
|
60.7
|
49.2
|
164.7
|
262.0
|
|||||||||||
|
Income
Taxes
|
87.7
|
47.8
|
21.3
|
74.6
|
131.5
|
||||||||||||
|
Income
(Loss) from Continuing Operations
|
(245.6
|
)
|
12.9
|
27.9
|
90.1
|
130.5
|
|||||||||||
|
Income
(Loss) from Discontinued Operations, Net of Tax
|
233.2
|
65.4
|
2.3
|
(4.4
|
)
|
0.6
|
|||||||||||
|
Net
Income (Loss)
|
$
|
(12.4
|
)
|
$
|
78.3
|
$
|
30.2
|
$
|
85.7
|
$
|
131.1
|
||||||
SELECTED
QUARTERLY FINANCIAL DATA
KNIGHT
INC. AND SUBSIDIARIES
Quarterly
Operating Results for 2006
|
Predecessor
Company
|
||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||
|
(In
millions)
(Unaudited)
|
||||||||||||
|
Operating
Revenues
|
$
|
2,675.7
|
2,479.0
|
2,606.9
|
2,447.0
|
|||||||
|
Gas
Purchases and Other Costs of Sales
|
1,745.9
|
1,521.4
|
1,612.4
|
1,459.7
|
||||||||
|
Other
Operating Expenses
|
503.4
|
534.3
|
566.3
|
520.0
|
||||||||
|
Operating
Income
|
426.4
|
423.3
|
428.2
|
467.3
|
||||||||
|
Other
Income and (Expenses)
|
(213.4
|
)
|
(210.3
|
)
|
(206.0
|
)
|
(229.2
|
)
|
||||
|
Income
from Continuing Operations Before Income Taxes
|
213.0
|
213.0
|
222.2
|
238.1
|
||||||||
|
Income
Taxes
|
79.1
|
64.3
|
73.5
|
69.0
|
||||||||
|
Income
from Continuing Operations
|
133.9
|
148.7
|
148.7
|
169.1
|
||||||||
|
Income
(Loss) from Discontinued Operations, Net of Tax
|
59.8
|
8.5
|
(4.5
|
)
|
(592.3
|
)
|
||||||
|
Net
Income (Loss)
|
$
|
193.7
|
157.2
|
144.2
|
(423.2
|
)
|
||||||
The
Supplementary Information on Oil and Gas Producing Activities is presented as
required by SFAS No. 69, Disclosures about Oil and Gas
Producing Activities. 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.
Kinder
Morgan CO2 Company,
L.P. and its consolidated subsidiaries (subsidiaries of Kinder Morgan Energy
Partners) represent our only oil and gas producing activities. As discussed in
Note 1(B) of the accompanying Notes to Consolidated Financial Statements, due to
our adoption of EITF No. 04-5, beginning January 1, 2006, the accounts, balances
and results of operations of Kinder Morgan Energy Partners are included in our
consolidated financial statements and we no longer apply the equity method of
accounting to our investment in Kinder Morgan Energy Partners. Therefore, the
following supplemental information on oil and gas producing activities reflects
our proportionate share of Kinder Morgan Energy Partners’ capitalized costs,
costs incurred and results of operations from oil and gas producing activities
for the years 2005 and 2004, when we accounted for Kinder Morgan Energy Partners
under the equity method.
203
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Supplemental
information is also provided for per unit production costs; oil and gas
production and average sales prices; 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.
Our
capitalized costs consisted of the following (in millions):
Capitalized
Costs Related to Oil and Gas Producing Activities
|
December
31,
|
|||||||||||
|
Consolidated
Companies
|
20071
|
20061
|
20052
|
||||||||
|
Wells
and equipment, facilities and other
|
$
|
1,612.5
|
$
|
1,369.5
|
$
|
166.8
|
|||||
|
Leasehold
|
348.1
|
347.4
|
48.7
|
||||||||
|
Total
proved oil and gas properties
|
1,960.6
|
1,716.9
|
215.5
|
||||||||
|
Accumulated
depreciation and depletion
|
(725.5
|
)
|
(470.2
|
)
|
(46.1
|
)
|
|||||
|
Net
capitalized costs
|
$
|
1,235.1
|
$
|
1,246.7
|
$
|
169.4
|
|||||
__________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidiaries.
|
|
2
|
For
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method; therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ capitalized costs related to oil and gas
producing activities.
|
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.
Our
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
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
20071
|
May 31, 20071
|
20061
|
20052
|
|||||||||||||
|
Consolidated
Companies
|
||||||||||||||||
|
Property
Acquisition
|
||||||||||||||||
|
Proved
oil and gas properties
|
$
|
-
|
$
|
-
|
$
|
36.6
|
$
|
1.0
|
||||||||
|
Development
|
156.9
|
87.5
|
261.8
|
42.8
|
||||||||||||
__________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
2
|
During
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method; therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ costs incurred in exploration, property
acquisitions and development.
|
There
are no capitalized costs 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.
204
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Our
results of operations from oil and gas producing activities for the seven months
ended December 31, 2007, the five months ended May 31, 2007 and for each of the
years 2006 and 2005 are shown in the following table (in millions):
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||
|
Seven
Months Ended
December
31,
|
Five
Months Ended
|
Year
Ended December 31,
|
||||||||||||||
|
20071
|
May 31, 20071
|
20061
|
20052
|
|||||||||||||
|
Consolidated
Companies
|
||||||||||||||||
|
Revenues3
|
$
|
352.0
|
$
|
237.7
|
$
|
524.7
|
||||||||||
|
Expenses:
|
||||||||||||||||
|
Production
costs
|
147.2
|
96.7
|
208.9
|
|||||||||||||
|
Other
operating expenses4
|
34.9
|
22.0
|
66.4
|
|||||||||||||
|
Depreciation,
depletion and amortization expenses
|
151.9
|
106.6
|
169.4
|
|||||||||||||
|
Total
expenses
|
334.0
|
225.3
|
444.7
|
|||||||||||||
|
Results
of operations for oil and gas producing activities
|
$
|
18.0
|
$
|
12.4
|
$
|
80.0
|
$
|
18.2
|
||||||||
__________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
2
|
During
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method, therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ results of operations for oil and gas
producing activities.
|
|
3
|
Revenues
include losses attributable to our hedging contracts of $311.5 million,
$122.7 million and $441.7 million for the seven months ended December 31,
2007, the five months ended May 31, 2007 and the year ended December 31,
2006, respectively.
|
|
4
|
Consists
primarily of carbon dioxide
expense.
|
The
table below represents estimates, as of December 31, 2007, 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. This data has been prepared using
constant prices and costs, as discussed in subsequent paragraphs of this
document. The estimates of reserves and future revenue in this document conforms
to the guidelines of the United States Securities and Exchange
Commission.
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.
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, prices and costs as
of the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations or declines based upon future conditions. 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
2007, Kinder Morgan Energy Partners filed estimates of our oil and gas reserves
for the year 2006 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 our operated
properties only, regardless of our net interest. The difference between the oil
reserves reported on Form EIA-23 and those reported in this report exceeds
5%.
205
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
Reserve
Quantity Information
|
Consolidated
Companies
|
||||||||
|
Crude
Oil
(MBbls)
|
NGLs
(MBbls)
|
Nat.
Gas
(MMcf)1
|
||||||
|
Proved
developed and undeveloped reserves:
|
||||||||
|
As
of December 31, 20042
|
22,862
|
3,741
|
294
|
|||||
|
As
of December 31, 20052
|
21,567
|
2,884
|
327
|
|||||
|
As
of December 31, 20063
|
123,978
|
10,333
|
291
|
|||||
|
Revisions
of Previous Estimates3,4
|
10,361
|
2,784
|
1,077
|
|||||
|
Production3
|
(12,984
|
)
|
(2,005
|
)
|
(290
|
)
|
||
|
As
of December 31, 20073
|
121,355
|
11,112
|
1,078
|
|||||
|
|
||||||||
|
Proved
developed reserves:
|
||||||||
|
As
of December 31, 20042
|
13,176
|
1,640
|
251
|
|||||
|
As
of December 31, 20052
|
11,965
|
1,507
|
251
|
|||||
|
As
of December 31, 20063
|
69,073
|
5,877
|
291
|
|||||
|
As
of December 31, 20073
|
70,868
|
5,517
|
1,078
|
|||||
__________
|
1
|
Natural
gas reserves are computed at 14.65 pounds per square inch absolute and 60
degrees Fahrenheit.
|
|
2
|
For
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method, therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ proved
reserves.
|
|
3
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
4
|
Associated
with an expansion of the carbon dioxide flood project area of the SACROC
unit.
|
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 SFAS No. 69. The assumptions that underlie the computation of the
standardized measure of discounted cash flows 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;
|
|
|
·
|
pricing
is applied based upon year-end market prices adjusted for fixed or
determinable contracts that are in existence at
year-end;
|
|
|
·
|
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.
|
Our
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
|
Year
Ended December 31,
|
|||||||||||
|
20071
|
20061
|
20052
|
|||||||||
|
Consolidated
Companies
|
|||||||||||
|
Future
Cash Inflows from Production
|
$
|
12,099.5
|
$
|
7,534.6
|
$
|
1,390.3
|
|||||
|
Future
Production Costs
|
(3,536.2
|
)
|
(2,617.9
|
)
|
(418.8
|
)
|
|||||
|
Future
Development Costs3
|
(1,919.2
|
)
|
(1,256.7
|
)
|
(132.1
|
)
|
|||||
|
Undiscounted
Future Net Cash Flows
|
6,644.1
|
3,660.0
|
839.4
|
||||||||
|
10%
Annual Discount
|
(2,565.7
|
)
|
(1,452.2
|
)
|
(372.2
|
)
|
|||||
|
Standardized
Measure of Discounted Future Net Cash Flows
|
$
|
4,078.4
|
$
|
2,207.8
|
$
|
467.2
|
|||||
__________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
2
|
During
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method, therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ standardized measure of discounted future
net cash flows.
|
|
3
|
Includes
abandonment costs.
|
206
|
Item 8:
Financial
Statements and Supplementary Data (continued)
|
Knight
Form 10-K
|
The following table represents our
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
|
Year
Ended December 31,
|
|||||||||||
|
20071
|
20061
|
20052
|
|||||||||
|
Consolidated
Companies
|
|||||||||||
|
Present
Value as of January 1
|
$
|
2,207.8
|
$
|
3,075.0
|
|||||||
|
Changes
During the Year:
|
|||||||||||
|
Revenues
Less Production and Other Costs3
|
(722.1
|
)
|
(690.0
|
)
|
|||||||
|
Net
Changes in Prices, Production and Other Costs3
|
2,153.2
|
(123.0
|
)
|
||||||||
|
Development
Costs Incurred
|
244.5
|
261.8
|
|||||||||
|
Net
Changes in Future Development Costs
|
(547.8
|
)
|
(446.0
|
)
|
|||||||
|
Purchases
of Reserves in Place
|
-
|
3.2
|
|||||||||
|
Revisions
of Previous Quantity Estimates4
|
510.8
|
(179.5
|
)
|
||||||||
|
Improved
Recovery
|
-
|
-
|
|||||||||
|
Accretion
of Discount
|
198.1
|
307.4
|
|||||||||
|
Timing
Differences and Other
|
33.9
|
(1.1
|
)
|
||||||||
|
Net
Change For the Year
|
1,870.6
|
(867.2
|
)
|
||||||||
|
Present
Value as of December 31
|
$
|
4,078.4
|
$
|
2,207.8
|
$
|
467.2
|
|||||
__________
|
1
|
Amounts
relate to Kinder Morgan CO2
Company, L.P. and its consolidated
subsidaries.
|
|
2
|
During
the period presented, we accounted for Kinder Morgan Energy Partners under
the equity method, therefore, amounts reflect our proportionate share of
Kinder Morgan Energy Partners’ standardized measure of discounted future
net cash flows.
|
|
3
|
Excludes
the effect of losses attributable to our hedging contracts of $434.2
million and $441.7 million for the years ended December 31, 2007 and 2006,
respectively.
|
|
4
|
2007
revisions are associated with an expansion of the carbon dioxide flood
project area for the SACROC unit. 2006 revisions are based on lower than
expected recoveries from a section of the SACROC unit carbon dioxide flood
project.
|
None.
207
|
Knight
Form 10-K
|
As
of December 31, 2007, our management, including our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
under the Securities Exchange Act of 1934. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon and as of the date of the evaluation, our Chief Executive Officer and
our Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required, and is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
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. 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. 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, 2007.
The
effectiveness of our internal control over financial reporting as of December
31, 2007, has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Certain
businesses we acquired during 2007 were excluded from the scope of our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2007. The excluded businesses consisted
of the following:
|
|
·
|
the
Vancouver Wharves bulk marine terminal, acquired May 30, 2007;
and
|
|
|
·
|
the
terminal assets and operations acquired from Marine Terminals, Inc.,
effective September 1, 2007.
|
These
businesses, in the aggregate, constituted 0.8% of our total operating revenues
for the seven months ended December 31, 2007 and 0.5% of our total assets as of
December 31, 2007.
There
has been no change in our internal control over financial reporting during the
fourth quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
None
208
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Knight
Form 10-K
|
Directors
and Executive Officers
Set
forth below is certain information concerning our directors and executive
officers. Our directors are elected annually by, and may be removed
by, Knight Midco Inc., as our sole common shareholder. Knight Midco Inc. is
indirectly wholly owned by Knight Holdco LLC. All of our officers serve at the
discretion of our board of directors.
|
Name
|
Age
|
Position
|
|
Richard
D.
Kinder
|
63
|
Director,
Chairman and Chief Executive Officer
|
|
C.
Park
Shaper
|
39
|
Director
and President
|
|
Steven
J.
Kean
|
46
|
Executive
Vice President and Chief Operating Officer
|
|
Kenneth
A. Pontarelli
|
44
|
Director
|
|
Kimberly
A.
Dang
|
38
|
Vice
President, Investor Relations and Chief Financial
Officer
|
|
David
D.
Kinder
|
33
|
Vice
President, Corporate Development and Treasurer
|
|
Joseph
Listengart
|
39
|
Vice
President, General Counsel and Secretary
|
|
Scott
E.
Parker
|
47
|
Vice
President (President, Natural Gas Pipelines)
|
|
James
E.
Street
|
51
|
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 Knight. 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
Knight 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 Knight 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 Knight 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 Knight.
C. Park Shaper is Director
and President of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Knight.
Mr. Shaper was elected President of Kinder Morgan Management, Kinder Morgan
G.P., Inc. and Knight in May 2005. He served as Executive Vice President of
Kinder Morgan Management, Kinder Morgan G.P., Inc. and Knight 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 Knight in May of 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 Knight 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 Knight 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 Knight. Mr. Kean was elected Executive Vice President and
Chief Operating Officer of Kinder Morgan Management, Kinder Morgan G.P., Inc.
and Knight in January 2006. He served as Executive Vice President, Operations of
Kinder Morgan Management, Kinder Morgan G.P., Inc. and Knight 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
Knight 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 Knight. Mr. Pontarelli is a
Managing Director of Goldman Sachs & Co. See Item 13. “Certain Relationships
and Related Transactions, and Director Independence—Related Transactions—Going
Private Transaction” for details regarding Goldman Sachs’ relationship with
Knight Holdco LLC and us. Mr. Pontarelli was elected Director of Knight Inc.
upon the consummation of the Going Private transaction in May 2007. He has also
served as member of the Board of Managers of Knight 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., Energy Future Holdings Corp. and NextMedia Investors, LLC. He
received a B.A. from Syracuse University and an M.B.A. from Harvard Business
School.
209
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Item 10. Directors,
Executive Officers and Corporate Governance.
(continued)
|
Knight
Form 10-K
|
Kimberly A. Dang is Vice
President, Investor Relations and Chief Financial Officer of Kinder Morgan
Management, Kinder Morgan G.P., Inc. and Knight. Mrs. Dang was elected Chief
Financial Officer of Kinder Morgan Management, Kinder Morgan G.P., Inc. and
Knight in May 2005. She served as Treasurer of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Knight from January 2004 to May 2005. She was elected Vice
President, Investor Relations of Kinder Morgan Management, Kinder Morgan G.P.,
Inc. and Knight in July 2002. From November 2001 to July 2002, she served as
Director, Investor Relations of Kinder Morgan Management, Kinder Morgan G.P.,
and Knight. She has also served as Chief Financial Officer of Knight Holdco LLC
since May 2007. Mrs. Dang has 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 Knight. Mr. Kinder was elected Treasurer of Kinder
Morgan Management, Kinder Morgan G.P., Inc. and Knight in May 2005. He was
elected Vice President, Corporate Development of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Knight in October 2002. He served as manager of
corporate development for Knight and Kinder Morgan G.P., Inc. from January 2000
to October 2002. He has also served as Treasurer of Knight 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 Knight. 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 Knight 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 Knight 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.
Scott E. Parker is Vice
President (President, Natural Gas Pipelines) of Kinder Morgan Management, Kinder
Morgan G.P., Inc. and Knight. He was elected Vice President (President, Natural
Gas Pipelines) of Kinder Morgan Management, Kinder Morgan G.P., Inc. and Knight
in May 2005. Mr. Parker served as President of NGPL, from March 2003 to May
2005. Mr. Parker served as Vice President, Business Development of NGPL from
January 2001 to March 2003. He held various positions at NGPL from January 1984
to January 2001. Mr. Parker holds a Bachelor’s degree in accounting from
Governors State University.
James E. Street is Vice
President, Human Resources and Administration of Kinder Morgan Management,
Kinder Morgan G.P., Inc. and Knight. 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 Knight 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.
Corporate
Governance
Subsequent
to the Going Private transaction, Knight Midco Inc. is our sole common
shareholder. As a result, Knight Midco Inc. elects all of our directors and our
board of directors no longer has a nominating and governance
committee.
Subsequent
to the Going Private transaction, Mr. Shaper and Mr. Pontarelli comprise our
audit committee as specified in 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). Requests for copies may be directed to Investor
Relations, Knight Inc., 500 Dallas Street, Suite 1000, Houston, Texas 77002 or
telephone (713) 369-9490. 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 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.
Section
16(a) Beneficial Ownership Reporting Compliance
Subsequent
to the completion of the Going Private transaction, our common stock is no
longer listed on any national securities exchange. As a result, our directors
and executive officers and beneficial owners of more than 10% of our common
stock are no longer subject to the reporting requirements of Section 16 of the
Securities Exchange Act of 1934. Prior to the Going
210
|
Item 10. Directors,
Executive Officers and Corporate Governance.
(continued)
|
Knight
Form 10-K
|
Private
transaction, such persons were required to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
Such persons were required by SEC regulation to furnish us with copies of all
Section 16(a) forms they filed. Based solely on our review of the copies of such
forms furnished to us and written representations from our executive officers
and directors, we believe that all Section 16(a) filing requirements were met
during 2007.
Our
executive officers also 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 Knight 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
Knight Holdco LLC. In this Item 11, “we,” “our” or “us” refers to Knight and,
where appropriate, Kinder Morgan Energy Partners, Kinder Morgan G.P., Inc. and
Kinder Morgan Management.
At
times in this item 11, we refer to ourselves for the period prior to the Going
Private transaction
as KMI. Prior to the Going Private transaction, our board of directors had a
compensation committee that complied with the requirements of the New York Stock
Exchange. Following the Going Private transaction, our board no longer has a
separately designated compensation committee. Mr. Richard D. Kinder as Chief
Manager of Knight Holdco makes compensation decisions with respect to our
executive officers. References in this Item 11 to our “compensation
committee” mean for the periods prior to the Going Private transaction, KMI’s
then-existing compensation committee, and for the periods following the Going
Private transaction, Mr. Kinder as Chief Manager of Knight Holdco.
The
compensation committee of the board of directors of Kinder Morgan Management,
which committee is 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 “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 Knight Holdco LLC,
but makes its compensation determinations at 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 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 the following 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). It has been our philosophy to pay our executive officers a base
salary not to exceed $200,000, which we believe is below annual base salaries
for comparable positions in the marketplace. The cap for our executive officers’
base salaries has been raised to an annual amount not to exceed $300,000. No
increases above $200,000 have been implemented at this time. If this increase
was implemented, we believe the base salaries paid to our executive officers
would continue to be below the industry average for similarly positioned
executives. While not awarded by us, our compensation committee was aware of the
units awarded by Knight Holdco LLC (as discussed more fully below) and took
these awards into account as components of the total compensation received by
our executive officers.
In
addition, we believe that the compensation of our Chief Executive Officer, Chief
Financial Officer and the executives 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’
211
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
compensation
is allocated to the “at risk” portion of our compensation program—the annual
cash bonus. Accordingly, for 2007, our executive compensation was weighted
toward the cash bonus, payable on the basis of achieving (i) an earnings before
interest, taxes, depreciation, depletion and amortization (referred to as
EBITDA) less capital spending target by us; and (ii) a cash distribution per
common unit target by Kinder Morgan Energy Partners.
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 $1,000,000
of compensation per year; however, if specified conditions are met, certain
compensation may be excluded from consideration of the $1,000,000 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 our and
Kinder Morgan Management’s compensation committees, we expect that all
compensation paid to our executives would qualify for deductibility under
federal income tax rules. Though we are advised that limited partnership’s 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.
Prior
to 2006, long-term equity awards comprised a third element of our executive
compensation program. These awards primarily consisted of grants of restricted
KMI stock and grants of non-qualified options to acquire shares of KMI common
stock, both pursuant to the provisions of KMI’s Amended and Restated 1999 Stock
Plan, referred to in this report as the KMI stock plan. Prior to 2003, we used
both KMI stock options and restricted KMI stock as the principal components of
long-term executive compensation, and beginning in 2003, we used grants of
restricted stock exclusively as the principal component of long-term executive
compensation. For each of the years ended December 31, 2006 and 2007, no
restricted stock or options to purchase shares of KMI, Kinder Morgan Energy
Partners or Kinder Morgan Management were granted to any of our named executive
officers.
Additionally,
in connection with the Going Private transaction, Knight Holdco LLC awarded
members of our management Class A-1 and Class B units of Knight Holdco LLC. In
accordance with SFAS No. 123R, Knight 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 Knight 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. For more information concerning the
Knight Holdco LLC units, see Item 13. “Certain Relationships and Related
Transactions, and Director Independence—Related Transactions—Going Private
Transaction”.
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 for our executive officers.
Additionally, we do not have employment agreements (other than with our Chairman
and Chief Executive Officer, Richard D. Kinder), special severance agreements or
change of control agreements for our executive officers. Our executives are
eligible for the same severance policy as our workforce, which caps severance
payments to an amount equal to six months of salary. We have no executive
company cars or executive car allowances nor do we offer or 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. Additionally, Mr. Kinder has requested
that he receive no annual bonus, unit grants, or other compensation from us. 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 Knight Holdco LLC in
connection with the Going Private
212
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
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
comprised of the following two elements: (i) a base cash salary; and (ii) a
possible annual cash bonus. With regard to our named executive officers other
than our Chief Executive Officer, our compensation committee reviews and
approves 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
meeting.
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 not be allocated among us, on the one hand,
and Kinder Morgan Management, our Kinder Morgan G.P., Inc. and us, on the
other.
Base
Salary
Base
salary is paid in cash. For each of the years 2007 and 2006, 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. Beginning in 2008, the base salary cap for our
executive officers has been raised to an annual amount not to exceed $300,000.
No increases above $200,000 have been implemented at this time. Generally, we
believe that our executive officers’ base salaries are (and will continue to be
following any implementation of the previously described increase) below base
salaries for executives in similar positions and with similar responsibilities
at companies of comparable size and scope.
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 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 may be paid to our
executive officers and other employees depending on a variety of factors,
including their individual performance, our financial performance, the financial
performance of our subsidiaries (including Kinder Morgan Energy Partners),
safety and environmental goals and regulatory compliance.
The
plan is administered by our compensation committee.
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 our and Kinder Morgan
Management’s compensation committees 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 report, Mr. Richard D.
Kinder, our Chairman and Chief Executive Officer, has elected to not participate
under the plan. As of January 31, 2008, excluding Mr. Richard D. Kinder, eleven
of our current officers were eligible to participate in the executive plan
component. All other U.S. eligible employees were eligible for the non-executive
plan component.
Following
recommendations and determinations, our compensation committee establishes which
of our eligible 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 will 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
213
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
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 our 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
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
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;
or
|
|
|
·
|
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.
|
Two
performance objectives were set for 2007 under both the executive plan component
and the non-executive plan component. The 2007 performance objectives were $3.44
in cash distributions per common unit by Kinder Morgan Energy Partners, and
$1,089.5 million of EBITDA less capital spending by us. These targets were the
same as our and Kinder Morgan Energy Partners’ previously disclosed 2007 budget
expectations. At the end of 2007 the extent to which the performance objectives
had been attained and the extent to which the bonus opportunity had been earned
under the formula previously established by our compensation committee was
determined. In 2007, both we and Kinder Morgan Energy Partners exceeded our
established targets.
The
table below sets forth the bonus opportunities that could have been payable by
us and Kinder Morgan Energy Partners to our executive officers if the
performance objectives established for 2007 had been 100% achieved. 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. The compensation committee set bonus opportunities under the plan for
2007 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 in 2007 are set forth in the Summary
Compensation Table in this report in the column entitled “Non-Equity Incentive
Plan Compensation.”
Knight
Annual Incentive
Plan
Bonus Opportunities for 2007
|
Name
and Principal Position
|
Dollar
Value
|
|||
|
Richard
D. Kinder, Chairman and Chief Executive Officer
|
$
|
-
|
1
|
|
|
Kimberly
A. Dang, Vice President and Chief Financial Officer
|
1,000,000
|
2
|
||
|
Steven
J. Kean, Executive Vice President and Chief Operating
Officer
|
1,500,000
|
3
|
||
|
Scott
E. Parker, Vice President (President, Natural Gas
Pipelines)
|
1,500,000
|
3
|
||
|
C.
Park Shaper, Director and
President
|
1,500,000
|
3
|
||
__________
214
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
1 Declined
to participate.
|
2
|
Under
the plan, for 2007, 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. Our compensation committee may reduce the award
payable by us to any participant for any
reason.
|
|
3
|
Under
the plan, for 2007, 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. Our compensation committee may 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. Awards may be granted under the plan for calendar years 2008
through 2009, unless the plan is terminated earlier by us. However, the plan
will remain in effect until payment has been completed with respect to all
awards granted under the plan prior to its termination.
Other
Compensation
Knight Inc. Savings Plan. The
Knight Inc. Savings Plan is a defined contribution 401(k) plan. The plan permits
all full-time employees of Knight and 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. In addition to a mandatory
contribution equal to 4% of base compensation per year for most plan
participants, our general partner may make special discretionary contributions.
Certain employees’ contributions are based on collective bargaining agreements.
The mandatory contributions are made each pay period on behalf of each eligible
employee. Participants may direct the investment of both their contributions and
employer contributions into a variety of investments at the employee’s
discretion. Plan assets are held and distributed pursuant to a trust
agreement.
Employer
contributions for employees vest on the second anniversary of the date of hire.
Effective October 1, 2005, for new employees of our Terminals – KMP business
segment, a tiered employer contribution schedule was implemented. This tiered
schedule provides for employer contributions of 1% for service less than one
year, 2% for service between one and two years, 3% for service between two and
five years, and 4% for service of five years or more. All employer contributions
for employees of our Terminals – KMP business segment 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 years to comply with changes in federal regulations).
At
its July 2007 meeting, the compensation committee of our and Kinder Morgan
Management’s boards of directors approved a special contribution of an
additional 1% of base pay into the Savings Plan for each eligible employee. Each
eligible employee will receive an additional 1% company contribution based on
eligible base pay each pay period beginning with the first pay period of August
2007 and continuing through the last pay period of July 2008. The additional 1%
contribution does not change or otherwise impact, the annual 4% contribution
that eligible employees currently receive. It may be converted to any other
Savings Plan investment fund at any time and it will vest according to the same
vesting schedule described in the preceding paragraph. Since this additional 1%
company contribution is discretionary, our and Kinder Morgan Management’s
compensation committee approvals will be required annually for each additional
contribution. During the first quarter of 2008, excluding our portion of the 1%
additional contribution described above, we will not make any additional
discretionary contributions to individual accounts for 2007.
Additionally,
in 2006, an option to make after-tax “Roth” contributions (Roth 401(k) option)
to a separate participant account was added to the Savings Plan as an additional
benefit to all participants. 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 employer
contribution will still be considered taxable income at the time of
withdrawal.
Knight 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. Certain employees continue to accrue benefits through a
career-pay formula, “grandfathered” according to age and years of service on
December 31, 2000, or collective bargaining arrangements. All other employees
accrue benefits through a personal retirement account in the Cash Balance
Retirement Plan. Under the plan, we make contributions on behalf of
participating employees equal to 3% of eligible compensation every pay period.
Interest is credited to the personal retirement accounts at the 30-year U.S.
Treasury bond rate, or an approved substitute, in effect each year. Employees
become fully vested in the plan after five years, and they may take a lump sum
distribution upon termination of employment or retirement.
The
following table sets forth the estimated actuarial present value of each named
executive officer’s accumulated pension benefit as of December 31, 2007, under
the provisions of the Cash Balance Retirement Plan. With respect to our
named
215
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
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
Benefit1
|
Contributions
During
2007
|
|||||||||||
|
Richard
D. Kinder
|
Cash
Balance
|
7
|
$
|
-
|
$
|
-
|
|||||||||
|
Kimberly
A. Dang
|
Cash
Balance
|
6
|
31,408
|
7,294
|
|||||||||||
|
Steven
J.
Kean
|
Cash
Balance
|
6
|
41,724
|
7,767
|
|||||||||||
|
Scott
E.
Parker
|
Cash
Balance
|
9
|
71,515
|
9,130
|
|||||||||||
|
C.
Park
Shaper
|
Cash
Balance
|
7
|
51,079
|
8,194
|
|||||||||||
__________
|
1
|
The
present values in the Pension Benefits table are based on certain
assumptions-including a 5.75% discount rate, RP 2000 mortality
(post-retirement only), 5% cash balance interest crediting rate, and lump
sums calculated using a 5% interest rate and IRS mortality. We assumed
benefits would commence at normal retirement date or unreduced retirement
date, if earlier. No death or turnover was assumed prior to retirement
date.
|
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 Knight
Holdco LLC in connection with the Going Private transaction, and while we, as a
subsidiary of Knight 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.
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.
Mr.
Scott E. Parker elected to not participate in the Going Private transaction. As
a result, we offered Mr. Parker a retention agreement. The agreement was
effective May 30, 2007, and lasts for three years. Mr. Parker is eligible for
quarterly cash payments of $65,000, a one-time relocation payment of $100,000,
and the right to participate in both the annual incentive plan and employee
benefit plans. Under the terms of the agreement, Mr. Parker will also receive
payments of $500,000 on May 30, 2008, $500,000 on May 30, 2009, and $2,000,000
on May 30, 2010, respectively, provided he is an active employee on each
respective date. The agreement also contains confidential information,
non-solicitation of employees and non-compete provisions.
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
2007 (collectively referred to as the “named executive officers”) for services
rendered to us, our subsidiaries or our affiliates, including Kinder Morgan
Energy Partners and Knight Holdco LLC (collectively referred to as the “Knight
affiliated entities”), during fiscal years 2007 and 2006. The amounts in the
columns below, except the column entitled “Unit Awards by Knight Holdco LLC”,
represent the total compensation paid or awarded to the named executive officers
by all the Knight affiliated entities, and as a result the amounts are in excess
of the compensation expense allocated to and recognized by us for services
rendered to us. The amounts in the column entitled “Unit Awards by Knight Holdco
LLC” consist of compensation expense calculated in accordance with SFAS No. 123R
and allocated to Knight Inc. (excluding any corresponding compensation expense
allocated to Kinder Morgan Energy Partners and consolidated into Knight Inc.)
for the Knight Holdco LLC Class A-1 and Class B units awarded by Knight Holdco
LLC to the named executive officers. As a subsidiary of Knight Holdco LLC, we
are allocated a portion of the compensation expense recognized by
216
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
Knight
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 the named executive officers has received any
payments in respect of such units.
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
||||||||||||||||||||||
|
Name
and
Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
by
KMI
|
Option
Awards
by
KMI
|
Non-Equity
Incentive
Plan
Compensation
|
Change
in
Pension
Value
|
All
Other
Compensation
|
Unit
Awards
by
Knight
Holdco
LLC
|
Total
|
|||||||||||||||||
|
Richard
D. Kinder
|
2007
|
$
|
1
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
385,200
|
$
|
385,201
|
||||||||
|
Director,
Chairman and
|
2006
|
1
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
|||||||||||||||||
|
Chief
Executive Officer
|
|||||||||||||||||||||||||||
|
Kimberly
A. Dang
|
2007
|
200,000
|
-
|
338,095
|
-
|
400,000
|
7,294
|
32,253
|
27,980
|
1,005,622
|
|||||||||||||||||
|
Vice
President and
|
2006
|
200,000
|
-
|
139,296
|
37,023
|
270,000
|
6,968
|
46,253
|
-
|
699,540
|
|||||||||||||||||
|
Chief
Financial Officer
|
|||||||||||||||||||||||||||
|
Steven
J. Kean
|
2007
|
200,000
|
-
|
4,397,080
|
-
|
1,100,000
|
7,767
|
147,130
|
111,820
|
5,963,797
|
|||||||||||||||||
|
Executive
Vice President
|
2006
|
200,000
|
-
|
1,591,192
|
147,943
|
-
|
7,422
|
284,919
|
-
|
2,231,476
|
|||||||||||||||||
|
And
|
|||||||||||||||||||||||||||
|
Chief
Operating Officer
|
|||||||||||||||||||||||||||
|
Scott
E. Parker
|
2007
|
200,000
|
-
|
2,340,080
|
-
|
1,100,000
|
9,130
|
307,688
|
-
|
3,956,898
|
|||||||||||||||||
|
Vice
President (President,
|
2006
|
200,000
|
350,000
|
881,317
|
29,490
|
500,000
|
8,735
|
164,630
|
-
|
2,134,172
|
|||||||||||||||||
|
Natural
Gas Pipelines)
|
|||||||||||||||||||||||||||
|
C.
Park Shaper
|
2007
|
200,000
|
-
|
1,950,300
|
-
|
1,200,000
|
8,194
|
155,953
|
176,660
|
3,691,107
|
|||||||||||||||||
|
Director
and President
|
2006
|
200,000
|
-
|
1,134,283
|
24,952
|
-
|
7,835
|
348,542
|
-
|
1,715,612
|
|||||||||||||||||
____________
|
1
|
Consists
of expense calculated in accordance with SFAS No. 123R attributable to
restricted KMI stock awarded in 2003, 2004 and 2005 according to the
provisions of the KMI Stock Plan. No restricted stock was awarded in 2007
or 2006. For grants of restricted stock, we take the value of the award at
time of grant and accrue the expense over the vesting period according to
SFAS No. 123R. For grants made July 16, 2003—KMI closing price was $53.80,
twenty-five percent of the shares in each grant vest on the third
anniversary after the date of grant and the remaining seventy-five percent
of the shares in each grant vest on the fifth anniversary after the date
of grant. For grants made July 20, 2004—KMI closing price was $60.79,
fifty percent of the shares vest on the third anniversary after the date
of grant and the remaining fifty percent of the shares vest on the fifth
anniversary after the date of grant. For grants made July 20, 2005—KMI
closing price was $89.48, twenty-five percent of the shares in each grant
vest on the third anniversary after the date of grant and the remaining
seventy-five percent of the shares in each grant vest on the fifth
anniversary after the date of grant. As a result of the Going Private
transaction, all outstanding restricted shares vested in 2007 and
therefore all remaining compensation expense with respect to restricted
stock was recognized in 2007 in accordance with SFAS No. 123R. We bore all
of the costs associated with this
acceleration.
|
|
2
|
Consists
of expense calculated in accordance with SFAS No. 123R attributable to
options to purchase KMI shares awarded in 2002 and 2003 according to the
provisions of the KMI Stock Plan. No options were granted in 2007 or 2006.
For options granted in 2002—volatility of 0.3912 using a 6 year term,
4.01% five year risk free interest rate return, and a 0.71% expected
annual dividend rate. For options granted in 2003—volatility of 0.3853
using a 6.25 year term, 3.37% treasury strip quote at time of grant, and a
2.973% expected annual dividend rate. As a result of the Going Private
transaction, all outstanding options vested in 2007 and therefore all
remaining compensation expense with respect to options was recognized in
2007 in accordance with SFAS No. 123R. As a condition to their being
permitted to participate in the Going Private transaction, Messrs. Kean
and Shaper agreed to the cancellation of 10,467 and 22,031 options,
respectively. These cancelled options had weighted average exercise prices
of $39.12 and $24.75 per share, respectively. We bore all of the costs
associated with this acceleration.
|
|
3
|
Represents
amounts paid according to the provisions of our Annual Incentive Plan. In
the case of Mr. Parker, for the year 2006, an additional $350,000 was paid
outside of the plan, as reflected in the Bonus column. Amounts were earned
in the fiscal year indicated but were paid in the next fiscal year.
Messrs. Kean and Shaper refused to accept a bonus for 2006. The committee
agreed that this was not a reflection of performance on either
person.
|
|
4
|
Represents
the 2007 and 2006, as applicable, change in the actuarial present value of
accumulated defined pension benefit (including unvested benefits)
according to the provisions of our Cash Balance Retirement
Plan.
|
|
5
|
Amounts
represent value of contributions to our Savings Plan (a 401(k) plan),
value of group-term life insurance exceeding $50,000, taxable parking
subsidy and dividends paid on unvested restricted stock awards. Amounts
each year include $10,000 representing the value of contributions to our
Savings Plan. Amounts representing the value of dividends paid on unvested
restricted stock awards are as follows: for 2007—Mrs. Dang $21,875; Mr.
Kean $136,500; Mr. Parker $77,000; and Mr. Shaper $144,375; for 2006—Mrs.
Dang $35,875; Mr. Kean $273,000; Mr. Parker $154,000; and Mr. Shaper
$336,875. Mr. Parker’s 2007 amount also includes amounts for imputed
income for company provided cell phone, a $100,000 relocation allowance,
and a $130,000 payment consistent with Mr. Parker’s retention
agreement.
|
|
6
|
Such
amounts represent the amount of the non-cash compensation expense
calculated in accordance with SFAS No. 123R attributable to the Class A-1
and Class B units of Knight Holdco LLC and allocated to us for financial
reporting purposes but does not include any such expense allocated to any
of its other subsidiaries. None of the 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
|
217
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
|
|
pay
any amounts in respect of such units. See Item 13. “Certain Relationships
and Related Transactions, and Director Independence—Related
Transactions—Going Private Transaction” for further discussion of these
units.
|
KMI
Stock Options and Restricted Stock
Effective
with the completion of the Going Private transaction on May 30, 2007, all of
KMI’s equity compensation awards (including awards held by our named executive
officers) were subject to the following treatment:
|
|
·
|
each
option or other award to purchase shares of KMI common stock granted under
any Kinder Morgan employee or director equity plan, whether vested or
unvested, that was outstanding immediately prior to the effective time of
the buyout, vested as of the effective time of the buyout, and was
cancelled and converted into the right to receive a cash payment equal to
the number of shares of KMI common stock underlying such options
multiplied by the amount (if any) by which the $107.50 per share merger
consideration issued in the Going Private transaction exceeded the option
exercise price, without interest and less any applicable withholding tax;
and
|
|
|
·
|
each
share of restricted stock or restricted stock unit under any Kinder Morgan
stock plan or benefit plan vested as of the effective time of the buyout
and was cancelled and converted into the right to receive a cash payment
equal to the number of outstanding shares of restricted stock or
restricted stock units, multiplied by the $107.50 per share merger
consideration, without interest and less any applicable withholding
tax.
|
The
following table sets forth, for each of our named executive officers (i) the
number of KMI stock options (all of which were vested) held by such persons;
(ii) the cash value realized with respect to such stock options upon
consummation of the Going Private transaction; (iii) the number of shares of
restricted KMI stock held by such persons; and (iv) the aggregate cash value
realized with respect to such shares of restricted stock upon consummation of
the Going Private transaction. A portion of the consideration received by the
named executive officers with respect to their options to acquire shares of KMI
common stock and their restricted shares of KMI common stock was reinvested in
exchange for ownership interests in Knight Holdco LLC, and certain executive
officers, as a condition to their being permitted to participate as investors in
Knight Holdco LLC, agreed to the cancellation of certain of their options prior
to the Going Private transaction. At the time of the Going Private transaction,
all stock awards programs and plans that related to KMI stock were terminated
and no awards have been granted since the Going Private transaction and no
awards are outstanding under any such terminated programs and
plans.
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||
|
Name
|
Stock
Options
|
Value Realized1
|
Shares
of
Restricted
Stock
|
Value Realized2
|
||||||||||||
|
Richard
D. Kinder
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
|
Kimberly
A. Dang
|
24,750
|
1,443,178
|
8,000
|
860,000
|
||||||||||||
|
Steven
J. Kean3
|
25,533
|
1,375,772
|
78,000
|
8,385,000
|
||||||||||||
|
Scott
E. Parker
|
10,000
|
537,000
|
44,000
|
4,730,000
|
||||||||||||
|
C.
Park Shaper4
|
197,969
|
12,529,810
|
82,500
|
8,868,750
|
||||||||||||
__________
|
1
|
Calculated
based on the actual exercise prices underlying the related options, as
opposed to the weighted average exercise price per share of
options.
|
|
2
|
Calculated
as $107.50 multiplied by the number of shares of restricted
stock.
|
|
3
|
Mr.
Kean, as a condition to his being permitted to participate as an investor
in Knight, agreed to the cancellation of 10,467 of his options shown
above, with a weighted average exercise price of $39.12 per share, prior
to the Going Private transaction.
|
|
4
|
Mr.
Shaper, as a condition to his being permitted to participate as an
investor in Knight, agreed to the cancellation of 22,031 of his options
shown above, with a weighted average exercise price of $24.75 per share,
prior to the Going Private
transaction.
|
Grants
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 2007 to our named executive officers, as well as awards of Knight Holdco
LLC units received in 2007 by each named executive officer. The table includes
the Knight Holdco LLC Class A-1 and Class B units awarded by Knight Holdco LLC
to the named executive officers. As a subsidiary of Knight Holdco LLC, we are
allocated a portion of the compensation expense recognized by Knight 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.
The table includes awards made during or for 2007. The information in the table
under the caption “Estimated Possible Payments Under Non-Equity Incentive Plan
Awards” represents the threshold, target and maximum amounts payable under the
Knight Annual Incentive Plan for performance in 2007. Amounts actually paid
under that plan for 2007 are set forth in the Summary Compensation Table under
the caption “Non-Equity Incentive Plan Compensation.” There will not be any
additional payouts
218
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
under
the Annual Incentive Plan for 2007.
|
Estimated
Possible Payouts Under
Non-Equity Incentive Plan
Awards1
|
All
other stock awards2
|
Grant
date
|
||||||||||||||
|
Name
|
Grant
date
|
Threshold
|
Target
|
Maximum
|
Number
of units
|
fair
value of
stock
awards3
|
||||||||||
|
Richard
D. Kinder
|
May
30, 2007
|
$
|
-
|
$
|
-
|
$
|
-
|
791,405,452
|
$
|
9,200,000
|
||||||
|
Kimberly
A. Dang
|
January
17, 2007
|
$500,000
|
$1,000,000
|
$1,500,000
|
||||||||||||
|
May
30, 2007
|
49,893,032
|
672,409
|
||||||||||||||
|
Steven
J. Kean
|
January
17, 2007
|
750,000
|
1,500,000
|
2,000,000
|
||||||||||||
|
May
30, 2007
|
162,114,878
|
2,708,095
|
||||||||||||||
|
Scott
E. Parker
|
January
17, 2007
|
500,000
|
1,500,000
|
2,000,000
|
||||||||||||
|
C.
Park Shaper
|
January
17, 2007
|
750,000
|
1,500,000
|
2,000,000
|
||||||||||||
|
May
30, 2007
|
225,436,274
|
4,296,125
|
||||||||||||||
_____________
|
1
|
Represents
grants under the Knight Annual Incentive Plan for performance in 2007. See
“Elements of Compensation—Possible Annual Cash Bonus (Non-Equity Cash
Incentive)” for a discussion of these
awards.
|
|
2
|
Represents
the sum of the number of Class A-1 units and the number of Class B units
of Knight Holdco LLC awarded to the named executive officers in connection
with the Going Private transaction. See Item 13. “Certain Relationships
and Related Transactions, and Director Independence—Related
Transactions—Going Private Transaction” for detail regarding these
awards.
|
|
3
|
Amounts
represent the fair value calculated in accordance with SFAS No. 123R
attributable to Class A-1 and Class B units of Knight Holdco LLC awarded
by Knight Holdco LLC to the named executive officers in connection with
the Going Private transaction. None of the 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 Item 13. “Certain Relationships and Related
Transactions, and Director Independence—Related Transactions—Going Private
Transaction” for further discussion of these
units.
|
Outstanding
Equity Awards at Fiscal Year-End
The
only unvested equity awards outstanding at the end of fiscal 2007 were the Class
B units of Knight Holdco LLC awarded by Knight Holdco LLC to the named executive
officers. As a subsidiary of Knight Holdco LLC, we are allocated a portion of
the compensation expense recognized by Knight 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 vested1
|
|||
|
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
|
|||
|
C.
Park
Shaper
|
Class
B units
|
217,636,499
|
N/A
|
|||
__________
|
1
|
Because
the Class B units are equity interests of Knight Holdco LLC, a private
limited liability company, the market value of such interests is not
readily determinable. None of the 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 Item 13. “Certain Relationships and Related
Transactions, and Director Independence—Related Transactions—Going Private
Transaction” for further discussion of these
units.
|
Director
Compensation
Compensation Committee Interlocks
and Insider Participation. Prior to the Going Private transaction, our
compensation committee consisted of Messrs. Ted A. Gardner,
William J. Hybl, Edward Randall, III, James M. Stanford, and
H. A. True, III. Subsequent to the Going Private transaction, our
board has no separate compensation committee. Mr. Richard D. Kinder as Chief
Manager of Knight Holdco makes compensation decisions with respect to our
executive officers. None of the members of our former compensation committee is
or has been one of our officers or employees, none of our executive officers
served during 2007 on a board of directors of another entity which has employed
any of the members of the former compensation committee or the members of our
current board.
219
|
Item 11. Executive
Compensation. (continued)
|
Knight
Form 10-K
|
Directors Fees. Prior to the
Going Private transaction, directors who were not also our employees
participated in our Non-Employee Directors Stock Awards Plan, which was
established in January 2005 and approved by our stockholders at our annual
meeting of stockholders on May 10, 2005, and which terminated at the time
of the Going Private transaction. Subsequent to the Going Private transaction,
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.
The
following table discloses the compensation earned by each of our non-employee
directors for Board service during 2007. With the exception of Mr. Pontarelli,
all of our non-employee directors resigned effective upon the consummation of
the Going Private transaction; therefore, all compensation set forth below is
for Board service prior to the consummation of the Going Private
transaction.
Non-Employee
Director Compensation for Fiscal Year 2007
|
(1)
|
(1)
|
||||||||||||||||||||
|
Name
|
Fees
Earned or
Paid
in Cash
|
Stock
Awards
|
Option
Awards
|
All
Other Compensation
|
Total
|
||||||||||||||||
|
Edward
H. Austin
|
$
|
82,506
|
-
|
-
|
$
|
-
|
$
|
82,506
|
|||||||||||||
|
Charles
W. Battey
|
82,506
|
-
|
-
|
-
|
82,506
|
||||||||||||||||
|
Stewart
A. Bliss
|
95,010
|
-
|
-
|
-
|
95,010
|
||||||||||||||||
|
Ted
A. Gardner
|
85,008
|
-
|
-
|
-
|
85,008
|
||||||||||||||||
|
William
J. Hybl
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
Michael
C. Morgan
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
Kenneth
A. Pontarelli
|
–
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Edward
Randall, III
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
James
M. Stanford
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
Fayez
Sarofim
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
H.
A. True, III
|
80,004
|
-
|
-
|
-
|
80,004
|
||||||||||||||||
|
Douglas
W.G. Whitehead
|
82,506
|
-
|
-
|
-
|
82,506
|
||||||||||||||||
__________
|
1
|
Prior
to 2007 all stock and option awards to the directors had vested;
consequently, we incurred no expense calculated in accordance with SFAS
No. 123R in 2007 in respect of any such stock and/or option awards,
including as a result of the closing of the Going Private
transaction.
|
Compensation
Committee Report
Because
our board of directors no longer has a separate compensation committee
subsequent to the Going Private transaction, our board of directors has
discussed and reviewed the above Compensation Discussion and Analysis for fiscal
year 2007 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 2007.
Board of
Directors:
Richard
D. Kinder
C.
Park Shaper
Kenneth
A. Pontarelli
220
|
Knight
Form 10-K
|
Knight
Midco Inc., an indirect wholly owned subsidiary of Knight Holdco LLC, owns 100%
of our outstanding common stock. The following table sets forth information as
of January 31, 2008, regarding the beneficial ownership of Kinder Morgan Energy
Partners’ common units and Kinder Morgan Management’s shares 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. For
information regarding the beneficial ownership of Knight Holdco LLC’s units by
our executive officers and directors, see Item 13. “Certain Relationships and
Related Transactions, and Director Independence—Related Transactions—Going
Private Transaction.”
Amount and Nature of Beneficial
Ownership1
|
Kinder
Morgan Energy Partners
Common
Units
|
Kinder
Morgan
Management
Shares
|
||||||
|
Number
of Units2
|
Percent
of
Class
|
Number
of Shares
|
Percent
of
Class
|
||||
|
Richard
D. Kinder4
|
315,979
|
*
|
84,663
|
*
|
|||
|
C.
Park
Shaper
|
4,000
|
*
|
23,793
|
*
|
|||
|
Kenneth
A.
Pontarelli
|
-
|
-
|
-
|
-
|
|||
|
Steven
J.
Kean
|
-
|
-
|
-
|
-
|
|||
|
Scott
E.
Parker
|
-
|
-
|
-
|
-
|
|||
|
Kimberly
A.
Dang
|
121
|
*
|
440
|
*
|
|||
|
Directors
and Executive Officers as a group (9 persons)5
|
336,484
|
*
|
128,335
|
*
|
|||
___________
*
Less than 1%.
|
1
|
Except
as noted otherwise, each individual has sole voting power and sole
disposition power over the units and shares
listed.
|
|
2
|
As
of January 31, 2008, Kinder Morgan Energy Partners had 170,224,734 common
units issued and outstanding.
|
|
3
|
As
of January 31, 2008, Kinder Morgan Management had 72,432,482 issued and
outstanding shares representing limited liability company interests,
including two voting shares owned by Kinder Morgan G.P.,
Inc.
|
|
4
|
Includes
7,879 common units owned by Mr. Kinder’s spouse. Mr. Kinder disclaims any
and all beneficial or pecuniary interest in these
units.
|
|
5
|
Includes
9,090 common units owned by spouses of our executives and includes 671
Kinder Morgan Management shares purchased by one of our executives for his
children. The executives disclaim any beneficial ownership in such common
units and shares.
|
Equity
Compensation Plan Information
Following
the completion of the Going Private transaction, we have no compensation plans
under which our equity securities may be issued, and there are no outstanding
awards under any previous equity compensation plans.
Related
Transactions
Going
Private Transaction
On
May 30, 2007, we completed the Going Private transaction, whereby pursuant to a
merger agreement, generally each share of our common stock was converted into
the right to receive $107.50 in cash without interest. At times in this item 13,
we refer to ourselves for the period prior to the Going Private transaction as KMI. See
Item 11. “Executive Compensation—KMI Stock Options and Restricted Stock” for a
discussion of the disposition of options to purchase KMI common stock and shares
of restricted KMI stock in the Going Private transaction. For further
information regarding this transaction, see “(a) General Development of
Business” within Items 1 and 2 of this report, and Notes 1(A) and 1(B) of the
accompanying Notes to Consolidated Financial Statements.
In
connection with the Going Private transaction, some of our executive officers
became investors in Knight Holdco LLC, our parent company. Each of the investors
in Knight Holdco LLC entered into an amended and restated limited liability
company agreement of Knight Holdco LLC which governs the rights and obligations
of the investors with respect to Knight Holdco LLC and us. Pursuant to the
limited liability company agreement, Knight Holdco LLC is a “manager managed”
limited liability company governed by an 11 member board of managers and
initially by a “chief manager.” Mr. Richard D. Kinder, our Chairman and Chief
Executive Officer, is Knight Holdco LLC’s initial chief manager. Mr. Kinder is
also a member of the
221
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
(continued)
|
Knight
Form 10-K
|
board
of managers and has the right to appoint an additional four members of the board
of managers. The chief manager has control over most of the operations of Knight
Holdco LLC, subject to rights of the board of managers (and in some cases, the
members of Knight Holdco LLC, acting in their capacity as such) to approve
significant actions proposed. to be taken by Knight Holdco LLC or its
subsidiaries (generally other than Kinder Morgan Energy Partners, Kinder Morgan
Management and their respective subsidiaries), including, among other things,
liquidations, issuances of equity securities, distributions (other than
identified tax related distributions), transactions with affiliates, settlement
of litigation or entry into agreements with a value in excess of
$50 million, entry into new lines of business and approval of the annual
budget. Additionally, the members of Knight Holdco LLC (and in some cases, just
certain members) have the ability to compel restructuring and liquidity events,
including an initial public offering of Knight Holdco LLC or any of its
subsidiaries or businesses, a sale or disposition of Knight Holdco LLC or any of
its material subsidiaries or its businesses, or distributions of excess cash to
the members of Knight Holdco LLC, although in some cases such actions may only
be so compelled after specified time periods. Mr. Kinder will be the chief
manager of Knight Holdco LLC until:
|
|
·
|
he
retires, dies or becomes unable to serve due to
disability,
|
|
|
·
|
such
time as he is removed by the members of Knight Holdco LLC for cause or for
the failure to meet performance targets for Knight Holdco LLC set forth in
the business plan, or
|
|
|
·
|
such
time as he ceases to own at least 2.5% of the Class A units of Knight
Holdco LLC.
|
Following
such time as Mr. Kinder ceases to be the chief manager of Knight Holdco LLC
as set forth above, except in circumstances related to the termination of
Mr. Kinder for cause, the existence of performance reasons or
Mr. Kinder’s failure to own the requisite percentage of Class A units
of Knight Holdco LLC, C. Park Shaper, our President and one of our
directors, provided he remains an executive officer of Knight Holdco LLC or us
at such time, will succeed Mr. Kinder as the chief manager of Knight Holdco
LLC, with the same rights and authority (other than the rights and authority
given to Mr. Kinder personally), until such time as:
|
|
·
|
he
retires, dies or becomes unable to serve as a result of
disability,
|
|
|
·
|
he
is removed for cause,
|
|
|
·
|
Knight
Holdco LLC fails to meet performance targets set forth in the business
plan, and the members of Knight Holdco LLC either decide to remove him or
to strip him of the powers of chief
manager,
|
|
|
·
|
Mr. Kinder
or his heirs or representatives has approved the board of managers’
decision to remove him,
|
|
|
·
|
Mr. Kinder
ceases to own at least 2.5% of the Class A units of Knight Holdco
LLC, or
|
|
|
·
|
upon
the occurrence of other circumstances relating to the reasons for
Mr. Kinder ceasing to be chief manager and/or Knight Holdco LLC’s
performance.
|
Following
such time as there is no chief manager, the board of managers will have control
of the day to day operations of Knight Holdco LLC, subject to the rights of the
members of Knight Holdco LLC to approve significant actions as described
above.
Upon
such time as Mr. Kinder is no longer chief manager of Knight Holdco LLC for
any reason other than cause, he shall cease to have the right to designate two
of his four members of the board of managers. The other two of such four
managers will instead be elected by a majority of the Class A units held by
current and former directors, officers and other members of our management
(other than Mr. Kinder) so long as they continue to hold more than 50% of
their initial stake in the Class A units. Except following his removal for
cause, Mr. Kinder shall be entitled to appoint himself as a manager with
one of his remaining two seats. In the event Mr. Kinder is removed for
cause, he shall only be entitled to appoint one manager (which shall not be
himself personally) and the seat of the other manager that Mr. Kinder would
have been entitled to designate will be filled by an independent manager elected
by the board of managers as a whole.
Generally,
Knight Holdco LLC has three classes of units—Class A units,
Class A-1 units, and Class B units. The Class A units were
issued to investors, including members of senior management who directly or
indirectly reinvested all or a portion of their KMI equity and/or cash, in
respect of their capital contributions to Knight Holdco LLC. Generally, the
holders of Class A units will share ratably in all distributions, subject
to amounts allocated to the Class A-1 units and the Class B units
as set forth below.
The
Class B units were awarded by Knight Holdco LLC to members of our
management in consideration of their services to or for the benefit of Knight
Holdco LLC. The Class B units represent interests in the profits of Knight
Holdco LLC following
222
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
(continued)
|
Knight
Form 10-K
|
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 of 5% of profits distributions 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 33⅓% on each of
the 3rd, 4th and
5th year
anniversary of the issuance of such Class B units to such holder. The
amended and restated limited liability company agreement also includes
provisions with respect to forfeiture of Class B units upon termination for
cause, Knight 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. Kinder,
and approved by other, non-management investors.
The
Class A-1 units were awarded by Knight Holdco LLC to members of our
management (other than Mr. Richard D. Kinder) who reinvested their equity
interests in Knight Holdco LLC in connection with the Going Private transaction
in consideration of their services to or for the benefit of Knight Holdco LLC.
Class A-1 units entitle a holder thereof to receive distributions from
Knight 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.
The
table below sets forth the beneficial ownership (as defined in Rule 13(d)(3) of the
Exchange Act) of Knight Holdco LLC’s units by each of our directors
(including directors who resigned effective with the closing of the Going
Private transaction) and executive officers, detailing the contributions made by
each in respect of their Class A units and the grant date fair value, as
calculated in accordance with SFAS No. 123R, of the Class A-1 and Class B units
received by each. In accordance with SFAS No. 123R, Knight 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 Knight
Holdco LLC, we are 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. Please see Item 11. “Executive
Compensation” for disclosure regarding the Class A-1 and Class B units received
by each of the named executive officers and the expense as calculated in
accordance with SFAS No. 123R and allocated to us for 2007 in respect of each
officer’s units. Except as noted otherwise, each individual has sole voting
power and sole disposition power over the units listed.
|
Class
A Units
|
% of Class
A Units1
|
Class
A-1 Units
|
% of Class
A-1 Units2
|
Class
B Units
|
% of Class
B Units3
|
|||||||
|
Current
Directors and Executive Officers:
|
||||||||||||
|
Richard
D. Kinder4
|
2,424,000,000
|
30.6
|
–
|
–
|
791,405,452
|
40.0
|
||||||
|
C.
Park Shaper5
|
13,598,785
|
*
|
7,799,775
|
28.3
|
217,636,499
|
11.0
|
||||||
|
Steven
J. Kean6
|
6,684,149
|
*
|
3,833,788
|
13.9
|
158,281,090
|
8.0
|
||||||
|
Kimberly
A. Dang7
|
750,032
|
*
|
430,191
|
1.6
|
49,462,841
|
2.5
|
||||||
|
David
D. Kinder8
|
1,075,981
|
*
|
617,144
|
2.2
|
55,398,382
|
2.8
|
||||||
|
Joseph
Listengart9
|
6,059,449
|
*
|
3,475,483
|
12.6
|
79,140,545
|
4.0
|
||||||
|
Scott
E. Parker
|
–
|
–
|
–
|
–
|
–
|
–
|
||||||
|
James
E. Street10
|
3,813,005
|
*
|
2,187,003
|
7.9
|
49,462,841
|
2.5
|
||||||
|
Kenneth
A. Pontarelli11
|
957,082,454
|
12.1
|
–
|
–
|
–
|
–
|
||||||
|
Executive
officers and directors as a group (9 persons)
|
3,413,063,855
|
43.1
|
18,343,384
|
66.5
|
1,400,787,650
|
70.8
|
||||||
|
Former
Directors:
|
||||||||||||
|
Fayez
Sarofim12
|
349,018,612
|
4.4
|
-
|
-
|
-
|
-
|
||||||
|
Michael
C. Morgan13
|
64,500,000
|
*
|
-
|
-
|
-
|
-
|
___________
|
*
|
Less
than 1%.
|
|
1
|
As
of January 31, 2008, Knight Holdco LLC had 7,914,367,913 Class A Units
issued and outstanding.
|
|
2
|
As
of January 31, 2008, Knight 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.
|
|
3
|
As
of January 31, 2008, Knight Holdco LLC had 1,922,620,621 Class B Units
issued and outstanding and 55,893,008 phantom Class B Units issued and
outstanding. The phantom Class B Units were issued to Canadian management
employees.
|
|
4
|
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 KMI common stock and his wife
contributed 5,173 shares of KMI common stock to Knight Holdco LLC that
were valued for purposes of Knight
Holdco
|
223
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
(continued)
|
Knight
Form 10-K
|
|
|
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 received
by Mr. Kinder had a grant date fair value as calculated in accordance with
SFAS No. 123R of $9,200,000.
|
|
5
|
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 Mr. Shaper 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
KMI restricted stock and options to acquire 197,969 shares of KMI 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 SFAS No. 123R of
$4,296,125.
|
|
6
|
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 KMI
restricted stock and options to acquire 25,533 shares of KMI 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 SFAS No. 123R of
$2,708,095.
|
|
7
|
Includes
49,462,841 Class B Units that Ms. Dang transferred to a limited
partnership. Ms. Dang may be deemed to be the beneficial owner of these
transferred Class B Units, because Ms. Dang has voting and disposition
power of these Class B Units, but she disclaims ten percent of any
beneficial and pecuniary interest in them. Ms. 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 KMI restricted stock and options to
acquire 24,750 shares of KMI common stock in exchange for her Class A
units. The Class A-1 units and Class B units received by Ms. Dang had an
aggregate grant date fair value as calculated in accordance with SFAS No.
123R of $672,409.
|
|
8
|
Includes
55,398,382 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 eight percent
of any beneficial and pecuniary interest in them. Mr. Kinder made a cash
investment of $1,075,981 of his after-tax proceeds from the conversion in
the Going Private transaction of 15,750 shares of KMI restricted stock in
exchange for his Class A units. The Class A-1 units and Class B units
received by Mr. Kinder had an aggregate grant date fair value as
calculated in accordance with SFAS No. 123R of
$783,742.
|
|
9
|
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
KMI restricted stock and options to acquire 48,459 shares of KMI 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 SFAS No. 123R of
$1,706,963.
|
|
10
|
Includes
49,462,841 Class B units Mr. Street transferred to a limited partnership.
Mr. Street may be deemed to be the beneficial owner of these transferred
Class B units, because Mr. Street has voting and disposition power of
these Class B units, but he disclaims twenty-five percent of any
beneficial or pecuniary interest in them. Mr. Street made a cash
investment of $3,813,005 of his after-tax proceeds from the conversion in
the Going Private transaction of 30,000 shares of KMI restricted stock and
options to acquire 34,588 shares of KMI common stock in exchange for his
Class A units. The Class A-1 units and Class B units received by Mr.
Street had an aggregate grant date fair value as calculated in accordance
with SFAS No. 123R of $1,070,209.
|
|
11
|
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; and
8,302,031 units owned by GS Capital Partners VI GmbH & Co. KG, a
German 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, an
NASD 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 ℅ 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.
|
|
12
|
An
aggregate of 1,711,801 shares of KMI common stock and $165,000,000 of cash
were contributed by Mr. Sarofim, either individually or by trusts and
other entities in which Mr. Sarofim has or shares voting and investment
power, to Knight Holdco LLC that were valued for purposes of Knight Holdco
LLC’s limited liability agreement at $349,018,612 in exchange for their
Class A units.
|
|
13
|
Portcullis
Partners, LP, a private investment partnership, contributed 600,000 shares
of KMI common stock to Knight
|
224
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
(continued)
|
Knight
Form 10-K
|
|
|
Holdco
LLC that were valued for purposes of Knight Holdco LLC’s limited liability
agreement at $64,500,000 in exchange for its Class A units. Mr. Morgan is
President of Portcullis Partners, LP and therefore may be deemed to have
beneficial ownership of the units owned by Portcullis Partners,
LP.
|
Other
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 other related transactions, see Note 1(S) of the
accompanying Notes to Consolidated Financial Statements.
Director
Independence
Our
board of directors prior to the Going Private transaction, referred to as the
“KMI board,” adopted governance guidelines for the KMI board and charters for
the audit committee, nominating and governance committee and compensation
committee. The governance guidelines and the rules of the New York Stock
Exchange (our common stock was listed on the New York Stock Exchange prior to
the Going Private transaction) required that a majority of the directors on the
KMI board be independent, as described in those guidelines and rules. To assist
in making determinations of independence, the KMI board determined that the
following categories of relationships were not material relationships that would
cause the affected director not to be independent:
|
|
·
|
If
the director was an employee, or had an immediate family member who was an
executive officer of Kinder Morgan Management, Kinder Morgan Energy
Partners or us or any of their or our affiliates, but the employment
relationship ended more than three years prior to the date of
determination (or, in the case of employment of a director as an interim
chairman, interim chief executive officer or interim executive officer,
such employment relationship ended by the date of
determination);
|
|
|
·
|
If
during any twelve month period within the three years prior to the
determination the director received no more than, and has no immediate
family member that received more than, $100,000 in direct compensation
from us or our affiliates, other than (i) director and committee fees
and pension or other forms of deferred compensation for prior service
(provided such compensation is not contingent in any way on continued
service), (ii) compensation received by a director for former service
as an interim chairman, interim chief executive officer or interim
executive officer, and (iii) compensation received by an immediate
family member for service as an employee (other than an executive
officer);
|
|
|
·
|
If
the director is a current employee, or has an immediate family member that
is a current executive officer, of another company that has made payments
to, or received payments from, us and our affiliates for property or
services in an amount which, in each of the three fiscal years prior to
the date of determination, was less than the greater of $1.0 million
or 2% of such other company’s annual consolidated gross
revenues. Contributions to tax-exempt organizations are not
considered payments for purposes of this
determination;
|
|
|
·
|
If
the director is also a director, but is not an employee or executive
officer, of Kinder Morgan G.P., Inc. or another affiliate of Kinder Morgan
Management or us, so long as such director is otherwise independent;
and
|
|
|
·
|
If
the director beneficially owns less than 10% of each class of voting
securities of Kinder Morgan G.P., Inc., Kinder Morgan Management or
us.
|
The
KMI board affirmatively determined that Messrs. Edward H. Austin, Charles
W. Battey, Stewart A. Bliss, Ted A. Gardner, William J. Hybl, Edward Randall,
III, James M. Stanford, H. A. True, III and Douglas W.G. Whitehead, who
constituted a majority of the KMI board, were independent as described in the
governance guidelines and the New York Stock Exchange rules. Each of them met
the standards above and had no other relationship with us.
The
governance guidelines and the KMI board’s audit committee charter, as well as
the rules of the New York Stock Exchange and the Securities and Exchange
Commission, required that members of the audit committee satisfy
independence
225
|
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
(continued)
|
Knight
Form 10-K
|
requirements
in addition to those above. The KMI board determined that all of the members of
the audit committee of the KMI board (Messrs. Austin, Battey, Bliss and
Whitehead) were independent as described under the relevant
standards.
Though
not formally considered by our current board because our common stock is no
longer registered with the SEC or traded on any national securities exchange,
based upon the listing standards of the New York Stock Exchange and the
governance guidelines applicable to the KMI board, we do not believe that any of
our directors would be considered “independent” because of Mr. Kinder’s and Mr.
Shaper’s employment by us and Mr. Pontarelli’s relationship with affiliates of
funds and other entities which hold significant interests in Knight Holdco LLC,
our parent company. See the table under “—Related Transactions—Going Private
Transaction” above. Accordingly, we do not believe that any of our directors,
when acting in their capacity as our audit committee and compensation committee,
would meet the independence requirements of Rule 10A-3 of the Securities
Exchange Act of 1934 or the New York Stock Exchange’s audit committee
independence requirements. 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 for the fiscal years ended December 31, 2007 and 2006
(in dollars):
|
Year
Ended December 31,
|
|||||
|
2007
|
2006
|
||||
|
Audit
fees1
|
$
|
5,689,710
|
$
|
4,126,700
|
|
|
Tax
fees2
|
2,974,126
|
1,994,650
|
|||
|
Total
|
$
|
8,663,836
|
$
|
6,121,350
|
|
|
|
_____________
|
|
1
|
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.
|
|
2
|
Includes
fees for professional services rendered for tax return review services and
for federal, state, local and foreign income tax compliance and consulting
services. For 2007 and 2006, amounts include fees of $2,352,533 and
$1,356,399, 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 2007. 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.
226
|
Knight
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 1(F) of the accompanying Notes to Consolidated
Financial Statements.
The
financial statements, including the notes thereto, of Kinder Morgan Energy
Partners, an equity method investee of Knight Inc., are incorporated herein by
reference to pages 114 through 210 of Kinder Morgan Energy Partners’ Annual
Report on Form 10-K for the year ended December 31, 2007.
|
(3)
|
Exhibits
|
Any
references made to K N Energy, Inc. or Kinder Morgan, Inc. in the exhibit
listing that follows are references to the former names of Knight Inc. and are
made because the exhibit being listed and incorporated by reference was
originally filed before the respective date of the change in Knight Inc.’s
name.
Exhibit
Number Description
|
|
2.1
|
Agreement
and Plan of Merger dated August 28, 2006, among Kinder Morgan, Inc.,
Knight Holdco LLC and Knight Acquisition Co. (filed as Exhibit 2.1 to
Knight 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 Knight Inc. and amendments
thereto (filed as Exhibit 3.1 to Knight 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 Knight 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 Knight Inc.’s Annual Report on Form 10-K/A, Amendment No. 1 filed on
May 22, 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 Knight Inc.’s Annual Report on Form 10-K/A,
Amendment No. 1 filed on May 22, 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 Knight Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2002 and incorporated herein by
reference)
|
|
|
4.6
|
Rights
Agreement between K N Energy, Inc. and the Bank of New York, as Rights
Agent, dated as of August 21, 1995 (filed as Exhibit 1 on Form 8-A dated
August 21, 1995 (File No. 1-6446) and incorporated herein by
reference)
|
227
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Knight
Form 10-K
|
Exhibit
Number Description
|
|
4.7
|
Amendment
No. 1 to Rights Agreement between K N Energy, Inc. and the Bank of New
York, as Rights Agent, dated as of September 8, 1998 (filed as Exhibit
10(cc) to K N Energy, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-6446) and incorporated herein by
reference)
|
|
|
4.8
|
Amendment
No. 2 to Rights Agreement of Kinder Morgan, Inc. dated July 8, 1999,
between Kinder Morgan, Inc. and First Chicago Trust Company of New York,
as successor-in-interest to the Bank of New York, as Rights Agent (filed
as Exhibit 4.1 to Knight Inc.’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 and incorporated herein by
reference)
|
|
|
4.9
|
Form
of Amendment No. 3 to Rights Agreement of Kinder Morgan, Inc. dated
September 1, 2001, between Kinder Morgan, Inc. and First Chicago Trust
Company of New York, as Rights Agent (filed as Exhibit 4(m) to Knight
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference)
|
|
|
4.10
|
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
Knight Inc.’s Registration Statement on Form S-4 (File No. 333-100338)
filed on October 4, 2002 and incorporated herein by
reference)
|
|
|
4.11
|
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 Knight Inc.’s Registration Statement on Form S-4
(File No. 333-102873) filed on January 31, 2003 and incorporated herein by
reference)
|
|
|
4.12
|
Form
of 6.50% Note (filed as contained in the Indenture incorporated by
reference to Exhibit 4.12 hereto and incorporated herein by
reference)
|
|
|
4.13
|
Form
of Senior Indenture between Kinder Morgan, Inc. and Wachovia Bank,
National Association, as Trustee (filed as Exhibit 4.2 to Knight Inc.’s
Registration Statement on Form S-3 (File No. 333-102963) filed on February
4, 2003 and incorporated herein by
reference)
|
|
|
4.14
|
Form
of Senior Note of Kinder Morgan, Inc. (included in the Form of Senior
Indenture filed as Exhibit 4.13
hereto)
|
|
|
4.15
|
Form
of Subordinated Indenture between Kinder Morgan, Inc. and Wachovia Bank,
National Association, as Trustee (filed as Exhibit 4.4 to Knight Inc.’s
Registration Statement on Form S-3 (File No. 333-102963) filed on February
4, 2003 and incorporated herein by
reference)
|
|
|
4.16
|
Form
of Subordinated Note of Kinder Morgan, Inc. (included in the Form of
Subordinated Indenture filed as Exhibit 4.15
hereto)
|
|
|
4.17
|
Indenture
dated as of December 9, 2005, among Kinder Morgan Finance Company, ULC,
Kinder Morgan, Inc. and Wachovia Bank, National Association, as Trustee
(filed as Exhibit 4.1 to Knight Inc.’s Current Report on Form 8-K filed on
December 15, 2005 and incorporated herein by
reference)
|
|
|
4.18
|
Forms
of Kinder Morgan Finance Company, ULC notes (included in the Indenture
filed as Exhibit 4.17 hereto)
|
|
|
4.20
|
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)
|
|
|
4.21
|
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 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)
|
228
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Knight
Form 10-K
|
Exhibit
Number Description
|
|
4.22
|
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 Knight Inc.’s
Current Report on Form 8-K filed on December 21, 2007 and incorporated
herein by reference)
|
|
|
4.23
|
Forms
of notes of NGPL PipeCo LLC (included in the Indenture filed as Exhibit
4.22 hereto)
|
|
|
4.24
|
Certain
instruments with respect to the long-term debt of Knight Inc. and its
consolidated subsidiaries that relate to debt that does not exceed 10% of
the total assets of Knight Inc. and its consolidated subsidiaries are
omitted pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, 17 C.F.R.
sec.229.601. Knight Inc. hereby agrees to furnish supplementally to the
Securities and Exchange Commission a copy of each such instrument upon
request.
|
|
|
10.1
|
1994
Amended and Restated Knight Inc. Long-term Incentive Plan (filed as
Appendix A to Knight Inc.’s 2000 Proxy Statement on Schedule 14A and
incorporated herein by reference)
|
|
|
10.2
|
Knight
Inc. Amended and Restated 1999 Stock Plan (filed as Appendix B to Knight
Inc.’s 2004 Proxy Statement on Schedule 14A and incorporated herein by
reference)
|
|
|
10.3
|
Knight
Inc. Amended and Restated 1992 Stock Option Plan for Nonemployee Directors
(filed as Appendix A to Knight Inc.’s 2001 Proxy Statement on Schedule 14A
and incorporated herein by
reference)
|
|
|
10.4
|
2000
Annual Incentive Plan of Knight Inc. (filed as Appendix D to Knight Inc.’s
2000 Proxy Statement on Schedule 14A and incorporated herein by
reference)
|
|
|
10.5
|
Knight
Inc. Employees Stock Purchase Plan (filed as Appendix E to Knight Inc.’s
2000 Proxy Statement on Schedule 14A and incorporated herein by
reference)
|
|
|
10.6
|
Form
of Nonqualified Stock Option Agreement (filed as Exhibit 10(f) to Knight
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference)
|
|
|
10.7
|
Form
of Restricted Stock Agreement (filed as Exhibit 10(g) to Knight Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference)
|
|
|
10.8
|
Directors
and Executives Deferred Compensation Plan effective January 1, 1998 for
executive officers and directors of K N Energy, Inc. (filed as Exhibit
10(aa) to K N Energy, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-6446) and incorporated herein by
reference)
|
|
|
10.9
|
Employment
Agreement dated October 7, 1999, between the Company 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)
|
|
|
10.10
|
Form
of Purchase Provisions between Kinder Morgan Management, LLC and Knight
Inc. (included as Annex B to the Second Amended and Restated Limited
Liability Company Agreement of Kinder Morgan Management, LLC filed as
Exhibit 4.2 to Kinder Morgan Management, LLC’s Registration Statement on
Form 8-A/A filed on July 24, 2002 and incorporated herein by
reference)
|
|
|
10.11
|
Resignation
and Non-Compete Agreement, dated as of July 21, 2004, between KMGP
Services, Inc. and Michael C. Morgan (filed as Exhibit 10.12 to Knight
Inc.’s Form 10-Q for the quarter ended June 30, 2004 and incorporated
herein by reference)
|
|
|
10.12
|
Credit
Agreement, dated as of August 5, 2005, by and among Knight Inc., the
lenders party thereto, Citibank, N.A., as Administrative Agent and
Swingline Lender, Wachovia Bank, National Association and JPMorgan Chase
Bank, N.A., as Co-Syndication Agents and The Bank of Tokyo-Mitsubishi,
Ltd. and Suntrust Bank, as Co-Documentation Agents (filed as Exhibit 10.1
to Knight Inc.’s Current Report on Form 8-K, filed on August 11, 2005 and
incorporated herein by reference)
|
229
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Knight
Form 10-K
|
Exhibit
Number Description
|
|
10.13
|
Amendment
Number 1 to Credit Agreement, dated as of August 5, 2005, by and among
Knight Inc., the lenders party thereto, Citibank, N.A., as Administrative
Agent and Swingline Lender, Wachovia Bank, National Association and
JPMorgan Chase Bank, N.A., as Co-Syndication Agents and The Bank of
Tokyo-Mitsubishi, Ltd. and Suntrust Bank, as Co-Documentation Agents
(filed as Exhibit 10.2 to Knight Inc.’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005 and incorporated herein by
reference)
|
|
|
10.14
|
Knight
Inc. Non-Employee Directors Stock Awards Plan (filed as Exhibit 10.1 to
Knight Inc.’s Current Report on Form 8-K filed on May 13, 2005 and
incorporated herein by reference)
|
|
|
10.15
|
Form
of Restricted Stock Agreement (filed as Exhibit 10.2 to Knight Inc.’s
Current Report on Form 8-K filed on May 13,
2005)
|
|
|
10.16
|
Form
of Nonqualified Stock Option Agreement (filed as Exhibit 10.3 to Knight
Inc.’s Current Report on Form 8-K filed on May 13, 2005 and incorporated
herein by reference)
|
|
|
10.17
|
364-Day
Credit Agreement dated as of November 23, 2005, by and among 1197774
Alberta ULC, as Borrower, Knight Inc., as Guarantor, the lenders party
thereto, and Citibank, N.A., Canadian Branch, as Administrative Agent
(filed as Exhibit 10.1 to Knight Inc.’s Current Report on Form 8-K filed
on November 30, 2005 and incorporated herein by
reference)
|
|
|
10.18
|
Form
of 2005 Credit Agreement dated as of January 13, 2006 among Terasen Gas
(Vancouver Island) Inc., the lenders party thereto and RBC Capital Markets
as Lead Arranger and Book Runner (filed as Exhibit 10.2 to Knight Inc.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and
incorporated herein by reference)
|
|
|
10.19
|
Knight
Inc. Amended and Restated 1999 Stock Plan (filed as Appendix A to Knight
Inc.’s 2006 Proxy Statement on Schedule 14A filed on April 3, 2006 and
incorporated herein by reference)
|
|
|
10.20
|
Knight
Inc. Foreign Subsidiary Employees Stock Purchase Plan (filed as Appendix B
to Knight Inc.’s 2006 Proxy Statement on Schedule 14A filed on April 3,
2006 and incorporated herein by
reference)
|
|
|
10.21
|
First
Amendment to the Knight Inc. Employees Stock Purchase Plan (filed as
Appendix C to Knight Inc.’s 2006 Proxy Statement on Schedule 14A filed on
April 3, 2006 and incorporated herein by
reference)
|
|
|
10.22
|
Form
of Credit Agreement, dated as of May 5, 2006, by and among Terasen Inc.,
the lenders party thereto and The Toronto-Dominion Bank, as Administrative
Agent (filed as Exhibit 10.1 to Knight Inc.’s Current Report on Form 8-K
filed on May 15, 2006 and incorporated herein by
reference)
|
|
|
10.23
|
Form
of Indemnification Agreement between Knight Inc. and each member of the
Special Committee of the Board of Directors (filed as Exhibit 10.1 to
Knight Inc.’s Current Report on Form 8-K filed on June 16, 2006 and
incorporated herein by reference)
|
|
|
10.24
|
Form
of Credit Agreement, dated as of June 21, 2006, by and among Terasen Gas
Inc.; Canadian Imperial Bank of Commerce, as Administrative Agent, Lead
Arranger and Sole Bookrunner; The Bank of Nova Scotia, as Syndication
Agent; and the other lenders identified in the Credit Agreement (filed as
Exhibit 10.1 to Knight Inc.’s Current Report on Form 8-K filed on June 27,
2006 and incorporated herein by
reference)
|
|
|
10.25
|
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)
|
|
|
10.26
|
Retention
Agreement, dated as of March 5, 2007, between Kinder Morgan, Inc. and
Scott E. Parker (filed as Exhibit 10.2 to Kinder Morgan, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007 and incorporated
herein by reference)
|
230
|
Item 15. Exhibits,
Financial Statement Schedules. (continued)
|
Knight
Form 10-K
|
Exhibit
Number Description
|
|
10.27
|
Purchase
Agreement, dated as of December 10, 2007, between Knight Inc. and Myria
Acquisition Inc. (filed as Exhibit 10.1 to Knight Inc.’s Current Report on
Form 8-K filed on December 11, 2007 and incorporated herein by
reference)
|
|
|
21.1*
|
Subsidiaries
of the Registrant
|
|
|
23.1*
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
23.2*
|
Consent
of Netherland, Sewell & Associates,
Inc.
|
|
|
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 114 through 210 of the
Annual Report on Form 10-K of Kinder Morgan Energy Partners, L.P. for the
year ended December 31, 2007)
|
__________
*Filed
herewith.
231
|
Knight
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.
|
|
KNIGHT
INC.
(Registrant)
|
||
|
By
|
/s/
Kimberly A. Dang
|
||
|
|
Kimberly
A. Dang
Vice
President and Chief Financial Officer
|
||
|
Date:
March 31, 2008
|
|
||
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
|
||
|
|
232