3. Identity of SFPP, Calnev and Other Parties
For ease of discussion, we generally refer to Application (A.) 06-09-016, which seeks approval of a change of control under Section 854, as the Section 854 Application, and to A.06-09-021, which seeks an exemption from Section 852, as the Section 852 Application. Where there is no need to distinguish between Section 854 and Section 852 Applicants, we collectively refer to them as Joint Applicants. Section 854 and Section 852 Applicants filed joint briefs and we refer to those documents as Joint Applicants' initial or reply briefs.
3.1. Organization & Operation of SFPP & Calnev
The Commission-regulated, intrastate-portions of SFPP and Calnev subject to the Section 854 Application are public utility pipelines which serve as common carriers of refined petroleum products, such as gasoline, diesel fuel, and jet fuel.
SFPP, a Delaware limited partnership qualified to do business in California, also operates in several other western states. SFPP's Commission-jurisdictional intrastate operations consist of several independent pipeline segments. The Section 854 Application summarizes the four major lines:
· The San Diego Line, which is a 135-mile pipeline serving major population areas in Orange County, immediately south of Los Angeles, and San Diego from refineries and port complexes in Los Angeles and Long Beach;
· The North Line, which consists of approximately 864 miles of trunk pipeline in five segments and transport [sic] products from Richmond and Concord, California to Brisbane, Sacramento, Chico, Fresno and San Jose, California, and Reno, Nevada from refineries in the San Francisco Bay Area and various pipeline marine terminals;
· The West Line, which consists of approximately 705 miles of primary pipeline and currently transports products for 38 shippers from six refineries and three pipeline terminals in the Los Angeles Basin to Phoenix and Tucson, Arizona and various intermediate commercial and military delivery points located within California. Products for the West Line also come through the Los Angels and Long Beach port complexes; and
· The Bakersfield Line, which is a 100-mile, 8-inch diameter pipeline serving Fresno, California.
(Section 854 Application at 3-4.)
Calnev, a Delaware limited liability company qualified to do business in California, consists of a 550-mile pipeline system that extends from Colton, California (where it connects with SFPP) to Las Vegas, Nevada. The intrastate portion includes a 55-mile pipeline that serves Edwards Air Force Base in the Mojave Desert. According to the Section 854 Application, the extension into Las Vegas provides non-stop transportation of "more than 1 million gallons of gasoline a day." (Id. at 4.)
3.2. Current Ownership & Control of SFPP & Calnev
Attachment 1 to today's decision illustrates the complex arrangement by which KMI, through Kinder Morgan Energy Partners, L.P. (KMEP) and other KMI subsidiaries, indirectly owns and controls SFPP and Calnev.2 KMI is a Kansas corporation, which the Section 854 Application describes as:
[O]ne of the largest energy transportation, storage and distribution companies in North America. It owns an interest in or operates approximately 43,000 miles of pipelines that transport primarily natural gas, crude oil, petroleum products and CO2; more than 150 terminals that store, transfer and handle products like gasoline and coal; and provides natural gas distribution service to over 1.1 million customers. (Id. at 5.)
The Section 854 Application describes KMI's ownership and control over SFPP and Calnev thus:
KMI owns a minority equity interest in KMEP and, in addition, the general partner interest of KMEP. The majority ownership in KMEP is publicly held through publicly traded units in the KMEP limited partnership. KMI's direct and indirect ownership in KMEP as of December 31, 2005 was approximately 15.2 percent. KMI exercises control over KMEP, however, through its ownership of the general partner interest and through its ownership of all of the voting shares of Kinder Morgan Management, LLC, to which KMEP's general partner, KMGPI, has delegated the authority to manage the business and affairs of KMEP (subject to certain approval rights of KMGPI). Because the general partner of KMEP and its delegate are controlled by KMI, KMI effectively maintains indirect control of SFPP and Calnev through its indirect control of KMEP. [footnote omitted]. (Id. at 5, emphasis added.)
The full name of KMGPI is Kinder Morgan G.P., Inc.
As Attachment 1 shows, KMEP holds SFPP and its affiliate, Calnev, via a 98.9899% limited partner interest in the KMEP subsidiary, Kinder Morgan Operating Limited Partnership-D (OLP-D); KMGPI holds the 1.0101% general partner interest in OLP-D. OLP-D owns 100% of Calnev through a subsidiary, Kinder Morgan Pipe Line, LLC (Kinder Morgan Pipeline), and holds a 99.5% general partner interest in SFPP (Santa Fe Pacific Pipelines, Inc. retains a 0.5% limited partner interest). KMEP, a master limited partnership organized under Delaware law, has ownership interests in four other operating limited partnerships besides OLP-D. These arrangements effectively provide KMI with indirect control over not only SFPP and Calnev, but also numerous other business enterprises (e.g., transportation of oil, natural gas and refined petroleum; storage of refined petroleum products, chemicals and other liquids; production of crude oil and carbon dioxide).
Neither Kinder Morgan Management, LLC (KMR3), KMGPI, KMEP, OLP-D, Kinder Morgan Pipeline, SFPP or Calnev has any employees. Attachment 2 to today's decision illustrates, schematically, the vehicles KMI uses to provide employees to its subsidiaries and allocate costs for shared services. Employees work for KMGP Services Company, Inc. (KMGP Services Co.), which is 100%-owned by KMGPI. KMGP Services Co. then dedicates all of its employees to KMEP (to be managed by KMR). Allocations for shared services occur through Kinder Morgan Services LLC (KM Services), which is 100%-owned by KMR.4
Commission approval for the existing ownership, as to SFPP, can be traced through D.98-01-047, authorizing SFPP's acquisition by KMEP, and D.99-10-015, authorizing SFPP's subsequent acquisition by KN Energy, Inc. (KN Energy) via KN Energy's acquisition of KMI. KN Energy later changed its name to KMI, leaving KMI with effective ownership and control of SFPP.
However D.01-03-074, the last change of control decision concerning Calnev, authorizes only KMEP to acquire Calnev. While D.01-03-074 notes that "KMEP is a subsidiary of Kinder Morgan, Inc.," KMI is not an applicant in the underlying proceeding (A.00-12-004), and the ordering paragraphs of D.01-03-074 do not transfer ownership and control to KMI. (D.01-03-074, 2001 Cal. PUC LEXIS 173, *2.) The Section 854 Application, however, asks us to approve transfer of control over Calnev from KMI to Knight Holdco and KMI, not KMEP, is the applicant.
Joint Applicants, in their reply brief, argue that:
Approval by the Commission of the transfer of control of Calnev to KMEP effected, by operation of law, KMI's ownership of KMEP's general partner, KMGPI. As such, while the relationship between KMEP and KMI was described in A.00-12-004 (and reflected in D.01-03-074), it was not believed necessary to include KMI as a named applicant in A.00-12-004. (Joint Applicants' Reply Brief at 32.)
Joint Applicants' argument does not square with Section 854(a), however.5 The statute unambiguously requires advance Commission approval of a change of control over any California public utility and renders void any change of control that lacks such preapproval. We recognize, however, that while the A.00-12-004 proponents failed to properly formulate their request, they did disclose the KMI/KMEP relationship in their filing.
Joint Applicants propose a solution which we think provides an acceptable resolution of this matter, given the particular circumstances involved and most importantly, because it does not appear that the A.00-12-004 proponents intended to mislead the Commission or that any harm has befallen the public interest as a result of their error. Joint Applicants propose that they file a petition to modify D.01-03-074, requesting clarification and correction of D.01-03-074 to extend the transfer of control of Calnev to KMI, in addition to KMEP. We make the filing of such a petition one of the conditions of our approval here.
3.3. Identity of Other Applicants
As the caption indicates, in addition to the three parties already identified -- SFPP, Calnev and KMI -- Section 854 Applicants include a fourth party, Knight Holdco. Knight Holdco is a private limited liability company formed under Delaware law; upon approval of the proposed transaction, Knight Holdco will become KMI's parent and KMI will no longer be publicly-traded.
Attachment 3 to today's decision illustrates the post-transaction organizational structure, including Knight Holdco's ownership by five groups of investors.6 The preliminary proxy statement filed with the United States Securities and Exchange Commission (SEC) provides information on the anticipated, respective ownership interests upon closing: KMI Management Group - 36.63%; Goldman Sachs -25.14%; AIG - 16.02%; Carlyle Partners IV - 11.11%; and Carlyle/Riverstone III - 11.11%.7 The KMI Management Group, identified in Attachment 3 as the "KMI Rollover Investors," consists of Richard Kinder, the current Chairman and CEO of KMI , William Morgan (though KMI's Portcullis Partners, LP), and two current KMI board members, Fayez Sarofim and Michael Morgan.
Goldman Sachs, AIG, Carlyle Partners IV and Carlyle/Riverstone III are also the Applicants in A.06-09-021, the Section 852 Application. There they are identified generically as "investment banks, diversified financial services providers, or private equity funds engaged in a broad range of financial activities that may involve acquiring securities in the ordinary course of their business." (Section 852 Application at 2.)
Goldman Sachs is a publicly traded Delaware corporation. It is "a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals." (Id. at 4.) Goldman Sachs' "three core businesses" are "(1) Investment Banking; (2) Trading and Principal Investments; and (3) Asset Management and Security Services." (Id. at 4-5.)
AIG, also a publicly traded Delaware corporation, "is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities worldwide." (Id. at 5.) The 852 Application states:
AIG's primary activities include both general insurance and life insurance and retirement services operations. Other significant activities include financial services and asset management. Through these operations, AIG subsidiaries provide insurance and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. AIG's asset management operations comprise a wide variety of investment-related services and investment products, including institutional and retail asset management offered to individuals and institutions both domestically and overseas. (Ibid.)
Carlyle Partners IV, "a $7.85 billion private equity fund that was launched in 2005 ... conducts leveraged buyout transactions primarily in North America in targeted industries." (Ibid.) Its controlling general partner is affiliated with The Carlyle Group, "a global private equity firm ... with over $44.3 billion under management." (Ibid.) The Carlyle Group "invests in buyouts, venture and growth capital, real estate and leveraged finance in Asia, Australia, Europe and North America, focusing on aerospace and defense, automotive and transportation, consumer and retail, energy and power, healthcare, industrial, technology and business services, and telecommunications and media." (Id. at 5-6.) The Section 852 Application also states that TC Group, L.L.C., which is affiliated with The Carlyle Group, indirectly owns and controls the general partner of Carlyle Partners IV and also indirectly holds a joint venture interest in the general partner of Carlyle/Riverstone III.
The final entity, Carlyle/Riverstone III, "is a $3.8 billion private equity fund that was launched in 2005 to invest in the energy and power industry." (Id. at 6.) The Commission's recent decision approving a change of control for the independent natural gas storage facility, Wild Goose Storage, Inc. (Wild Goose), notes that Carlyle/Riverstone III, a limited partnership registered in Delaware in 2005, is one of four investment funds established by the joint venture between The Carlyle Group and Riverstone Holdings LLC (Riverstone Holdings), another Delaware limited liability company.8 The Section 852 Application states that the general partner that controls Carlyle/Riverstone III is affiliated with The Carlyle Group and with Riverstone Holdings LLC, "an energy and power-focused private equity firm founded in 2000, with $7 billion currently under management." (Ibid.) Riverstone Holdings "conducts buyouts and growth capital investments in the midstream, upstream, power, oilfield service and renewable sectors of the energy industry." (Ibid.)
3.4. Identity of Opposing Parties
The core group that opposes the Section 854 Application (unless approval is specifically conditioned as discussed below) consists of major California customers on SFPP and Calnev. Five of these customers --Valero Marketing and Supply Company, Ultramar Inc., BP West Coast Products LLC, ExxonMobil Oil Corporation, and Chevron Products Company-in some instances joined by a sixth, Tesoro Refining and Marketing Company, refer to themselves as the Indicated Shippers. A seventh customer, ConocoPhillips Company, has appeared separately from the Indicated Shippers, though it generally shares interests and positions common to them. Today's decision refers to all of these customers as Shippers, unless separate identification is necessary for procedural or substantive reasons. These parties participated in hearings on the Section 854 Application and filed post-hearing briefs, but have taken no position on the Section 852 Application, either separately or collectively.
Consumer Federation of California (CFC), a non-profit federation of individuals and organizations whose own memberships consist of California consumer groups, senior citizens groups, and labor organizations, opposes both the Section 854 and Section 852 Applications. CFC participated in the Section 854 Application hearing and filed post-hearing briefs. CFC has participated because it views the Commission's decision in this consolidated docket to be precedential for future equity fund/insurance company investment in and ownership of California public utilities.
The Division of Ratepayer Advocates (DRA) did not actively participate at hearing but filed post hearing briefs, which argue against any absolute exemption from Section 852 and propose certain conditions, including an agreement negotiated with the Joint Applicants. DRA avers that its views should not be interpreted as support or opposition for either Application, however.
2 The diagram is Exhibit (Ex.) J (Pre-Transaction) to the Section 854 Application.
3 Since most of references in the record use the term KMR, which is the New York Stock Exchange (NYSE) listing for Kinder Morgan Management, LLC, today's decision follows that convention. On the other hand, while record references to KMEP sometimes use its NYSE listing, KMP, most do not and today's decision therefore uses the acronym KMEP, unless quoting testimony or a document that uses KMP.
4 Attachment 2 is Ex. PKA-3 to Ex. 102, the prepared testimony of Indicated Shippers' witness Peter K. Ashton, President of Innovation & Information Consultants, Inc., an economic and management consulting firm. The layout of Attachment 1, while somewhat cleaner and easier to grasp visually, lacks detail shown in Attachment 2 and does not show KMGP Services Co. or KM Services.
5 Section 854(a) provides:
No person or corporation, whether or not organized under the laws of this state, shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the commission. The commission may establish by order or rule the definitions of what constitute merger, acquisition, or control activities which are subject to this section. Any merger, acquisition, or control without that prior authorization shall be void and of no effect. No public utility organized and doing business under the laws of this state, and no subsidiary or affiliate of, or corporation holding a controlling interest in a public utility, shall aid or abet any violation of this section. (Emphasis added.)
6 The diagram is Ex. J (Post-Transaction) to the Section 854 Application.
7 We grant the unopposed Motion of the Goldman Sachs Group, Inc., American International Group, Inc., Carlyle Partners IV, L.P., Carlyle/Riverstone Global Energy and Power Fund III, L.P. to Place Knight HoldCo Ownership Information into the Record and for the Commission to take Judicial Notice of the SEC Filing Containing this Information, filed February 20, 2007, which contains a link to the SEC filing: http://www.sec.gov/Archives/edgar/data/54502/000104746906013030/a2173932zprer14a.htm.
8 See generally, Decision (D.) 06-11-019, 2006 Cal PUC LEXIS 499. The decision authorizes the transfer of control of Wild Goose from the Canadian company, EnCana Corporation, to Niska Gas Storage US, LLC, whose parent is a limited liability company 80%-owned by the joint venture of Carlyle/Riverstone III and its affiliated fund, Carlyle/Riverstone II, and 20%-owned by SemGroup, an Oklahoma-limited partnership.
