<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
KINDER MORGAN, INC.
(Exact Name of Registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 4613 43-1761550
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1301 MCKINNEY, SUITE 3450
HOUSTON, TEXAS 77010
(713) 844-9500
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JOSEPH LISTENGART
KINDER MORGAN, INC.
1301 MCKINNEY, SUITE 3450
HOUSTON, TEXAS 77010
(713) 844-9500
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
---------------------------
Please send copies of communications to:
<TABLE>
<S> <C>
DAVID L. RONN MICHAEL ROSENWASSER
BRACEWELL & PATTERSON, L.L.P. ANDREWS & KURTH L.L.P.
SOUTH TOWER PENNZOIL PLACE 805 THIRD AVENUE
711 LOUISIANA STREET, SUITE 2900 NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77002-2781 (212) 850-2800
(713) 221-1352
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) SHARE(2) PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock.................. 8,337,500 shares $20.00 $166,750,000 $46,357
Rights(3).....................
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</TABLE>
(1) Includes 1,087,500 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Each share of common stock includes one right as described under
"Description of Our Capital Stock."
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject To Completion. Dated May 10, 1999.
[Kinder Morgan LOGO] 7,250,000 Shares
KINDER MORGAN, INC.
Common Stock
---------------------------
This is an initial public offering by Kinder Morgan, Inc. of 7,250,000
shares of common stock. Kinder Morgan, Inc. is the sole stockholder of Kinder
Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners, L.P., a
publicly-traded limited partnership that manages a diversified portfolio of
midstream energy assets.
Before the offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share of
common stock will be between $18.00 and $20.00. Kinder Morgan, Inc. intends to
list the common stock on the New York Stock Exchange under the symbol "KMI".
See "Risk Factors" on page 10 to read about important factors that you
should consider before buying our common stock.
---------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Kinder Morgan, Inc............ $ $
</TABLE>
The underwriters may, under various circumstances, purchase up to an
additional 1,087,500 shares of common stock from Kinder Morgan, Inc. at the
initial public offering price less the underwriting discount.
---------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO. PAINEWEBBER INCORPORATED
---------------------------
Prospectus dated ________ , 1999.
<PAGE> 3
INSIDE FRONT COVER
[SCHEMATIC DIAGRAM OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS]
<PAGE> 4
GUIDE TO READING THIS PROSPECTUS
The following should help you understand some of the conventions and
defined terms used in this prospectus:
- Throughout this prospectus, we refer to ourselves, Kinder Morgan, Inc.,
as "we" or "us."
- When the context requires, references to "we" and "us" include Kinder
Morgan, G.P., Inc., our wholly-owned Delaware corporate subsidiary.
Additionally, references to "we" or "us" may include Kinder Morgan Energy
Partners, L.P., a publicly-traded Delaware limited partnership of which
Kinder Morgan G.P., Inc. is the sole general partner, and Kinder Morgan
Energy Partners' operating limited partnerships and subsidiaries.
- Unless otherwise specified, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
- We acquired Enron Liquids Pipeline Company, the predecessor company to
Kinder Morgan G.P., Inc. on February 14, 1997. You should recognize that
any reference to or discussion of periods before that date is to a period
before our ability to influence any activities of Kinder Morgan G.P.,
Inc., Kinder Morgan Energy Partners and its operating limited
partnerships and subsidiaries.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements.
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, L.P., a publicly-traded limited
partnership that manages a diversified portfolio of midstream energy assets. We
acquired Kinder Morgan G.P., Inc. in February 1997. We plan to implement an
aggressive growth strategy to pursue strategic acquisitions of midstream energy
assets and businesses, both on our own and in cooperation with Kinder Morgan
Energy Partners. Although we have not yet reached a definitive agreement for any
acquisition, we have had discussions with several potential acquisition
candidates and intend to move quickly toward the advancement of these
discussions and the implementation of our acquisition strategy.
Our current earnings and cash flow are generated solely from cash
distributions received from Kinder Morgan G.P., Inc., which are in turn
generated by the operations of Kinder Morgan Energy Partners, its operating
limited partnerships and its subsidiaries. We believe that the stable cash flows
of Kinder Morgan Energy Partners will continue to provide us a secure source of
revenues. We also expect our revenues to grow due to Kinder Morgan Energy
Partners' growth-oriented strategy and the terms of its partnership agreement.
The partnership agreement generally provides Kinder Morgan G.P., Inc. a
percentage of cash distributions made by Kinder Morgan Energy Partners that
increases, up to 50%, as distributions to the common unitholders of Kinder
Morgan Energy Partners increase. At Kinder Morgan Energy Partners' current per
unit distribution, Kinder Morgan G.P., Inc., in its capacity as general partner
of Kinder Morgan Energy Partners:
- receives approximately 29% of the cash distributed by Kinder Morgan
Energy Partners to its partners; and
- shares equally, at the 50% level, with the common units in any increases
in Kinder Morgan Energy Partners' per unit cash distribution resulting in
Kinder Morgan G.P., Inc.'s receipt of an additional $488,157 for each
$0.01 increase in the per common unit distribution of Kinder Morgan
Energy Partners based on the 48,815,690 common units currently
outstanding.
Our management, in its capacity as the management of Kinder Morgan G.P.,
Inc., has an established track record of acquisitions and efficient management
of the operations of Kinder Morgan Energy Partners. Since our acquisition of
Kinder Morgan G.P., Inc. in February 1997, Kinder Morgan Energy Partners has
increased the per unit quarterly cash distribution to its common unitholders by
over 120%, from $0.315 to $0.70. We intend to implement the same strategy of
strategic acquisitions, cost cuts and enhanced utilization of assets.
Since we are a business corporation with different cash distribution
requirements and tax characteristics than a publicly-traded limited partnership
like Kinder Morgan Energy Partners, we believe we will have the added
flexibility to pursue acquisitions which may not be suitable for or available to
Kinder Morgan Energy Partners. For example, we may pursue acquisitions of
companies that Kinder Morgan Energy Partners could not pursue due to:
- the nature of the target companies' income jeopardizing Kinder Morgan
Energy Partners' partnership tax status; or
- the target companies' stockholders unwillingness to accept Kinder Morgan
Energy Partners' limited partnership units.
We may divide purchased assets between us and Kinder Morgan Energy Partners
as appropriate after we consider each entity's different characteristics and
strategies. We intend for this shared
1
<PAGE> 6
approach to allow us and Kinder Morgan Energy Partners potentially to combine
acquisition resources and strategies so that both entities share the associated
costs and maximize the value of the acquired assets or businesses. This enhanced
flexibility should permit Kinder Morgan Energy Partners:
- to make acquisitions it could not otherwise make; and
- to increase its asset base to generate additional cash for distributions
to its partners.
These actions may result in larger cash distributions by Kinder Morgan
Energy Partners to Kinder Morgan G.P., Inc., that would allow Kinder Morgan
G.P., Inc. to make larger cash distributions to us.
Kinder Morgan Energy Partners is the largest publicly-traded pipeline
limited partnership in the United States and has the second largest products
pipeline system based on volumes delivered. Kinder Morgan Energy Partners
manages a diversified portfolio of midstream energy assets which is divided into
three reportable business segments:
- Pacific Operations;
- Mid-Continent Operations; and
- Bulk Terminals.
Kinder Morgan Energy Partners' objective is to increase unitholder
distributions through:
- the reduction of operating expenses;
- better utilization and expansion of its asset base; and
- selective, strategic acquisitions that help increase distributions to its
partners.
PACIFIC OPERATIONS
Kinder Morgan Energy Partners' Pacific Operations have approximately 3,300
miles of pipelines which transport over one million barrels per day of refined
petroleum products. The three main product types transported are gasoline (63%),
diesel fuel (20%) and jet fuel (17%). The Pacific Operations also include 13
truck-loading terminals and provide pipeline service to approximately 44
customer-owned terminals, three commercial airports and 12 military bases.
Kinder Morgan Energy Partners serves, directly or indirectly, some of the
fastest growing population centers in the United States, including:
- Los Angeles, San Diego, and Orange County, California;
- the San Francisco Bay area;
- Las Vegas, Nevada; and
- Tucson and Phoenix, Arizona.
The Pacific Operations transport, directly or indirectly, virtually all of the
refined products used in Arizona and Nevada, together with the majority of
refined products used in California. The transportation of gasoline, jet, and
diesel fuel generally increases or decreases as population in an area increases
or decreases.
Kinder Morgan Energy Partners and we believe that the populations of these
areas will continue to grow. Kinder Morgan Energy Partners intends to expand its
Pacific Operations to meet the increased demand resulting from this anticipated
growth.
MID-CONTINENT OPERATIONS
Kinder Morgan Energy Partners' Mid-Continent Operations consist of:
- ownership of 24% of Plantation Pipe Line Company, which owns and operates
a 3,100 mile pipeline system throughout the southeastern United States
that transports over 600,000 barrels per day of refined petroleum
products. Kinder Morgan Energy Partners has entered into a definitive
agreement to purchase from Chevron Pipe Line Company an additional 27%
ownership interest in Plantation Pipe Line Company for approximately
$124.2 million. The purchase is subject to standard closing conditions
and a right of first refusal by Plantation Pipe Line Company's other
stockholder. We anticipate that the closing will occur in the second
quarter of 1999. Plantation Pipe Line Company serves various metropolitan
areas, including Atlanta, Georgia; Charlotte, North Carolina; and
2
<PAGE> 7
the Washington, D.C. area. We believe population increases in the
southeastern United States will lead to increased use and expansion of
Plantation Pipe Line Company's pipeline system. Plantation Pipe Line
Company is currently considering several significant expansion projects.
- the North System pipeline includes a 1,600 mile natural gas liquids and
refined products pipeline. Since the North System serves a relatively
mature market, Kinder Morgan Energy Partners intends to focus on the
increase of the volumes transported by Kinder Morgan Energy Partners
through the continuation of reliable, cost-effective transportation
services and the continued increase in the range of products transported
and services offered.
- the Cypress Pipeline, a 100-mile natural gas liquids pipeline that
originates in the natural gas liquids hub in Mont Belvieu, Texas and
serves a major petrochemical producer in Lake Charles, Louisiana.
- ownership of 20% of Shell CO(2) Company, a leader in the production,
transportation and marketing of carbon dioxide for enhanced oil recovery
projects. Shell CO(2) Company intends to compete aggressively for new
supply and transportation projects which we believe will arise in the
Permian Basin and in other maturing United States basins as they
transition from primary production to enhanced recovery methods.
- ownership of 50% of Heartland Pipeline Company, a joint venture with
Conoco Inc., which transports refined petroleum products over the North
System from refineries in Kansas and Oklahoma. Heartland Pipeline Company
recently began, and is scheduled to complete in June 1999, a $3.4 million
expansion into the Omaha, Nebraska and Council Bluffs, Iowa markets.
- gas processing and fractionation assets, which include ownership of 25%
of the Mont Belvieu Fractionator, a 200,000 barrel per day full service
fractionating facility, and the Painter Gas Processing Plant, which is
leased to Amoco under a long-term arrangement.
BULK TERMINALS
Kinder Morgan Energy Partners' Bulk Terminals consist of 24 bulk terminals
which handle over 40 million tons of dry and liquid bulk products annually. The
Bulk Terminals segment includes:
- five coal terminals;
- eight petroleum coke terminals; and
- eleven other bulk terminals.
Kinder Morgan Energy Partners plans to grow its bulk terminals business by:
- the expansion of the use of its existing facilities, particularly those
facilities which handle low-sulfur western coal;
- the design, construction and operation of new facilities for current and
prospective customers; and
- acquisitions that will allow Kinder Morgan Energy Partners to use its
operational expertise and customer relationships to improve the
performance of the acquired business.
OUR STRUCTURE AND MANAGEMENT
We own 100% of Kinder Morgan G.P., Inc. Kinder Morgan G.P., Inc. owns:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units of Kinder Morgan Energy Partners;
and
- a 1.0101% general partner interest in four subsidiary operating limited
3
<PAGE> 8
partnerships of Kinder Morgan Energy Partners.
Our two largest stockholders, Richard D. Kinder, Director, Chairman and
Chief Executive Officer, and William V. Morgan, Director, Vice Chairman and
President, have agreed with the underwriters not to dispose of any of our common
stock for two years without first obtaining the written consent of the
representatives of the underwriters. In addition, First Union Corporation, a
principal stockholder of Kinder Morgan, Inc. has agreed with the underwriters
not to dispose of any common stock or securities convertible into or
exchangeable for shares of our common stock for one year without first obtaining
the written consent of the representatives of the underwriters.
Kinder Morgan G.P., Inc. has approximately 1,100 employees. Upon completion
of the offering and prior to an acquisition, we will have 4 employees, our
executives. We may add employees as appropriate, when we acquire operating
assets.
Our principal executive offices are located at 1301 McKinney, Suite 3450,
Houston, Texas 77010, and our phone number is (713) 844-9500.
The following chart depicts the organization and our ownership of our
subsidiaries. Kinder Morgan G.P., Inc. holds a 1.0101% general partner interest,
and Kinder Morgan Energy Partners holds a 98.9899% limited partnership interest
in each entity marked with an asterisk. Santa Fe Pacific Pipelines, Inc. owns a
0.5% special limited partnership interest in SFPP, L.P.
[GRAPH SHOWING COMPANY STRUCTURE]
<TABLE>
<S> <C> <C> <C>
O Plantation Pipe Line O Cora Coal Terminal O 4 Coal Terminals O Pacific Operations
Company O Painter Plant O 8 Petroleum Coke Terminals
O North System O 11 Other Bulk Terminals
O Cypress Pipeline
O Shell CO(2) Company
O Heartland Pipeline Company
O Mont Belvieu Fractionator
</TABLE>
4
<PAGE> 9
THE OFFERING
Securities offered.................. 7,250,000 shares of common stock.
8,337,500 shares of common stock if the
underwriters' over-allotment option is
exercised in full.
Shares of common stock outstanding
after the offering.................. 40,000,000 shares which includes
36,896,023 shares of common stock and
3,103,977 shares of non-voting
convertible common stock.
If the underwriters' over-allotment
option is exercised in full:
- 1,087,500 additional shares of
common stock will be issued; and
- 41,087,500 shares of common stock,
including shares of non-voting
convertible common stock, will be
outstanding.
Use of proceeds..................... We estimate that we will receive
approximately $135 million from the sale
of the shares, after the deduction of
underwriting discounts and commissions
but before the deduction of offering
expenses. We intend to use the net
proceeds:
- to pay offering expenses;
- to repay indebtedness outstanding
under our credit facility; and
- for working capital and general
corporate purposes, including to
finance acquisitions of strategic
assets and, when we believe market
conditions to be favorable,
purchases of limited partnership
units of Kinder Morgan Energy
Partners.
New York Stock Exchange listing..... We have applied and intend to list the
common stock on the New York Stock
Exchange under the symbol "KMI".
5
<PAGE> 10
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF
KINDER MORGAN, INC.
Our summary historical consolidated income statement and balance sheet data
shown below are derived from our financial statements and their notes. The
selected historical income statement and balance sheet data shown below for the
year ended December 31, 1996, and the period from January 1, to February 14,
1997, relate to Enron Liquids Pipeline Company as our predecessor.
Our summary historical consolidated income statement and balance sheet data
shown below as of and for the three months ended March 31, 1998 and March 31,
1999, are derived from our unaudited financial statements that, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. The interim results shown below for the three
months ended March 31, 1999 may not be indicative of results for the full year.
Our summary historical consolidated financial data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc. in February 1997;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;"
- we borrowed and distributed to our existing shareholders $65 million in
May of 1999 under our existing credit facility; and
- together with our financial statements and their notes.
<TABLE>
<CAPTION>
PREDECESSOR KINDER MORGAN, INC.
--------------------------- ------------------------------------------------
PERIOD FROM
JANUARY 1, PERIOD FROM THREE MONTHS
YEAR ENDED 1997 -- FEBRUARY 14, ENDED
DECEMBER 31, FEBRUARY 14, 1997 -- YEAR ENDED MARCH 31,
1996 1997 DECEMBER 31, DECEMBER 31, ------------------
PREDECESSOR PREDECESSOR 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: --
Equity in earnings of
subsidiaries................. $ 1,886 $ 234 $ 4,577 $ 37,575 $ 5,021 $ 14,220
Operating expenses:
Depreciation and amortization
expense.................... 182 21 67 603 -- 256
General and administrative
expenses................... 2,658 332 1,025 877 146 124
Total operating
expenses............. 2,840 353 1,092 1,480 146 380
-------- ------- ------- -------- ------- --------
Operating income (loss)........ (954) (119) 3,485 36,095 4,875 13,840
Other income (expense):
Interest expense............. -- -- (831) (4,507) (99) (1,965)
Interest income.............. 4,471 740 49 740 10 47
-------- ------- ------- -------- ------- --------
Income before tax.............. 3,517 621 2,703 32,328 4,786 11,922
Income tax expense............. 869 5,002 1,065 11,661 1,760 4,412
-------- ------- ------- -------- ------- --------
Net income (loss).............. $ 2,648 $(4,381) $ 1,638 $ 20,667 $ 3,026 $ 7,510
======== ======= ======= ======== ======= ========
Earnings per common share...... -- -- -- --
BALANCE SHEET DATA
(AT PERIOD END):
Total assets................... $109,574 $25,035 $24,347 $ 74,282 $39,226 $ 62,566
Total liabilities.............. 28,726 -- 4,565 116,577 19,030 96,934
Stockholders' equity
(deficit).................... 80,848 25,035 19,782 (42,295) 20,196 (34,368)
</TABLE>
6
<PAGE> 11
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF
KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partner's summary historical consolidated income
statement and balance sheet data shown below are derived from its financial
statements and their notes.
Kinder Morgan Energy Partner's summary historical consolidated income
statement and balance sheet data shown below as of and for the three months
ended March 31, 1998 and March 31, 1999, are derived from its unaudited
financial statements that, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
interim results shown below for the three months ended March 31, 1999 may not be
indicative of results for the full year.
Kinder Morgan Energy Partner's summary historical consolidated financial
data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc. in February 1997;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" and
- together with Kinder Morgan Energy Partners' financial statements and
their notes.
Additions to property, plant and equipment for 1997 exclude the $11,688,000
of assets that Kinder Morgan Energy Partners acquired in its acquisition of
Grand Rivers Terminal in September 1997. The Pacific Operations volumes reflect
Kinder Morgan Energy Partners' acquisition of its Pacific Operations on March 6,
1998. The Mid-Continent Operations volumes include only the volumes for the
North System and the Cypress Pipeline. The Bulk Terminals transport volumes
represent the volumes:
- for the Cora Terminal, excluding ship or pay volumes of 252 thousand tons
for 1996;
- of the Grand Rivers Terminal from September 1997;
- of Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- of the Pier IX and Shipyard River Terminals from December 18, 1998.
The financial data for both the three months ended March 31, 1998, and the
year ended December 31, 1998, include the results of operations for the Pacific
Operations from March 6, 1998, for Kinder Morgan Bulk Terminals, Inc. from July
1, 1998, and for Plantation Pipe Line Company from September 15, 1998.
7
<PAGE> 12
KINDER MORGAN ENERGY PARTNERS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues....................... $ 71,250 $ 73,932 $ 322,617 $ 36,741 $ 100,049
Cost of product sold........... 7,874 7,154 5,860 853 569
Operating and maintenance...... 22,347 17,982 77,162 7,839 25,437
Fuel and power................. 4,916 5,636 22,385 3,145 7,184
Depreciation and
amortization................. 9,908 10,067 37,321 4,719 12,054
General and administrative..... 9,132 8,862 39,984 5,094 7,818
-------- -------- ---------- ---------- ----------
Operating income............... 17,073 24,231 139,905 15,091 46,987
Equity in earnings of
partnerships................. 5,675 5,724 25,732 5,282 7,955
Interest expense............... (12,634) (12,605) (40,856) (5,903) (12,160)
Other income (expense), net.... 3,129 (353) (5,992) (506) (271)
Income tax (provision)
benefit...................... (1,343) 740 (1,572) -- (1,442)
Extraordinary charge on early
extinguishment of debt....... -- -- (13,611) (13,611) --
-------- -------- ---------- ---------- ----------
Net income..................... $ 11,900 $ 17,737 $ 103,606 $ 353 $ 41,069
======== ======== ========== ========== ==========
Additions to property, plant
and equipment................ $ 8,575 $ 6,884 $ 73,188 -- $ 18,347
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment.................... $235,994 $244,967 $1,763,386 $1,664,214 $1,770,813
Total assets................... 303,603 312,906 2,152,272 1,911,177 2,169,846
Long-term debt................. 160,211 146,824 611,571 636,652 631,205
Partners' capital.............. 118,344 150,224 1,360,663 1,079,370 1,358,536
OPERATING DATA:
Pacific Operations volumes
(thousands of barrels)....... -- -- 325,954 29,928 89,267
Mid-Continent Operations
volumes (thousands of
barrels)..................... 46,601 46,309 44,783 11,816 11,931
Bulk Terminals transport
volumes (thousands of tons).. 6,090 9,087 24,016 2,964 9,569
</TABLE>
8
<PAGE> 13
SUMMARY OF RISK FACTORS
RISKS RELATED TO OUR BUSINESS
- We rely on Kinder Morgan Energy Partners for all of our revenues.
- We may experience difficulties in the identification, acquisition and
integration of suitable operations.
- If we lose our key employees, our business will suffer.
- Because of environmental and safety regulation of acquired businesses
that we or Kinder Morgan Energy Partners acquire, we may incur
substantial costs and liabilities.
- The restrictions in our credit facility may prevent us from taking
advantage of potentially beneficial transactions.
- You will experience immediate and substantial dilution of your shares.
- We may sell additional shares, which may dilute interests of existing
stockholders.
- Our restated certificate of incorporation and restated bylaws provide for
anti-takeover measures that may potentially frustrate beneficial
transactions.
- A trading market may not develop for your shares or you may not be able
to resell your shares at the initial offering price.
- Our management owns over a majority of our outstanding shares and
therefore has control over most matters that require our stockholders'
approval.
RISKS RELATED TO CONFLICTS OF INTEREST
- The fiduciary duties of our officers and directors may conflict with
those of Kinder Morgan G.P., Inc.
- Similar acquisition strategies create conflicts.
- We may not be fully compensated for the risks of or work done on
acquisitions shared with Kinder Morgan Energy Partners.
- We may not be fully reimbursed for the use of our officers and employees
by Kinder Morgan G.P., Inc.
- Kinder Morgan G.P., Inc. has significant influence over our business.
RISKS RELATED TO KINDER MORGAN
ENERGY PARTNERS' BUSINESS
- Pending Federal Energy Regulatory Commission and California Public
Utilities Commission proceedings seek substantial refunds and reductions
in the tariff rates of Kinder Morgan Energy Partners.
- Rapid growth may cause difficulties integrating new operations.
- Kinder Morgan Energy Partners does not own the land on which its
pipelines are constructed and is therefore subject to the possibility of
increased costs for its loss of land use.
- Distributions and earnings from Shell CO(2) Company may be limited.
- Litigation or governmental regulation relating to environmental
protection and operational safety may result in substantial costs and
liabilities.
- Competition could lead to lower profits.
- Restrictions in Kinder Morgan Energy Partners' debt agreements may
prevent it from engaging in some beneficial transactions.
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RISK FACTORS
You should consider the following risk factors together with all of the
other information included in this prospectus in your evaluation of an
investment in our common stock.
Realization of any of the following risks could have a material adverse
effect on our business, financial condition, cash flows and results of
operations. In that case, the trading price of our shares could decline and you
may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE RELY ON KINDER MORGAN ENERGY PARTNERS FOR ALL OF OUR REVENUES.
Although we expect to grow our business by the acquisition of strategic
midstream energy assets and businesses, currently our sole source of earnings
and cash flow is cash distributions received from Kinder Morgan G.P., Inc.
Kinder Morgan G.P., Inc. owns and receives quarterly distributions for:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units representing limited partner
interests in Kinder Morgan Energy Partners;
- a 1.0101% general partner interest in each of four subsidiary operating
partnerships of Kinder Morgan Energy Partners; and
- an incentive cash distribution based on the amount of available cash of
Kinder Morgan Energy Partners distributed to the holders of its common
units.
In the event Kinder Morgan Energy Partners decreases its cash distributions
to its unitholders, our revenues may decrease substantially, primarily due to
the decrease that results in the cash incentive distribution. The cash incentive
distribution initially would be reduced by 50% of the decrease in the cash
distributions to all partners. If the per unit distribution to Kinder Morgan
Energy Partners' common unitholders falls below target levels described in its
partnership agreement, that percentage would decrease.
WE MAY EXPERIENCE DIFFICULTIES IN THE IDENTIFICATION, ACQUISITION AND
INTEGRATION OF SUITABLE OPERATIONS.
We cannot assure you that:
- we can identify attractive acquisition candidates;
- we will be able to acquire assets or businesses on economically
acceptable terms;
- any acquisition will not be dilutive to earnings and operating surplus;
or
- any additional debt incurred to finance an acquisition will not affect
our ability to pay dividends or otherwise restrict our operations.
Our acquisition strategy involves many risks, including, among other
things:
- difficulties inherent in the integration of operations and systems;
- the diversion of our management's attention from other business concerns;
- the potential loss of our management or other key employees of acquired
businesses; and
- the potential need to borrow money to finance acquisitions, which we
cannot assure that we will be able to obtain on acceptable terms.
IF WE LOSE OUR KEY EMPLOYEES, OUR BUSINESS WILL SUFFER.
We are highly dependent on various members of our management, particularly
Richard D. Kinder and William V. Morgan. The loss of one or more members of our
management could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Furthermore, we cannot assure
you that we will be successful in the recruitment and retention of qualified
management, sales and technical personnel, which is critical to our success. The
loss of various key employees or our inability to attract and retain other
qualified employees could have a material
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adverse effect on our business, financial condition, results of operations and
cash flows.
BECAUSE OF ENVIRONMENTAL AND SAFETY REGULATION OF ACQUIRED BUSINESSES THAT WE OR
KINDER MORGAN ENERGY PARTNERS ACQUIRE, WE MAY INCUR SUBSTANTIAL COSTS AND
LIABILITIES.
We intend to make acquisitions of midstream energy businesses that may be
subject to federal, state and local laws and regulations regarding environmental
and safety practices. The costs and liabilities that may result could negatively
affect our business, financial condition, results of operations and cash flows.
THE RESTRICTIONS IN OUR CREDIT FACILITY MAY PREVENT US FROM TAKING ADVANTAGE OF
POTENTIALLY BENEFICIAL TRANSACTIONS.
We intend to enter into a new credit facility upon the completion of this
offering which will contain restrictive covenants that may prevent us from
engaging in various beneficial transactions. These provisions may also limit or
prohibit distributions under specific circumstances. We expect the credit
facility will require us to comply with various affirmative and negative
covenants.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF YOUR SHARES.
The assumed initial offering price of $20.00 exceeds the estimated tangible
net book value of $0.83 per share. You will incur immediate and substantial
dilution of $19.17 per share.
WE MAY SELL ADDITIONAL SHARES, WHICH MAY DILUTE INTERESTS OF EXISTING
STOCKHOLDERS.
Our restated certificate of incorporation allows us to issue up to 200
million shares of common stock, 10 million shares of non-voting convertible
common stock and 5 million shares of preferred stock. After this offering, there
will be 40,000,000 shares of our common stock, including shares of our non-
voting convertible common stock, outstanding. We may issue additional shares at
times and under circumstances as we deem appropriate, including the issuance of
shares of preferred stock without stockholder approval. An issuance of
additional shares could negatively dilute and diminish existing stockholders'
relative voting strength and share of tangible net book value.
OUR RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BYLAWS PROVIDE FOR
ANTI-TAKEOVER MEASURES THAT MAY POTENTIALLY FRUSTRATE BENEFICIAL TRANSACTIONS.
Our restated certificate of incorporation and restated bylaws contain
anti-takeover provisions, including provisions that provide for:
- a classified board;
- restrictions on the call of a special meeting of stockholders; and
- the requirement of a supermajority vote of our stockholders to amend our
charter or bylaws.
In addition we have entered into a rights agreement that generally provides
for significant dilution and increased expense to any person who acquires a
significant amount of our common stock. These factors could discourage or make
more difficult a merger, tender offer, proxy contest or acquisition of a
significant portion of our common stock even if that event potentially would be
favorable to the interests of our stockholders.
A TRADING MARKET MAY NOT DEVELOP FOR YOUR SHARES OR YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT THE INITIAL OFFERING PRICE.
Before the offering, there has been no public market for the shares. We
have applied and intend to list the shares for trading on the New York Stock
Exchange. We do not know the extent to which investor interest will lead to the
development of a trading market or how liquid that market might be. The initial
public offering price for the shares will be determined through negotiations
between us and the representatives of the underwriters. You may not be able to
resell your shares at or above the initial public offering price.
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OUR MANAGEMENT OWNS OVER A MAJORITY OF OUR OUTSTANDING SHARES AND THEREFORE HAS
CONTROL OVER MOST MATTERS THAT REQUIRE OUR STOCKHOLDERS' APPROVAL.
After the completion of the offering, Richard D. Kinder and William V.
Morgan will own approximately 66.5% of our outstanding shares of common stock.
As a result, they will be able to elect our board of directors and to greatly
influence the outcome of all corporate action requiring the approval of our
directors or stockholders.
RISKS RELATED TO CONFLICTS OF INTEREST
THE FIDUCIARY DUTIES OF OUR OFFICERS AND DIRECTORS MAY CONFLICT WITH THOSE OF
KINDER MORGAN G.P., INC.
Conflicts of interest may arise as a result of the relationships between
Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners and us. Our directors
and officers have fiduciary duties to manage our business in a manner beneficial
to us and our stockholders. Simultaneously, some of our directors and officers
are also directors and officers of Kinder Morgan G.P., Inc. and have fiduciary
duties to manage the business of Kinder Morgan G.P., Inc. and Kinder Morgan
Energy Partners in a manner beneficial to Kinder Morgan G.P., Inc., Kinder
Morgan Energy Partners and Kinder Morgan Energy Partners' unitholders. The
resolution of these conflicts may not always be in our best interest or that of
our stockholders.
SIMILAR ACQUISITION STRATEGIES CREATE CONFLICTS.
Since Kinder Morgan Energy Partners and we plan to grow our businesses
through acquisitions, conflicts may arise because:
- individuals who serve on our board of directors also serve on the board
of directors of Kinder Morgan G.P., Inc., and this service requires the
disclosure of information to the board of Kinder Morgan G.P., Inc. of any
transaction that could be of interest to that board on behalf of Kinder
Morgan G.P., Inc., Kinder Morgan Energy Partners or its operating limited
partnerships and subsidiaries;
- acquisition opportunities may be presented to the interlocking directors
or those officers common to Kinder Morgan G.P., Inc. and us that could be
in the best interests of both Kinder Morgan Energy Partners and us; and
- Kinder Morgan Energy Partners' acquisition strategy has been, and we
believe it will continue to be, to acquire midstream energy assets that
generate long-term, steady cash flows and that can be acquired at a price
accretive to Kinder Morgan Energy Partners' earnings and cash flow;
however, there is no legal limitation on Kinder Morgan Energy Partners'
business that requires Kinder Morgan Energy Partners not to enter into or
acquire businesses outside of those described above and therefore Kinder
Morgan Energy Partners' acquisition interests could conflict with ours.
There may be practical reasons why Kinder Morgan Energy Partners would not
pursue a transaction based on, among other factors:
- the volatility of cash flow generated by the acquired business;
- the timing of the return of investment in the acquired business; and
- whether that transaction would produce qualifying income.
The presence of qualifying income is important since the availability of
tax and economic benefits to Kinder Morgan Energy Partners and its partners
depends, in large part, on the classification of Kinder Morgan Energy Partners
as a partnership for federal income tax purposes. The Internal Revenue Code
provides that publicly-traded partnerships will, as a general rule, be taxed as
corporations. However, an exception exists for a publicly-traded partnership in
which 90% or more of its gross income for every taxable year consists of
qualifying income. Qualifying income includes income and gains derived from the
exploration, development, mining or production,
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processing, refining, transportation, including pipelines, or marketing of any
mineral or natural resource including oil, natural gas or products of oil and
natural gas. Other types of qualifying income include interest, other than from
a financial business, dividends, gains from the sale of real property and gains
from the sale or other disposition of capital assets held for the production of
income that otherwise constitutes qualifying income. We believe it is extremely
unlikely that Kinder Morgan Energy Partners would pursue a transaction that
would cause it to have in excess of 10% of non-qualifying income and cause it to
be taxed as a corporation. However, we cannot assure you that Kinder Morgan
Energy Partners may not pursue a transaction that would cause it to derive less
than 90% of its gross income from sources which constitute qualifying income.
Any transaction we effect could have been an opportunity of Kinder Morgan
Energy Partners' and vice-versa. The resolution of these conflicts by our board
of directors and the board of directors of Kinder Morgan G.P., Inc. may not
always be the most beneficial resolution to us as compared to a resolution if we
did not have to consider these conflicts, particularly due to the limitations in
our restated certificate of incorporation as described below.
WE MAY NOT BE FULLY COMPENSATED FOR THE RISKS OF OR WORK DONE ON ACQUISITIONS
SHARED WITH KINDER MORGAN ENERGY PARTNERS.
There may be transactions in which we and Kinder Morgan Energy Partners
combine resources and divide the acquired assets based on various factors,
including, without limitation, the benefits to Kinder Morgan Energy Partners of
the acquisition of these assets. To share these transactions, it may be
necessary for us to act solely on behalf of Kinder Morgan Energy Partners
through the acquisition and later transfer to Kinder Morgan Energy Partners of
these assets. Kinder Morgan Energy Partners and we intend that we would be
reimbursed for our costs related to that transaction and any adverse income tax
effects of the transaction and later transfer. However, unless circumstances
warrant, there may be no reimbursement for the risks and potential future
returns associated with our acquisition. Instead of the transaction being for
our entire benefit, we would only benefit to the extent those assets produce
distributions by Kinder Morgan Energy Partners and as a result, increase the
amounts distributable to us based on Kinder Morgan G.P., Inc.'s general partner
interest in Kinder Morgan Energy Partners.
WE MAY NOT BE FULLY REIMBURSED FOR THE USE OF OUR OFFICERS AND EMPLOYEES BY
KINDER MORGAN G.P., INC.
In the future, we may share administrative personnel with Kinder Morgan
G.P., Inc. to operate both our business and the business of Kinder Morgan Energy
Partners. In that case, our officers, who in some cases are also the officers of
Kinder Morgan G.P., Inc., will allocate, in their reasonable and sole
discretion, the time our employees spend on behalf of us and on behalf of Kinder
Morgan G.P., Inc. for the benefit of Kinder Morgan Energy Partners. These
allocations may not necessarily be the result of arms length negotiations
between Kinder Morgan G.P., Inc. and us. Although we intend to be reimbursed for
our employees' activities, due to the nature of the allocations, this
reimbursement may not exactly match the actual time and overhead spent.
KINDER MORGAN G.P., INC. HAS SIGNIFICANT
INFLUENCE OVER OUR BUSINESS.
Kinder Morgan G.P., Inc. determines for Kinder Morgan Energy Partners the
amount and timing of asset purchases and sales, capital expenditures, borrowings
and reserves. All of these decisions can impact the amount of cash that is
distributed by Kinder Morgan Energy Partners to its unitholders and to us based
on Kinder Morgan G.P., Inc.'s general partner interest in Kinder Morgan Energy
Partners.
Kinder Morgan G.P., Inc. also determines the amount of distributions to the
unitholders of Kinder Morgan Energy Partners. This determination affects the
amount of the distribution to Kinder Morgan G.P., Inc., which in turn affects
the amount of dividends Kinder
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Morgan G.P., Inc. can make to us as its sole stockholder.
Our corporate purpose excludes any purchase, sale, investment, divestment
or any other transaction if the completion of that transaction by Kinder Morgan
G.P., Inc., Kinder Morgan Energy Partners or its operating limited partnerships
or subsidiaries is determined by the board of directors of Kinder Morgan G.P.,
Inc. to be fair and reasonable to those entities, as applicable. That
determination may be made for transactions first offered to us or in which we
will participate to some degree. To the extent Kinder Morgan G.P., Inc.'s
directors make that determination, those transactions will not be within our
corporate power and our officers and directors who are also officers and
directors of Kinder Morgan G.P., Inc. will be unable to act on our behalf for
those transactions.
If Kinder Morgan G.P., Inc.'s board of directors later determines to
abandon the transaction, the transaction would again be within our corporate
purpose and be available for us should our board of directors decide to pursue
it. By your purchase of common stock, you effectively consent to this limitation
on our corporate purpose and agree that we do not have the power to enter into
transactions to be completed by Kinder Morgan G.P., Inc., Kinder Morgan Energy
Partners or its operating limited partnerships and subsidiaries.
In addition, the partnership agreement of Kinder Morgan Energy Partners
limits the fiduciary duties of Kinder Morgan G.P., Inc. and its affiliates to
Kinder Morgan Energy Partners and restricts the remedies available to Kinder
Morgan Energy Partners' unitholders for actions taken by Kinder Morgan G.P.,
Inc. or its affiliates that might otherwise constitute conflicts and breaches of
fiduciary duty. If the board of directors of Kinder Morgan G.P., Inc. determines
that a resolution of a conflict is fair and reasonable, Kinder Morgan G.P., Inc.
and its affiliates will not be in breach of fiduciary or other duties to Kinder
Morgan Energy Partners and its unitholders under state law. The fair and
reasonable determination may be made with the help of independent financial and
legal advisors and, if determined necessary or appropriate by Kinder Morgan
G.P., Inc.'s board of directors, by its independent directors. Therefore, any
transaction that we want to pursue that was disclosed to the board of directors
of Kinder Morgan G.P., Inc. and which that board of directors determines is fair
and reasonable for Kinder Morgan Energy Partners not to pursue may be effected
by us. However, Kinder Morgan G.P., Inc. may consider factors outside of our
best interests when it makes that determination.
Therefore, based on the above, Kinder Morgan G.P., Inc. can have great
influence over what transactions we may pursue and the amount of distributions
we receive from Kinder Morgan G.P., Inc. based on distributions made by Kinder
Morgan Energy Partners. We will be bound by Kinder Morgan G.P., Inc.'s decision.
Kinder Morgan G.P., Inc. is not required to consider our best interests when it
makes that decision, and its decision may significantly impact our ability to
pursue transactions that we might otherwise desire.
RISKS RELATED TO KINDER MORGAN ENERGY
PARTNERS' BUSINESS
PENDING FEDERAL ENERGY REGULATORY COMMISSION AND CALIFORNIA PUBLIC UTILITIES
COMMISSION PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN THE TARIFF
RATES OF KINDER MORGAN ENERGY PARTNERS.
Some shippers on Kinder Morgan Energy Partners' pipelines have filed
complaints with the Federal Energy Regulatory Commission and the California
Public Utilities Commission that seek substantial refunds and reductions in the
tariff rates on Kinder Morgan Energy Partners' Pacific Operations. As described
below, the Federal Energy Regulatory Commission has issued an opinion that
relates to the complaint before it, and Kinder Morgan Energy Partners has
reserved for the impact of the opinion. In addition, the California Public
Utilities Commission affirmed the dismissal of the complaint before it.
Nonetheless, an adverse ruling on appeal of these decisions could negatively
impact revenues, results of operations, financial condition, liquidity, and
funds available for
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distribution to unitholders and to Kinder Morgan G.P., Inc. As a result, Kinder
Morgan G.P., Inc. would have fewer funds available for distribution to us.
Additional challenges to tariff rates could be filed with the Federal Energy
Regulatory Commission or California Public Utilities Commission in the future.
The complaints filed before the Federal Energy Regulatory Commission allege
that some pipeline tariff rates of the Pacific Operations are not entitled to
"grandfathered" status under the Energy Policy Act of 1992 because "changed
circumstances" may have occurred under the Act. An initial decision by the
Federal Energy Regulatory Commission Administrative Law Judge was issued on
September 25, 1997. The initial decision determined that the Pacific Operations'
West Line rates were grandfathered but that the rates on the East Line, which
transports less than 10% of the Pacific Operations' volumes, were not
grandfathered under the Energy Policy Act of 1992. The initial decision also
included rulings that were generally adverse to the Pacific Operations regarding
cost of service issues.
On January 13, 1999, the Federal Energy Regulatory Commission issued an
opinion that affirmed, in major respects, including the grandfathered status of
the West Line, the initial decision, but also modified parts of the decision
that were adverse to Kinder Morgan Energy Partners. Before the Federal Energy
Regulatory Commission opinion, Kinder Morgan Energy Partners reserved
approximately $8 million annually, which created adequate total reserves to meet
Kinder Morgan Energy Partners' estimated obligations under the Federal Energy
Regulatory Commission opinion. Some of the complainants have appealed the
Federal Energy Regulatory Commission's decision to the United States Court of
Appeals for the District of Columbia circuit.
The complaints filed before the California Public Utilities Commission
generally challenge the rates charged for intrastate transportation of refined
petroleum through the Pacific Operations' pipeline system in California. On June
18, 1998, a California Public Utilities Commission Administrative Law Judge
issued a ruling in Kinder Morgan Energy Partners' favor and dismissed the
complaints. The Administrative Law Judge's decision was affirmed by the
California Public Utilities Commission on August 6, 1998. The shippers have
filed an appeal with the California Supreme Court.
RAPID GROWTH MAY CAUSE DIFFICULTIES
INTEGRATING NEW OPERATIONS.
Part of Kinder Morgan Energy Partners' business strategy includes the
acquisition of additional businesses to allow increased distributions to
unitholders. During the period from December 31, 1996 to December 31, 1998,
Kinder Morgan Energy Partners made several acquisitions that increased its asset
base approximately seven times. Its net income for the year ended December 31,
1998, was over eight times higher than the net income for the year ended
December 31, 1996. Kinder Morgan Energy Partners and we believe that Kinder
Morgan Energy Partners can profitably combine the operations of acquired
businesses with its existing operations. However, unexpected costs or challenges
may arise whenever businesses with different operations and management are
combined. Successful business combinations require management and other
personnel to devote significant amounts of time to the integration of the
acquired business with existing operations. These efforts may temporarily
distract Kinder Morgan G.P., Inc.'s management's attention from day-to-day
business, the development or acquisition of new properties and other business
opportunities. In addition, the management of the acquired businesses will often
not join Kinder Morgan G.P., Inc.'s management team. The change in management
may make it more difficult to integrate an acquired business with existing
operations.
KINDER MORGAN ENERGY PARTNERS DOES NOT OWN THE LAND ON WHICH ITS PIPELINES ARE
CONSTRUCTED AND IS THEREFORE SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR
ITS LOSS OF LAND USE.
Kinder Morgan Energy Partners generally does not own the land on which its
pipelines
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are constructed. Instead, Kinder Morgan Energy Partners obtains the right to
construct and operate the pipelines on other people's land for a period of time.
If Kinder Morgan Energy Partners were to lose these rights, its business could
be negatively affected, thus limiting its ability to pay distributions to Kinder
Morgan G.P., Inc. and therefore, to us.
Southern Pacific Transportation Company has allowed Kinder Morgan Energy
Partners to construct and operate a significant portion of its Pacific
Operations' pipeline under their railroad tracks. Southern Pacific
Transportation Company and its predecessors were given the right to construct
their railroad tracks under federal statutes enacted in 1871 and 1875. The 1871
statute was thought to be an outright grant of ownership that would continue
until the land ceased to be used for railroad purposes. Two United States
Circuit Courts, however, ruled in 1979 and 1980 that railroad rights-of-way
granted under laws similar to the 1871 statute provide only the right to use the
surface of the land for railroad purposes without any right to the underground
portion. If a court were to rule that the 1871 statute does not permit the use
of the underground portion for the operation of a pipeline, Kinder Morgan Energy
Partners may be required to obtain permission from the land owners to continue
to maintain its pipelines. Although we cannot assure you, Kinder Morgan Energy
Partners and we believe Kinder Morgan Energy Partners could obtain permission
over time at a cost that would not have a material negative effect on the
financial position or results of operations of Kinder Morgan Energy Partners or
us.
Kinder Morgan Energy Partners has been advised by counsel that it has the
power of eminent domain for the liquids pipelines in the states in which it
operates (except for Illinois) with the assumption that it meets various
requirements, which differ from state to state. We believe that Kinder Morgan
Energy Partners meets these requirements; however, we also believe that Shell
CO(2) Company, a joint venture with Shell in which Kinder Morgan Energy Partners
owns an indirect 20% interest, does not have the power of eminent domain for its
carbon dioxide pipelines. Shell CO(2) Company's inability to exercise the power
of eminent domain could have a material negative effect on its business and, as
a result, on our business, if Kinder Morgan Energy Partners were to lose the
right to use or occupy the property on which its pipelines are located.
DISTRIBUTIONS AND EARNINGS FROM SHELL CO(2) COMPANY MAY BE LIMITED.
It is possible that Kinder Morgan Energy Partners would not receive any
distributions from Shell CO(2) Company during 2002 and 2003. During 1999-2001,
Kinder Morgan Energy Partners will receive a fixed, quarterly priority
distribution from Shell CO(2) Company of approximately $3.6 million, or $14.5
million per year. These distributions are accounted for as equity earnings. In
2002 and 2003, Shell CO(2) Company will increase or decrease cash distributions
to Kinder Morgan Energy Partners so that Kinder Morgan Energy Partners'
percentage of the total cash distribution during 1998-2003 equals its ownership
percentage, initially 20%, of Shell CO(2) Company during that time. These
calculations will be done on a present value basis using a discount rate of 10%.
After 2003, Kinder Morgan Energy Partners will participate in distributions
according to its ownership percentage.
LITIGATION OR GOVERNMENTAL REGULATION RELATING TO ENVIRONMENTAL PROTECTION AND
OPERATIONAL SAFETY MAY RESULT IN SUBSTANTIAL COSTS AND LIABILITIES.
The business operations of Kinder Morgan Energy Partners are subject to
federal, state and local laws and regulations that relate to environmental
practices and operational safety. If an accidental leak or spill of liquid
petroleum products occurs in a pipeline or at a storage facility, Kinder Morgan
Energy Partners may have to pay a significant amount to clean up the leak or
spill. The costs and liabilities that result could negatively affect the level
of cash available for distributions to unitholders and to Kinder Morgan G.P.,
Inc. As a result, Kinder Morgan G.P., Inc. would have fewer funds available for
distribution to us. Although neither Kinder Morgan Energy Partners nor we can
predict
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the impact of Environmental Protection
Agency standards or future environmental or safety measures, these costs could
increase significantly if environmental laws and regulations become stricter.
Since the costs of environmental regulation are already significant, additional
regulation could negatively affect the level of cash available for distributions
to its partners, including Kinder Morgan G.P., Inc., and as a result, to us.
COMPETITION COULD LEAD TO LOWER PROFITS.
Kinder Morgan Energy Partners' competition could ultimately lead to lower
levels of profits and lower cash distributions to unitholders and Kinder Morgan
G.P., Inc., and as a result, to us. Propane competes with electricity, fuel, oil
and natural gas in the residential and commercial heating market. In the engine
fuel market, propane competes with gasoline and diesel fuel. Butanes and natural
gasoline used in motor gasoline blending and isobutane used in premium fuel
production compete with alternative products. Natural gas liquids used as
feedstocks for refineries and petrochemical plants compete with alternative
feedstocks. The availability and prices of alternative energy sources and
feedstocks significantly affect demand for natural gas liquids.
Pipelines are generally the lowest cost method for intermediate and
long-haul overland product movement. Accordingly, the most significant
competitors to Kinder Morgan Energy Partners' pipelines are:
- proprietary pipelines owned and operated by major oil companies in the
areas where Kinder Morgan Energy Partners' pipelines deliver products;
- refineries within the market areas served by Kinder Morgan Energy
Partners' pipelines; and
- trucks.
Additional pipelines may be constructed in the future to serve specific
markets now served by Kinder Morgan Energy Partners' pipelines. Trucks
competitively deliver products to specified short-haul destinations within the
distinct Los Angeles and San Francisco Bay areas, but are less competitive over
longer hauls. In addition, various major petroleum companies and independent
terminal operators directly compete with Kinder Morgan Energy Partners at
several terminal locations. At those locations, pricing, service capabilities
and available tank capacity control market share.
Kinder Morgan Energy Partners' ability to compete also depends upon general
market conditions, which may change. Kinder Morgan Energy Partners conducts its
operations without the benefit of exclusive franchises from government entities.
Kinder Morgan Energy Partners provides common carrier transportation services
through its pipelines at posted tariffs. In addition, although Kinder Morgan
Energy Partners does have long-term contracts with some customers, customers
generally ship on Kinder Morgan Energy Partners' pipelines without long-term
contracts for transportation service.
Demand for transportation services for refined petroleum products is
primarily a function of:
- total and per capita fuel consumption;
- prevailing economic and demographic conditions;
- alternate modes of transportation;
- alternate product sources; and
- price.
RESTRICTIONS IN KINDER MORGAN ENERGY PARTNERS' DEBT AGREEMENTS MAY PREVENT IT
FROM ENGAGING IN SOME BENEFICIAL TRANSACTIONS.
DEBT INSTRUMENTS MAY LIMIT FINANCIAL FLEXIBILITY. The instruments that
govern Kinder Morgan Energy Partners' debt contain restrictive covenants that
may prevent it from engaging in various beneficial transactions. These
provisions may also limit or prohibit distributions to unitholders under some
circumstances. The agreements that govern Kinder Morgan Energy Partners' debt
generally require it to comply with various affirmative and negative covenants
including
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the maintenance of specific financial ratios and restrictions on:
- the incurrence of additional debt;
- the entrance into mergers, consolidations and sales of assets;
- investment activity; and
- the grant of liens.
Additionally, the agreements that govern Kinder Morgan Energy Partners'
debt generally prohibit Kinder Morgan Energy Partners from:
- the distribution of cash to unitholders more often than quarterly;
- the distribution of amounts in excess of 100% of available cash for the
immediately preceding calendar quarter; and
- any distribution to unitholders if an event of default exists or would
exist when that distribution is made.
The instruments that govern any additional debt incurred to refinance the
debt may also contain similar restrictions.
RESTRICTIONS ON THE ABILITY TO PREPAY SFPP, L.P.'S DEBT MAY LIMIT KINDER
MORGAN ENERGY PARTNERS' FINANCIAL FLEXIBILITY. SFPP, L.P. is subject to some
restrictions on its debt that may limit Kinder Morgan Energy Partners'
flexibility to structure or refinance existing or future debt. These
restrictions include the following:
- Kinder Morgan Energy Partners may not prepay SFPP, L.P.'s First Mortgage
Notes before December 15, 1999;
- after December 15, 1999, and before December 15, 2002, Kinder Morgan
Energy Partners may prepay the SFPP, L.P. First Mortgage Notes with a
make-whole prepayment premium; and
- Kinder Morgan Energy Partners agreed as part of the acquisition of the
Pacific Operations to not take specific actions related to the $190
million of the SFPP, L.P. First Mortgage Notes that would cause adverse
tax consequences for the preceding general partner of SFPP, L.P.
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock offered
in this prospectus are estimated to be approximately $134 million, after
deducting the underwriting discount and estimated offering expenses payable by
us. If the underwriters' over-allotment option is exercised in full, we estimate
that net proceeds will be approximately $154 million.
We intend to use a portion of the net proceeds of this offering to pay all
but approximately $5 million of the existing term loan debt under our credit
facility. The interest rate as of March 31, 1999 on the term loan debt to be
repaid is 5.75%, and the maturity date is May 31, 2000. Since June 1998, we used
the term loan debt under our credit facility to pay aggregate dividends of $147
million to our stockholders.
The balance of the net proceeds from this offering will be used for working
capital and general corporate purposes, including to finance acquisitions of
strategic assets and, when we believe market conditions to be favorable,
purchases of limited partnership units of Kinder Morgan Energy Partners.
19
<PAGE> 24
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999:
- on an actual basis;
- on an "as adjusted" basis to reflect the additional borrowing of
$65,000,000 under our credit facility, the dividend of that amount to our
shareholders and the scheduled repayment in May, 1999 of $7,000,000 of a
credit facility debt; and
- on a pro forma basis to reflect the estimated net proceeds from the sale
of the common stock offered by us after deducting the underwriting
discount and estimated offering expenses payable by us and the repayment
of debt with the estimated net proceeds and available working capital
cash.
In each case, the table assumes that the underwriters' over-allotment option is
not exercised. You should read this information together with our historical
financial statements and the notes to those statements appearing elsewhere in
this prospectus. An asterisk in the table indicates the number rounds to zero.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
ACTUAL AS ADJUSTED PRO FORMA
-------- ----------- -----------
(IN THOUSANDS OF DOLLARS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities............................... $ 81,705 $139,705 $ 5,205
-------- -------- --------
Stockholders' equity:
Series A Common Stock, par value $0.01; 25,000
shares authorized, 8,047 shares issued and
outstanding....................................... * * --
Series B Common Stock, par value $0.01; 25,000
shares authorized, 2,541 shares issued and
outstanding....................................... * * --
Common stock, par value $0.01; 200,000,000 shares
authorized, 29,646,023 issued and outstanding, as
adjusted; 36,896,023 issued and outstanding, pro
forma............................................. -- 296 369
Non-voting convertible common stock, par value
$0.01, 10,000,000 shares authorized, 3,103,977
shares issued and outstanding, as adjusted and pro
forma............................................. 31 31
Preferred stock, par value $0.01, 5,000,000 shares
authorized, 200,000 shares designated as Series A
Junior Participating Preferred Stock and 15,000
shares designated as Series B Junior Participating
Preferred Stock, no shares issued and
outstanding....................................... -- -- --
Additional paid-in capital.......................... -- -- 132,631
Retained earnings (deficit)......................... (34,368) (99,768) (99,768)
-------- -------- --------
Total stockholders' equity................ $(34,368) $(99,441) $ 33,263
-------- -------- --------
Total Capitalization...................... $ 47,337 $ 40,264 $ 38,468
======== ======== ========
</TABLE>
20
<PAGE> 25
DILUTION
On a pro forma basis as of March 31, 1999 after giving effect to the
offering, the tangible net book value of our assets would have been
approximately $33.3 million or $.83 per share, assuming an initial public
offering price of $20.00 per share. Purchasers of common stock in the offering
will experience substantial and immediate dilution in tangible net book value
per share of common stock for financial accounting purposes, as illustrated in
the following table. The pro forma tangible net book value per share of common
stock after the offering is determined by dividing the total number of shares of
common stock (40,000,000) to be outstanding after the offering into our pro
forma tangible net book value, after giving effect to the application of the net
proceeds of the offering.
<TABLE>
<S> <C>
Assumed initial public offering price per share of common
stock..................................................... $20.00
Net tangible book value (deficit) per common share before
the offering........................................... (3.05)
Increase in net tangible book value per common share
attributable to new investors.......................... 3.88
Less: Pro forma tangible net book value per share of common
stock after the offering.................................. .83
------
Immediate dilution in tangible net book value per share of
common stock to new investors............................. $19.17
======
</TABLE>
The following table summarizes as of March 31, 1999, the number of shares
of common stock, including non-voting convertible common stock, we have issued
and the total consideration provided to us giving effect to the sale of shares
in this offering. The calculation below is based on an initial public offering
price of $20 per share, before deducting the underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
------------------------ -------------------------
NUMBER PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Existing Stockholders.............. 32,750,000 81.88%
New Investors...................... 7,250,000 18.12% 145,000,000
----------- ----- ------------ ---
Total.................... 40,000,000 100% 145,000,000 100%
=========== ===== ============ ===
</TABLE>
------------------------------
This discussion and table assumes no exercise of options that,
simultaneously with the completion of the offering, will be outstanding under
Kinder Morgan, Inc.'s 1999 Stock Awards Plan. At that time, there will be
options outstanding to purchase shares of common stock at a price equal to the
initial public offering price per share.
21
<PAGE> 26
DIVIDEND POLICY
We currently intend to pay to our stockholders quarterly dividends on the
common stock and non-voting convertible common stock. We intend to pay a
dividend for the third quarter of 1999. That dividend is expected to be $
per share. We cannot assure you, however, that this dividend, or any future
dividend, will be declared or paid.
The determination of the amount of cash dividends, including the quarterly
dividend referred to above, if any, to be declared and paid will depend upon our
financial condition, results of operations, cash flow, the level of our capital
expenditures, future business prospects and any other matters that our board of
directors deems relevant.
22
<PAGE> 27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
KINDER MORGAN, INC.
Our selected historical consolidated income statement and balance sheet
data shown below are derived from our financial statements and their notes. Our
selected historical consolidated income statement and balance sheet data shown
below for the years ended December 31, 1994, December 31, 1995, December 31,
1996 and the period from January 1, to February 14, 1997 relate to Enron Liquids
Pipeline Company as our predecessor.
Our selected historical consolidated income statement and balance sheet
data shown below as of and for the three months ended March 31, 1998 and March
31, 1999, are derived from our unaudited financial statements that, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The interim results shown below
for the three months ended March 31, 1999 may not be indicative of results for
the full year.
Our selected historical consolidated income statement and balance sheet
data shown below for the years ended December 31, 1994 and December 31, 1995 are
derived from unaudited financial statements of our predecessor company not
included in this prospectus.
Our selected historical consolidated financial data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc. in February 1997;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;"
- we borrowed and distributed to our existing shareholders $65 million in
May of 1999 under our existing credit facility; and
- together with our financial statements and their notes.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 -
---------------------------------------- FEBRUARY 14,
1994 1995 1996 1997
----------- ----------- ------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA: --
Partnership income...... $ 868 $ 1,921 $ 1,886 $ 234
Operating expense:
Depreciation and
amortization
expense.............. 106 122 182 21
General and
administrative
expenses............. 2,824 4,042 2,658 332
-------- -------- -------- -------
Total operating
expenses........ 2,930 4,164 2,840 353
-------- -------- -------- -------
Operating income
(loss)................. (2,062) (2,243) (954) (119)
Other income (expense):
Interest expense....... -- -- -- --
Interest income........ 1,696 4,433 4,471 740
-------- -------- -------- -------
Income before tax....... (366) 2,190 3,517 621
Income tax expense
(benefit).............. (633) 555 869 5,002
-------- -------- -------- -------
Net income (loss)....... $ 267 $ 1,635 $ 2,648 $(4,381)
======== ======== ======== =======
Earnings per common
share..................
BALANCE SHEET DATA (AT
PERIOD END):
Current assets.......... $ 1,086 $ 1,351 $ 937 $ 93
Non-current assets...... 106,857 106,939 108,637 24,942
Total assets............ 107,943 108,290 109,574 25,035
Current liabilities..... 92 259 248 --
Non-current
liabilities............ 31,285 29,831 28,478 --
Total liabilities....... 31,377 30,090 28,726 --
Stockholders' equity
(deficit).............. 76,566 78,200 80,848 25,035
<CAPTION>
KINDER MORGAN, INC.
------------------------------------------------
PERIOD FROM THREE MONTHS
FEBRUARY 14, ENDED
1997 - YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
------------ ------------ ------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Partnership income...... $ 4,577 $ 37,575 $ 5,021 $ 14,220
Operating expense:
Depreciation and
amortization
expense.............. 67 603 -- 256
General and
administrative
expenses............. 1,025 877 146 124
------- -------- ------- --------
Total operating
expenses........ 1,092 1,480 146 380
------- -------- ------- --------
Operating income
(loss)................. 3,485 36,095 4,875 13,840
Other income (expense):
Interest expense....... (831) (4,507) (99) (1,965)
Interest income........ 49 740 10 47
------- -------- ------- --------
Income before tax....... 2,703 32,328 4,786 11,922
Income tax expense
(benefit).............. 1,065 11,661 1,760 4,412
------- -------- ------- --------
Net income (loss)....... $ 1,638 $ 20,667 $ 3,026 $ 7,510
======= ======== ======= ========
Earnings per common
share.................. -- -- -- --
BALANCE SHEET DATA (AT
PERIOD END):
Current assets.......... $ 958 $ 28,644 $ 6,370 $ 13,625
Non-current assets...... 23,389 45,638 35,452 48,941
Total assets............ 24,347 74,282 41,822 62,566
Current liabilities..... 1,880 16,577 6,148 15,229
Non-current
liabilities............ 2,685 100,000 12,882 81,705
Total liabilities....... 4,565 116,577 19,030 96,934
Stockholders' equity
(deficit).............. 19,782 (42,295) 22,792 (34,368)
</TABLE>
23
<PAGE> 28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF
KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partner's selected historical consolidated income
statement and balance sheet data shown below are derived from its financial
statements and their notes.
Kinder Morgan Energy Partner's selected historical consolidated income
statement and balance sheet data shown below as of and for the three months
ended March 31, 1998 and March 31, 1999, are derived from its unaudited
financial statements that, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
interim results shown below for the three months ended March 31, 1999 may not be
indicative of results for the full year.
Our selected historical consolidated income statement and balance sheet
data shown below for the years ended December 31, 1994 and December 31, 1995 are
derived from unaudited financial statements of Kinder Morgan Energy Partners not
included in this prospectus.
Kinder Morgan Energy Partner's selected historical consolidated financial
data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc. in February 1997;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" and
- together with Kinder Morgan Energy Partners' financial statements and
their notes.
Additions to property, plant and equipment for 1994 and 1997 exclude the
$12,825,000 and $11,688,000 of assets that Kinder Morgan Energy Partners
acquired in its acquisition of Painter Gas Processing Plant in June 1994 and of
Grand Rivers Terminal in September 1997. The Pacific Operations volumes reflect
Kinder Morgan Energy Partners' acquisition of its Pacific Operations on March 6,
1998. The Mid-Continent Operations volumes include only the volumes for the
North System and the Cypress Pipeline Systems. The Bulk Terminals transport
volumes represent the volumes:
- for the Cora Terminal, excluding ship or pay volumes of 252 thousand tons
for 1996;
- of the Grand Rivers Terminal from September 1997;
- of the Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- of the Pier IX and Shipyard River Terminals from December 18, 1998.
The financial data for both the three months ended March 31, 1998, and the
year ended December 31, 1998, includes the results of operations for the Pacific
Operations from March 1998, for the Bulk Terminals from July 1, 1998, and for
Plantation Pipe Line Company from September 15, 1998.
24
<PAGE> 29
KINDER MORGAN ENERGY PARTNERS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues.............................. $ 54,904 $ 64,304 $ 71,250 $ 73,932 $ 322,617 $ 36,741 $ 100,049
Cost of product sold.................. 940 8,020 7,874 7,154 5,860 853 569
Operating and maintenance............. 13,644 15,928 22,347 17,982 77,162 7,839 25,437
Fuel and power........................ 5,481 3,934 4,916 5,636 22,385 3,145 7,184
Depreciation and
amortization........................ 8,539 9,548 9,908 10,067 37,321 4,719 12,054
General and administrative............ 8,196 8,739 9,132 8,862 39,984 5,094 7,818
-------- -------- -------- -------- ---------- ---------- ----------
Operating income...................... 18,104 18,135 17,073 24,231 139,905 15,091 46,987
Equity in earnings of partnerships.... 5,867 5,755 5,675 5,724 25,732 5,282 7,955
Interest expense...................... (11,989) (12,455) (12,634) (12,605) (40,856) (5,903) (12,160)
Other income (expense),
net................................. 509 1,311 3,129 (353) (5,992) (506) (271)
Income tax (provision)
benefit............................. (1,389) (1,432) (1,343) 740 (1,572) -- (1,442)
Extraordinary charge on early
extinguishment of debt.............. -- -- -- -- (13,611) (13,611) --
-------- -------- -------- -------- ---------- ---------- ----------
Net income.................... $ 11,102 $ 11,314 $ 11,900 $ 17,737 $ 103,606 $ 353 $ 41,069
======== ======== ======== ======== ========== ========== ==========
Additions to property, plant and
equipment........................... $ 5,195 $ 7,826 $ 8,575 $ 6,884 $ 38,407 $ 4,359 $ 18,347
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and equipment..... $238,850 $236,854 $235,994 $244,967 $1,763,386 $1,664,214 $1,770,813
Total assets.......................... 299,271 303,664 303,603 312,906 2,152,272 1,911,177 2,169,846
Long-term debt........................ 150,219 156,938 160,211 146,824 611,571 636,652 631,205
Partners' capital..................... 128,474 123,116 118,344 150,224 1,360,663 1,079,370 1,358,536
OPERATING DATA
Pacific Operations volumes (thousands
of barrels)......................... -- -- -- -- 325,954 29,928 89,267
Mid-Continent Operations volumes
(thousands of barrels).............. 46,078 41,613 46,601 46,309 44,783 11,816 11,931
Bulk Terminals transport volumes
(thousands of tons)................. 4,539 6,486 6,090 9,087 24,016 2,964 9,569
</TABLE>
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, a publicly-traded limited partnership
that manages a diversified portfolio of midstream energy assets.
Currently our sole source of earnings and cash flow is cash distributions
received from Kinder Morgan G.P., Inc. Kinder Morgan G.P., Inc. owns and
receives quarterly distributions for:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units representing limited partner
interests in Kinder Morgan Energy Partners;
- a 1.0101% general partner interest in each of four subsidiary operating
partnerships of Kinder Morgan Energy Partners;
- an incentive cash distribution based on the amount of available cash of
Kinder Morgan Energy Partners distributed to the holders of its common
units.
In the event Kinder Morgan Energy Partners decreases its cash distributions
to its unitholders, our revenues may decrease substantially, primarily due to
the decrease that results in the cash incentive distribution. The cash incentive
distribution initially would be reduced by 50% of the decrease in the cash
distributions to all partners. If the per unit distribution to Kinder Morgan
Energy Partners' common unitholders falls below specific target levels described
in its partnership agreement, that percentage would decrease.
We expect to grow by the efficient operation of acquired assets and by our
share of increased cash distributions from Kinder Morgan Energy Partners. Kinder
Morgan Energy Partners should increase its cash distribution as it increases its
use of existing assets, pursues its own acquisition strategy and makes
additional acquisitions. We believe Kinder Morgan Energy Partners can make
acquisitions more effectively with the flexibility provided by a shared
acquisition approach with us.
The management discussion and analysis of financial condition and results
of operations for periods prior to 1997 relate to Enron Liquids Pipeline Company
as our predecessor.
KINDER MORGAN, INC.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Equity in earnings of our subsidiaries increased $9.2 million (183.2%) for
the three months ended March 31, 1999, as compared to the same period in 1998
due to increased distributions from Kinder Morgan Energy Partners to Kinder
Morgan G.P., Inc., our wholly-owned subsidiary.
Operating expense increased $234,000 (160.9%) for the three months ended
March 31, 1999, as compared to the same period in 1998 primarily due to
increased amortization, partially offset by decreased general and administrative
expenses.
Interest expense, net of interest income, increased $1.8 million (2048.3%)
for the three months ended March 31, 1999, as compared to the same period in
1998 due to an increase in the average debt outstanding for the comparable
periods.
1998 Compared to 1997
Equity in earnings of our subsidiaries increased $33.0 million (721.0%) for
1998 as compared to 1997 due to increased distributions from Kinder Morgan
Energy Partners to Kinder Morgan G.P., Inc.
Operating expenses increased $388,000 (35.5%) for 1998 compared to 1997 due
to increased amortization expense offset partially by decreased general and
administrative expenses.
Interest expense, net of interest income, increased $3.0 million (381.7%)
for 1998 as
26
<PAGE> 31
compared to 1997 due to an increase in the average debt outstanding.
1997 Compared to 1996
Equity in earnings of our subsidiaries increased $2.9 million (155.1%) for
1997 as compared to 1996 due to increased distributions from Kinder Morgan
Energy Partners to both Kinder Morgan G.P. Inc., our wholly-owned subsidiary and
Enron Liquids Pipeline Company as our predecessor.
Operating expenses decreased $1.4 million (49.1%) for 1997 as compared to
1996 primarily due to decreased amortization and general and administrative
expenses.
Interest income, net of interest expense decreased $4.5 million for 1997 as
compared to 1996 due to the elimination of interest income received by Enron
Liquids Pipeline Company, as our predecessor company, from its affiliates.
OUR LIQUIDITY AND CAPITAL RESOURCES
Historically, our cash requirements have been for debt service and various
administrative expenses. Since we currently do not operate any assets, we
currently do not require cash to fund normal operating expenses or capital
expenditures. We anticipate that operating expenses, capital expenditures and
general and administrative expenses will increase as we pursue and make
acquisitions. In addition, we will require cash for quarterly dividends, if any,
to our stockholders. We expect to fund normal operating expenses, dividends and
interest payments through cash generated from operations. In addition to the use
of cash generated from operations, we could meet our cash requirements with the
retained portion of the proceeds of this offering, through borrowings under a
new credit facility or by the issuance of additional securities.
1998 Compared to 1997
Cash Provided by Operating Activities
Net cash provided by operating activities was $13.2 million for 1998, a
525.1% increase over 1997, primarily due to increased distributions from Kinder
Morgan G.P., Inc., and an increase in accrued liabilities partially offset by,
among other things, an increase in accounts receivable.
Net cash provided by operating activities was $8.2 million for the first
three months of 1999, a 1,480.2% increase compared to the same period in 1997,
primarily due to increased distributions from Kinder Morgan G.P., Inc., and a
decrease in accounts receivable partially offset by an increase in accrued
liabilities.
Cash Used in Investing Activities
Net cash used in investment activities was $12.5 million for 1998, a 44.4%
decrease compared 1997. The net cash used in 1997 for investing activities was
attributable to our acquisition of Enron Liquids Pipeline Company. The $12.5
million of cash used in investing activities in 1998 enabled Kinder Morgan G.P.,
Inc. to contribute to Kinder Morgan Energy Partners its percentage of the cost
of the acquisition by Kinder Morgan Energy Partners of the Pacific Operations.
No cash was provided by investment activities for the first three months of
1999, compared to $9.6 million of net cash used in investment activities for the
comparable period in 1998. The $9.6 million of cash used in investing activities
in the first quarter of 1998 enabled Kinder Morgan G.P., Inc. to contribute its
percentage of the cost of the acquisition by Kinder Morgan Energy Partners of
the Pacific Operations.
Cash Provided by/(Used In) Financing Activities
Net cash provided by financing activities was $13.0 million for 1998,
compared to $20.5 million for 1997. The decrease was primarily due to our
receipt in 1997 of proceeds from contributed capital, the issuance of common
stock and due to dividends paid in 1998. The decrease in net cash provided by
financing activities was partially offset by the issuance of debt and dividends
paid in 1998.
Net cash used in financing activities was $18.1 million for the first three
months of 1999 compared to $9.2 million provided by
27
<PAGE> 32
financing activities during the comparable period of 1998. The difference was
due to increased payments of debt in 1999, partially offset by the issuance of
debt in 1998.
RECENT DEVELOPMENTS
On May 3, 1999, Kinder Morgan Energy Partners announced that it had entered
into a definitive agreement to purchase from Chevron Pipe Line Company an
additional 27% of Plantation Pipe Line Company for approximately $124.2 million.
Kinder Morgan Energy Partners intends to close the acquisition, which will
increase its stake in Plantation to 51%, as soon as is practicable, subject to
clearance under the Hart-Scott-Rodino Antitrust Improvements Act and a right of
first refusal by Plantation Pipe Line Company's other stockholder.
YEAR 2000
We do not have any computer systems which are involved in the operations of
our business. We do, however, use the accounting and managerial software that is
also used by Kinder Morgan G.P., Inc. As a result, for the accounting and
managerial software that we share with Kinder Morgan G.P., Inc., we would also
share the Year 2000 issues related to the software as described elsewhere in
this prospectus.
CREDIT FACILITIES
We have a $165 million revolving credit facility with a syndicate of
financial institutions. This includes a $15 million revolving loan commitment
and a $150 million term loan. First Union National Bank is the administrative
agent under the credit facility. Borrowings must be repaid on or before May 31,
2000. The term loan requires mandatory quarterly principal reductions based on
our cash flow.
Interest on advances is generally payable quarterly. Interest on loans
under the credit facility accrues at our option at a floating rate equal to
either:
- First Union National Bank's base rate (but not less than the Federal
Funds Rate plus 0.5% per annum); or
- LIBOR, plus 3.00% per annum.
The credit facility includes restrictive covenants that are customary for
this type of facility. These covenants include:
- requirements to maintain our corporate existence and our properties;
- requirements to perform our obligations and comply with laws, including
environmental laws and laws relating to employee benefits;
- requirements to grant a security interest in newly-acquired property;
- requirements to maintain various financial ratios;
- restrictions on the incurrence of additional indebtedness;
- restrictions on mergers, consolidations and sales of assets;
- restrictions on investments;
- restrictions on the grant of liens;
- prohibitions on dividends with exceptions;
- prohibitions on the issuance of stock that is convertible into debt or
that is subject to mandatory repurchase or redemption; and
- restrictions on capital leases.
We are currently in negotiations for a new credit facility to increase
available borrowings and to make other changes suitable for a publicly-held
company.
As of May 10, 1999, we had outstanding borrowings under the credit facility
of $158.5 million which is comprised of $147 million outstanding under our $150
million term loan and $11.5 million outstanding under our $15 million revolving
facility. We intend to use the proceeds of the offering to pay all but
approximately $5 million of the outstanding balance of the term loan.
KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partners manages a diversified portfolio of midstream
energy
28
<PAGE> 33
assets, including six refined products/liquids pipeline systems containing over
5,000 miles of trunk pipeline and over 20 truck loading terminals. Kinder Morgan
Energy Partners also operates 24 bulk terminal facilities that transload over 40
million tons of coal, petroleum coke and other products annually. In addition,
Kinder Morgan Energy Partners owns 24% of Plantation Pipe Line Company, with an
agreement to purchase an additional 27% subject to standard closing conditions
and a right of first refusal by Plantation Pipe Line Company's other
stockholder, 20% of Shell CO(2) Company and a 25% interest in a Y-grade
fractionation facility. Kinder Morgan Energy Partners' three reportable segments
are:
- Pacific Operations;
- Mid-Continent Operations; and
- Bulk Terminals.
RESULTS OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS
Three Months Ended March 31, 1999
compared to Three Months Ended
March 31, 1998
Kinder Morgan Energy Partners' first quarter results reflect record
quarterly earnings before extraordinary items and strong revenue growth across
all business segments. Total net earnings before extraordinary charges for the
first quarter of 1999 were $41.1 million, $0.57 per unit, compared to $14.0
million, $0.52 per unit, for the first quarter of 1998. Included in 1998 net
earnings was an extraordinary charge of $13.6 million associated with debt
refinancing transactions, that included both a prepayment premium and the
write-off of unamortized debt issue costs. After the extraordinary charge, net
income for the first quarter 1998 was $0.4 million. There was revenue growth
across all Kinder Morgan Energy Partners' business segments, primarily due to
the acquisitions of the Pacific Operations, formerly Santa Fe Pacific Pipeline
Partners, L.P. in March 1998 and Kinder Morgan Bulk Terminals, Inc., formerly
Hall-Buck Marine, Inc., in July 1998. Total Kinder Morgan Energy Partners
revenue increased to $100.0 million in the first quarter of 1999 compared to
$36.7 million in the first quarter of 1998. Operating income for the three
months ended March 31, 1999 was $47.0 million compared to $15.1 million for the
same period of 1998.
The Pacific Operations reported segment earnings of $42.4 million and
operating revenues of $60.7 million for the first three months of 1999. Segment
earnings and operating revenues for the first three months of 1998 were $12.9
million and $20.8 million, respectively. The 1999 first quarter results reflect
the inclusion of a full quarter of operations and continued strong demand for
refined products in markets served by Kinder Morgan Energy Partners' Pacific
Operations.
The Mid-Continent Operations realized $10.1 million in segment earnings in
the first quarter of 1999 compared to $9.4 million in the year-earlier period.
The 7% earnings increase in 1999 was primarily due to earnings from Kinder
Morgan Energy Partners' equity investment in Plantation Pipe Line Company, which
was acquired in September 1998. Segment revenues were $10.6 million in the first
quarter of 1999 and $10.1 million in the first quarter of 1998. The 5% increase
in segment revenue was the result of a 3% increase in average tariff rates
accompanied by a slight increase of 1% in barrels transported. Higher throughput
volumes resulted in an increase in operating expenses. Combined operating,
maintenance, fuel and power expenses increased 9% to $3.7 million compared with
last year's first quarter. Depreciation and amortization expense for the first
quarter of 1999 was $2.6 million versus $1.9 million in the same period last
year. The increase of $0.7 million in depreciation and amortization expense
represents Kinder Morgan Energy Partners' amortization of goodwill associated
with its investment in Plantation Pipe Line Company.
Earnings from equity investments totaled $7.6 million in the first quarter
of 1999 compared to $5.2 million in the first quarter of 1998. The 46% increase
is mainly due to the inclusion of $2.9 million in earnings from Kinder Morgan
Energy Partners' equity investment in Plantation Pipe Line Company
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<PAGE> 34
and higher earnings from its investment in Heartland Pipeline Company. Higher
overall equity earnings were partially offset by lower returns on Kinder Morgan
Energy Partners' investment in the Mont Belvieu Fractionator, primarily due to a
decrease in fractionation volumes.
Income tax expense for the segment increased $1.1 million in 1999 over the
previous year. The 1999 income tax expense increase represents Kinder Morgan
Energy Partners' share of tax expense related to its investment in Plantation
Pipe Line Company.
The Bulk Terminals segment reported earnings of $8.8 million in the first
quarter of 1999 compared to $2.5 million in the same period of 1998. Segment
revenues for the first quarters of 1999 and 1998 were $28.7 million and $5.8
million, respectively. The 1999 increase in operating results reflects Kinder
Morgan Energy Partners' acquisitions of Kinder Morgan Bulk Terminals, Inc. in
July 1998 and the Pier IX and Shipyard River Terminals in December 1998.
Excluding these acquisitions, revenues from Kinder Morgan Energy Partners' other
coal terminals increased 25% in the first quarter of 1999 compared with the
year-earlier period. The revenue increase was primarily the result of a 19%
increase in coal volumes transferred and a slight increase of 2% in average coal
transfer rates. Cost of products sold decreased 40% compared with last year's
first quarter. The decrease was mainly due to a lower number of coal purchase
contracts incurred in coal marketing activity. Operations and maintenance
expenses, combined with fuel and power expenses, totaled $16.4 million in the
first quarter of 1999 and $2.1 million in the first quarter of 1998. The
increase in operating expenses was the result of the 1998 business acquisitions.
Excluding the acquired operations, combined expenses decreased 5% compared to
the first quarter of last year. The acquisitions affected other expense
categories as well. Depreciation and amortization expenses, along with taxes,
other than income taxes, were higher in the first quarter of 1999 versus the
comparable period in 1998. Depreciation and amortization expenses were $1.8
million in 1999 and $0.4 million in 1998. Taxes, other than income taxes, were
$0.9 million in 1999 and $0.1 million in 1998.
Operating statistics for the first quarter are as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
-------------
1998 1999
----- -----
<S> <C> <C>
Pacific Operations
Delivery Volumes (millions of barrels).................... 29.9 89.3
Average Revenue (dollars per barrel)...................... $0.69 $0.68
Mid-Continent Operations (North System and Cypress only)
Delivery Volumes (millions of barrels).................... 11.8 11.9
Average Tariff (dollars per barrel)....................... $0.78 $0.80
Bulk Terminals
Transport Volumes (millions of tons)...................... 3.0 9.6
</TABLE>
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<PAGE> 35
Earnings contribution by Kinder Morgan Energy Partners' business segment
for the first quarter is as follows:
EARNINGS CONTRIBUTION BY KINDER MORGAN ENERGY PARTNERS' BUSINESS SEGMENT
(EXCLUDES GENERAL AND ADMINISTRATIVE EXPENSES, DEBT COSTS, AND MINORITY
INTEREST;
INCLUDES THE RESULTS OF ACQUIRED OPERATIONS FROM THE DATE OF ACQUISITION)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST QUARTER
-----------------
1998 1999
------- -------
<S> <C> <C>
Pacific Operations.......................................... $12,865 $42,400
Mid-Continent Operations.................................... $ 9,409 $10,071
Bulk Terminals.............................................. $ 2,450 $ 8,839
</TABLE>
Total general and administrative expenses of Kinder Morgan Energy Partners
were $7.8 million in the first quarter of 1999 compared to $5.1 million in the
same period of 1998. The increase was attributable to higher administrative
expenses associated with the Pacific Operations and Kinder Morgan Bulk
Terminals, Inc. acquisitions made by Kinder Morgan Energy Partners in 1998.
Kinder Morgan Energy Partners continues to focus on productivity and expense
controls.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, was $11.8 million in the first quarter of 1999 compared to $5.7 million
in the same period of 1998. The increase was mainly due to debt assumed by
Kinder Morgan Energy Partners as part of the acquisition of the Pacific
Operations as well as expenses related to the financing of Kinder Morgan Energy
Partners' 1998 investments.
Minority interest expense increased to $0.6 million in the first quarter of
1999 versus $0.1 million in the first quarter of 1998. The increase was the
result of earnings attributable to the Pacific Operations as well as to higher
overall Kinder Morgan Energy Partners' net income.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Key acquisitions and strong performance across all business segments during
1998 allowed Kinder Morgan Energy Partners to realize a 105% increase in net
income per unit before extraordinary items. Kinder Morgan Energy Partners
reported net earnings before extraordinary charge of $117.2 million, or $2.09
per unit for 1998 and $17.7 million, or $1.02 per unit for 1997. Included in the
1998 results was an extraordinary charge of $13.6 million associated with debt
refinancing transactions, including both a prepayment premium and the write-off
of unamortized debt issue costs. After the extraordinary charge, net income for
the full year 1998 was $103.6 million, or $1.75 per unit. The acquisition of the
Pacific Operations, which were formerly Santa Fe Pacific Pipeline Partners, L.P.
in March 1998 was the primary contributing factor for the increase in total
revenue of Kinder Morgan Energy Partners to $322.6 million in 1998 from $73.9
million in 1997. Operating income for 1998 was $139.9 million versus $24.2
million in 1997.
For 1998, the Pacific Operations reported segment earnings of $140.1
million and total operating revenues of $221.4 million. The amounts reflect
strong demand for gasoline, jet fuel and diesel fuel in markets served by Kinder
Morgan Energy Partners' Pacific Operations. Segment earnings included other
expense charges of $6.4 million, mainly the result of accrued expenses relating
to the Federal Energy Regulatory Commission Rate Case reserve.
The Mid-Continent Operations earned $37.2 million in segment earnings for
1998 compared to $27.5 million in 1997. Mid-Continent Operations consist of the
North
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<PAGE> 36
System, the Cypress Pipeline, the Painter gas processing plant, and Kinder
Morgan Energy Partners' equity investments in Shell CO(2) Company, Plantation
Pipe Line Company and the Mont Belvieu Fractionator. The 35% increase in
earnings was primarily driven by high returns from Kinder Morgan Energy
Partners' investment in Shell CO(2) Company. Segment revenues were $38.3 million
for 1998 and $55.8 million for 1997. The revenue decrease was primarily related
to the Central Basin Pipeline, which was contributed to Shell CO(2) Company in
March 1998 and later accounted for as an investment in partnership.
Cost of products sold decreased to $0.2 million in 1998 compared to $4.6
million in 1997 due to lower purchase/sale contracts reported by the North
System and to the transfer of the Central Basin Pipeline. Operating and
maintenance expenses, combined with fuel and power expenses, were $14.1 million
in 1998. This amount compares to $17.1 million for 1997. The decrease was
attributable to the assignment of the Mobil gas processing agreement at the
Bushton Plant in April 1997, the transfer of the Central Basin Pipeline and a
slight decrease of 3% in barrels transported. The transfer of the Central Basin
Pipeline also accounted for a decrease in depreciation expense and other tax
expenses in 1998. Depreciation and amortization expenses, combined with taxes,
other than income taxes, were $10.3 million in 1998 and $11.7 million in 1997.
Earnings from equity investments grew to $24.9 million in 1998 compared to
$5.7 million in 1997. The increase was chiefly the result of Kinder Morgan
Energy Partners' interests in Plantation Pipe Line Company and Shell CO(2)
Company, both of which are accounted for under the equity method. Other income
items increased $0.6 million in 1998 compared to 1997. This was attributable to
a $0.6 million contested product loss at the Mont Belvieu Fractionator in 1997.
Income tax expense for the segment increased $1.7 million in 1998 over the
previous year. The 1998 income tax provision includes Kinder Morgan Energy
Partners' share of tax expense relating to its investment in Plantation Pipe
Line Company.
The Bulk Terminals segment reported earnings of $19.2 million in 1998
versus $10.7 million in 1997. Revenues from Bulk Terminal activity were $62.9
million for 1998 and $18.2 million for 1997. The increase in operating results
was directly affected by Kinder Morgan Energy Partners' acquisition of Kinder
Morgan Bulk Terminals, Inc., formerly Hall-Buck Marine, Inc., in July 1998 and
the inclusion of a full year of operations from the Grand Rivers coal terminal,
acquired in September 1997. The increase in total segment revenue was also
driven by a 93% increase in revenues earned by the Red Lightning energy services
unit, which began operations in April 1997. Cost of products sold for the year
1998 was $5.7 million compared to $2.6 million in 1997. The increase was due to
a higher number of coal purchase contracts as part of the coal marketing
activity. Operations and maintenance expenses, combined with fuel and power
expenses, totaled $31.3 million in 1998 and $3.6 million in 1997. The increase
was the result of 1998 business acquisitions and higher coal volumes transferred
at Kinder Morgan Energy Partners' Cora Terminal. Depreciation and amortization
expense was $3.9 million in 1998 and $1.1 million in 1997. Taxes, other than
income taxes, were $1.6 million in 1998 and $0.3 million in 1997. The increase
in both depreciation and taxes was primarily due to the addition of Kinder
Morgan Bulk Terminals.
Total general and administrative expenses of Kinder Morgan Energy Partners
totaled $40.0 million in 1998 compared to $8.9 million in 1997. The increase was
attributable to higher administrative expenses associated with new acquisitions,
primarily the Pacific Operations, made by Kinder Morgan Energy Partners in March
1998. Kinder Morgan Energy Partners continues to focus on productivity and
expense controls.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, was $38.6 million in 1998 compared to $12.1 million in 1997. The
increase was primarily due to debt assumed by Kinder Morgan Energy Partners as
part of the acquisition of the Pacific Operations as well
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<PAGE> 37
as expenses related to the financing of Kinder Morgan Energy Partners' 1998
investments.
Minority interest expense increased to $1.0 million in 1998 versus $0.2
million in 1997. The increase was the result of earnings attributable to the
Pacific Operations as well as to higher overall Kinder Morgan Energy Partners
income.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net income of Kinder Morgan Energy Partners increased 49% to $17.7 million
in 1997 from $11.9 million in 1996. The results for 1996 included a
non-recurring gain of $2.5 million, attributable to the cash buyout received
from Chevron, USA for early termination of a gas processing contract at the
Painter Plant. See note 7 of the notes to the consolidated financial statements
of Kinder Morgan Energy Partners. Revenues of Kinder Morgan Energy Partners
increased 4% to $73.9 million in 1997 compared to $71.3 million in 1996.
A significant portion of the overall earnings increase was attributable to
the Bulk Terminals segment. The segment reported net earnings of $10.7 million
for 1997, $6.3 million or 142%, higher than the previous year. Earnings from the
coal terminals increased 81%, primarily the result of increases in both coal
tons transferred and average transfer rates at the Cora Terminal, as well as the
addition of the Grand Rivers Terminal in September 1997. Operating results from
Red Lightning, the energy services business unit, also contributed positive
earnings. Segment revenues totaled $18.2 million, up $10.1 million from 1996.
The large increase reflects the addition of the Red Lightning energy services
unit starting in April 1997, the addition of the Grand Rivers Terminal, and a
35% increase in revenues earned by the Cora Terminal. The increase in revenues
from the Cora Terminal resulted from a 17% increase in volumes transferred,
accompanied by a 6% increase in average transfer rates. Cost of products sold
increased to $2.6 million in 1997 from $0.2 million in 1996. This was due to the
coal purchase contracts entered into by the Red Lightning business unit.
Operating and maintenance expenses, together with fuel and power expenses, were
$3.6 million in 1997 and $2.0 million in 1996. Excluding the effect of the Grand
Rivers Terminal, these operating costs increased 31% in 1997, mainly due to the
increase in coal tons transferred by the Cora Terminal.
In 1997, the Mid-Continent Operations reported $27.5 million in segment
earnings from total revenues of $55.8 million. This compares to 1996 segment
earnings of $28.7 million from revenues of $63.2 million. The decline in segment
earnings was primarily the result of the $2.5 million non-recurring gain
recognized in 1996 referred to above. The decrease in segment revenue was mainly
the result of the termination of gas processing at the Painter Plant in August
1996 and the assignment of the Mobil gas processing agreement at the Bushton
Plant to KN Processing, Inc. in April 1997. Revenues from the liquids pipelines
remained relatively flat in 1997 as compared to 1996. Pipeline revenues were
$53.5 million in 1997 versus $54.0 million in 1996. Revenues from the Cypress
Pipeline increased 11% due to a 14% increase in throughput volumes. The North
System's revenues decreased 3% due to a 5% decrease in barrels transported. Cost
of products sold was $4.6 million in 1997 versus $7.7 million in 1996. The
decrease was due to fewer purchase/sale contracts on the liquids pipelines as
well as the termination of purchase/sale contracts at the Painter Plant.
Operating and maintenance expenses, combined with fuel and power expenses, were
$17.1 million for 1997 and $21.8 million for 1996. A significant decrease in
segment operating expenses resulted from the assignment of the Mobil Agreement
and the leasing of the Painter Facility to Amoco Oil Company in February 1997.
Additionally, the decrease in volumes transferred by the North System in 1997
resulted in a 4% decrease in its operating and fuel costs. Taxes, other than
income taxes, decreased $0.7 million, or 20%, in 1997 due to adjustments to the
liquids pipelines' ad valorem tax valuations and higher 1996 ad valorem tax
provisions. Other non-operating income and expense decreased $3.3 million in
1997 versus 1996. The decrease reflects the $2.5 million buyout
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<PAGE> 38
payment received from Chevron in 1996 and a $0.6 million contested product loss
at the Mont Belvieu Fractionator recorded in the fourth quarter of 1997. A
decrease in the cumulative difference between book and tax depreciation and the
effect of a partial liquidating distribution of Kinder Morgan Natural Gas
Liquids Corporation, the corporate entity holding Kinder Morgan Energy Partners'
interest in the Mont Belvieu Fractionator, resulted in a $2.1 million reduction
in income tax expense for 1997 compared to 1996.
Total general and administrative expenses of Kinder Morgan Energy Partners
totaled $8.9 million in 1997 compared to $9.1 million in 1996. The 2% decrease
in administrative expenses was the result of cost savings realized by new
management.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, for 1997 of $12.1 million was relatively unchanged from the amount
reported in 1996, which was $11.9 million.
OUTLOOK
Kinder Morgan Energy Partners intends to actively pursue a strategy to
increase Kinder Morgan Energy Partners' operating income. Kinder Morgan Energy
Partners will use a three-pronged strategy to accomplish this goal.
- COST REDUCTIONS. Kinder Morgan Energy Partners has substantially reduced
its operating expenses since Kinder Morgan G.P., Inc. was acquired in
February 1997 and will continue to seek further reductions where
appropriate. Since the acquisition of the Pacific Operations in March
1998, Kinder Morgan Energy Partners has also reduced costs by more than
$20 million per year through the elimination of redundant general and
administrative and other expenses.
- INTERNAL GROWTH. Kinder Morgan Energy Partners intends to expand the
operations of its current facilities. Kinder Morgan Energy Partners has
taken a number of steps that we believe will increase revenues from
existing operations, including the following:
- the Pacific Operations committed over $40 million to expand its
pipeline and storage facilities;
- the Cypress Pipeline expanded its capacity by 25,000 barrels per day in
November 1997;
- earnings and cash flow, as historically related to the operations of
the Central Basin Pipeline, increased in 1998 as a result of the
partnership formed with Shell;
- the Heartland Pipeline Company joint venture with Conoco commenced in
April 1999 a $3.4 million expansion into the Omaha, Nebraska and
Council Bluffs, Iowa markets; and
- a $30 million rail project at the Grand Rivers Terminal, expected to
enhance efficiency and speed of moving coal through the terminal.
- STRATEGIC ACQUISITIONS. Since January 1, 1998, Kinder Morgan Energy
Partners made the following acquisitions:
- Shell CO(2) Company, 20%, on March 5, 1998;
- SFPP, L.P. on March 6, 1998;
- Kinder Morgan Bulk Terminals, Inc. on July 1, 1998;
- Plantation Pipe Line Company, 24%, on September 15, 1998; with a
definitive agreement to purchase an additional 27%, subject to
customary conditions to closing and a right of first refusal by
Plantation Pipe Line Company's other stockholder, executed on April 30,
1999; and
- Pier IX and Shipyard River Terminals on December 18, 1998.
Kinder Morgan Energy Partners intends to seek opportunities to make
additional strategic acquisitions to expand existing businesses or to enter into
related businesses. Kinder Morgan Energy Partners
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<PAGE> 39
periodically considers potential acquisition opportunities as those
opportunities are identified by Kinder Morgan Energy Partners. We cannot assure
you Kinder Morgan Energy Partners will be able to complete any acquisitions. We
anticipate that Kinder Morgan Energy Partners will finance acquisitions
temporarily by borrowings under its credit facility and permanently by a
combination of debt and equity funding from the issuance of new debt securities
and units.
We believe that the increase in paid distributions per unit of Kinder
Morgan Energy Partners resulted from favorable operating results in 1998. On
April 12, 1999, Kinder Morgan Energy Partners declared a distribution of $0.70
per unit for the first quarter of 1999. We believe that future operating results
of Kinder Morgan Energy Partners will continue to support similar levels of
quarterly cash distributions; however, we cannot assure you that future
distributions will continue at those levels.
LIQUIDITY AND CAPITAL RESOURCES
Kinder Morgan Energy Partners' primary cash requirements, in addition to
normal operating expenses, are debt service, sustaining capital expenditures,
discretionary capital expenditures and quarterly distributions to partners. In
addition to the use of cash generated from operations, Kinder Morgan Energy
Partners could meet its cash requirements through borrowings under its credit
facilities, issuing long-term notes or issuing additional units. We expect
Kinder Morgan Energy Partners to fund future cash distributions and to sustain
capital expenditures with existing cash and cash flows from its operating
activities. Expansion capital expenditures are expected to be funded through
additional borrowings by Kinder Morgan Energy Partners or issuance of additional
units. Interest payments are expected to be paid from cash flows from operating
activities and debt principal payments will be met by additional borrowings by
Kinder Morgan Energy Partners as they become due or by issuance of additional
units.
Cash Provided by Operating Activities
Net cash provided by operating activities was $46.4 million for the three
months ended March 31, 1999, versus $21.5 million in the comparable period of
1998. The period-to-period increase of $24.9 million in cash flow from
operations was primarily the result of higher net earnings, non-cash
depreciation and amortization charges and distributions from equity investments.
Higher earnings and depreciation charges, chiefly due to business acquisitions
made during 1998, increased $27.1 million and $7.3 million, respectively, in the
first quarter of 1999 when compared to the same period in 1998. Distributions
from Kinder Morgan Energy Partners' investments in Shell CO(2) Company and
Plantation Pipe Line Company were the primary factors for the $6.5 million
increase in equity investment distributions. The overall increase in cash
provided by operating activities was partially offset by lower cash inflows
relative to net changes in working capital items, higher payments for pipeline
right-of-way easements and long-term payments under Kinder Morgan Energy
Partners' executive compensation plan.
Cash Used in Investing Activities
Net cash used in investing activities was $18.9 million for the three month
period ended March 31, 1999, compared to $91.3 million in the same year-earlier
period. The $72.4 million decrease reflects $61.8 million used for the March 6,
1998 acquisition of the Pacific Operations and $25.0 million used for the March
5, 1998 cash investment in Shell CO(2) Company. Lower overall funds used in
investing activities were partially offset by a $14.0 million increase in
capital expenditures driven primarily by continued investment in Kinder Morgan
Energy Partners' Pacific Operations. Excluding the effect of cash used for asset
acquisitions, additions to property, plant and equipment were $18.4 million in
the first quarter of 1999 and $4.4 million in the first quarter of 1998. These
additions of property, plant and equipment include both expansion and
maintenance projects.
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<PAGE> 40
Cash Provided by/(Used in) Financing Activities
Net cash used in financing activities amounted to $25.9 million for the
three month period ended March 31, 1999. This increase of $143.5 million from
the comparable 1998 period was the result of decreased net borrowings and
contributions by Kinder Morgan, G.P., Inc. The overall increase in cash used in
financing activities was partially offset by lower debt refinancing fees.
Overall debt financing activities provided $19.6 million in cash during the
three month period of 1999, versus $134.2 million during the comparable period
of 1998. The 1998 first quarter financing activities included borrowings made by
Kinder Morgan Energy Partners as part of the acquisition of the Pacific
Operations. Distributions to all partners increased to $43.6 million in the
three month period ended March 31, 1999, compared to $10.0 million in the
comparable 1998 period. Higher distributions were the result of an increase in
distributed cash flows. In addition, the higher distributions were as a result
of an increase in the number of units, an increase in paid distributions per
unit and an increase in incentive distributions to Kinder Morgan G.P., Inc. as a
result of increased distributions to unitholders. Kinder Morgan Energy Partners
paid distributions of $0.65 per unit in the first quarter of 1999 compared to
$0.5625 per unit in the first quarter of 1998.
The partnership agreement requires Kinder Morgan Energy Partners to
distribute 100% of "available cash", as defined in the 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 cash receipts of Kinder Morgan Energy Partners and its
operating partnerships, less cash disbursements and net additions to reserves
and amounts payable to the former Santa Fe general partner in respect of its
0.5% special limited partnership interest in SFPP, L.P.
Kinder Morgan Energy Partners' debt instruments generally require Kinder
Morgan Energy Partners to maintain a reserve for future debt service
obligations. The purpose of the reserve is to lessen differences in the amount
of available cash from quarter to quarter due to the timing of required
principal and interest payments, which may only be required on a semi-annual or
annual basis, and to provide a source of funds to make those payments. Kinder
Morgan Energy Partners' debt instruments generally require Kinder Morgan Energy
Partners to set aside each quarter a portion of the principal and interest
payments due in the next six to twelve months.
Available cash of Kinder Morgan Energy Partners generally is distributed
98% to the limited partners, including the approximate 2% limited partner
interest of Kinder Morgan G.P., Inc., and 2% to Kinder Morgan G.P., Inc. This
general requirement is modified to provide for incentive distributions to be
paid to Kinder Morgan G.P., Inc. if quarterly distributions to unitholders
exceed specified targets.
In general, distributions by Kinder Morgan Energy Partners of available
cash constituting cash from operations for any quarter will be made in the
following manner:
- first, 98% to the holders of units pro rata and 2% to Kinder Morgan G.P.,
Inc. until the holders of units have received a total of $0.3025 per unit
for that quarter for each unit (the "First Target Distribution");
- second, 85% of any available cash then remaining to the holders of units
pro rata and 15% to Kinder Morgan G.P., Inc. until the holders of units
have received a total of $0.3575 per unit for that quarter for each unit
(the "Second Target Distribution");
- third, 75% of any available cash then remaining to all holders of units
pro rata and 25% to Kinder Morgan G.P., Inc. until the holders of units
have received a total of $0.4675 per unit for that quarter for each unit
(the "Third Target Distribution"); and
- fourth, 50% of any available cash then remaining to all holders of units
pro
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<PAGE> 41
rata and 50% to Kinder Morgan G.P., Inc.
Cash incentive distributions are generally defined as all cash distributions to
Kinder Morgan G.P., Inc. that are in excess of 2% of the aggregate amount of
cash being distributed. Kinder Morgan G.P., Inc.'s cash incentive distribution
declared by Kinder Morgan Energy Partners for the first quarter of 1999 was
$13.1 million, while the cash incentive distribution paid during the first
quarters of 1999 and 1998 were $10.7 million and $1.9 million, respectively.
Credit Facilities
Kinder Morgan Energy Partners has a $325 million revolving credit facility
with a syndicate of financial institutions. First Union National Bank is the
administrative agent under the agreement. Kinder Morgan Energy Partners and its
subsidiary Kinder Morgan Operating Limited Partnership "B" are co-borrowers
under its credit facility. Beginning in May 2000, the amount available under its
credit facility reduces on a quarterly basis, with the final installment due in
February 2005.
Kinder Morgan Energy Partners' operating partnerships and its other
restricted subsidiaries, as defined in the credit facility, of Kinder Morgan
Energy Partners, other than SFPP, L.P., have guaranteed Kinder Morgan Energy
Partners' obligations under its credit facility. Kinder Morgan Energy Partners
has guaranteed the obligations of Kinder Morgan Operating Limited Partnership
"B" under its credit facility. The credit facility is unsecured but requires
Kinder Morgan Energy Partners, in some circumstances, to provide cash collateral
to the lenders to secure letters of credit.
Interest on advances under the credit facility is generally payable
quarterly. Interest on loans accrues at Kinder Morgan Energy Partners' option at
a floating rate equal to either:
- First Union National Bank's base rate, but not less than the federal
funds rate plus 0.5% per year, or
- LIBOR, plus a margin that will vary from 0.75% to 1.25% per annum
depending upon the ratio of Kinder Morgan Energy Partners' debt to cash
flow.
The credit facility includes restrictive covenants that are customary for
this type of facility, including:
- requirements to maintain various financial ratios;
- restrictions on the incurrence of additional indebtedness;
- restrictions on entering into mergers, consolidations and sales of
assets;
- restrictions on making investments;
- restrictions on granting liens;
- prohibitions on making cash distributions to holders of units more
frequently than quarterly;
- prohibitions on making cash distributions in excess of 100% of available
cash for the immediately preceding calendar quarter; and
- prohibitions on making any distribution to holders of units if an event
of default exists or would exist upon making that distribution.
As of March 31, 1999, Kinder Morgan Energy Partners had no outstanding
borrowings under its credit facility. Kinder Morgan Energy Partners has used
previous borrowings of:
- approximately $142 million borrowed to refinance its First Mortgage
Notes, including a make whole prepayment premium, and the bank credit
facilities of two of its operating partnerships;
- approximately $25 million borrowed to fund its cash investment in Shell
CO(2)Company;
- approximately $100 million borrowed to fund part of the acquisition of
the Pacific Operations, including post-closing adjustments;
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<PAGE> 42
- $100 million borrowed to fund part of the purchase price of its interest
in Plantation Pipe Line Company;
- $35 million borrowed to refinance debt of Kinder Morgan Bulk Terminals,
Inc. that was outstanding at the time of the acquisition and to fund
general corporate purposes; and
- $35 million borrowed to finance the acquisition of the Pier IX Terminal
and the Shipyard River Terminal.
Kinder Morgan Energy Partners used approximately $230 million of proceeds
from the sale of senior notes in January 1999 to pay down outstanding balances
under the credit facility.
Kinder Morgan Energy Partners used approximately $210 million of proceeds
from a public offering of units in June 1998 to pay down outstanding balances
under the credit facility.
Kinder Morgan Energy Partners' First Mortgage Notes were incurred for the
original formation of Kinder Morgan Energy Partners. Kinder Morgan Energy
Partners under its credit facility borrowed the remainder of the indebtedness
incurred to refinance the First Mortgage Notes, for working capital and for
general partnership purposes. Kinder Morgan Energy Partners' First Mortgage
Notes bore interest at a fixed rate of 8.79% per year. The remaining
indebtedness under its credit facility incurred to refinance the First Mortgage
Notes bore interest at varying rates with a weighted average rate of
approximately 7.65% per year as of December 31, 1997. Kinder Morgan Energy
Partners' First Mortgage Notes were payable in 10 equal annual installments of
$11 million commencing in June 1998. The remaining indebtedness under its credit
facility incurred to refinance the First Mortgage Notes will mature in 1999.
As of March 31, 1999, SFPP, L.P. had long-term debt of $355 million that
consists of $244.0 million of First Mortgage Notes and $111.0 million borrowed
under SFPP, L.P.'s $175 million bank credit facility. The SFPP First Mortgage
Notes are payable in annual installments through December 15, 2004. The credit
facility matures in August 2000. Kinder Morgan Energy Partners intends to
refinance some or all of the remaining SFPP, L.P. First Mortgage Notes as they
become payable. The credit facility permits SFPP, L.P. to refinance the $64
million of SFPP, L.P. First Mortgage Notes due on or before December 15, 1999,
plus a $31.5 million prepayment allowed on that date. The SFPP, L.P. credit
facility also provides for a working capital facility of up to $25 million.
Senior Notes
On January 29, 1999, Kinder Morgan Energy Partners issued $250 million of
6.30% Senior Notes due 2009. Interest on the senior notes is payable
semi-annually on February 1 and August 1 of each year beginning on August 1,
1999. The indenture governing the senior notes contains restrictions on the
ability of Kinder Morgan Energy Partners to enter into sale and leaseback
transactions, grant liens on its assets and merge or consolidate with other
entities. Each subsidiary that guarantees any senior debt of Kinder Morgan
Energy Partners must also guarantee the senior notes. Currently, the senior
notes are guaranteed by:
- all of Kinder Morgan Energy Partners' operating partnerships other than
SFPP, L.P.;
- Kinder Morgan Bulk Terminals, Inc.;
- Kinder Morgan Natural Gas Liquids Corporation; and
- Kinder Morgan CO(2), LLC.
Kinder Morgan Energy Partners may redeem the senior notes at any time, upon
not less than 30 and not more than 60 days notice, at a price equal to 100% of
the principal amount of the senior notes plus accrued interest to the redemption
date plus a make-whole premium, if any. The redemption right is subject to the
right of holders of record on the relevant record date to receive interest due
on an interest payment date that is on or prior to the redemption date. The
redemption price will never be less than 100% of the principal amount of the
38
<PAGE> 43
senior notes plus accrued interest to the redemption date.
The amount of the make-whole premium will be equal to the excess, if any,
of:
- the sum of the present values, calculated as of the redemption date, of:
-- each interest payment that, but for that redemption, would have been
payable on the senior notes being redeemed on each interest payment
date occurring after the redemption date excluding any accrued
interest for the period before the redemption date; and
-- the principal amount that would have been payable at the final
maturity of the senior notes if they had not been redeemed;
over
- the principal amount of the senior notes being redeemed.
The present value of those interest and principal payments will be
calculated by discounting the amount of each payment of interest or principal
from the date that the payment would have been payable, but for the redemption,
to the redemption date at a discount rate equal to the treasury yield, as
defined below, plus 25 basis points.
For purposes of determining the make-whole premium, "treasury yield" means
a rate of interest per year equal to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds to
the remaining term to maturity of the senior notes, calculated to the nearest
1/12th of a year.
Capital Requirements for Recent Transactions
SHELL CO(2) COMPANY. On March 5, 1998, Kinder Morgan Energy Partners
transferred the Central Basin Pipeline and $25 million in cash to Shell
CO(2)Company in exchange for a 20% limited partner interest in Shell CO(2)
Company. Kinder Morgan Energy Partners financed its cash investment in Shell
CO(2) Company through its credit facility.
SANTA FE PACIFIC PIPELINE PARTNERS. On March 6, 1998, Kinder Morgan Energy
Partners acquired substantially all of the assets of Santa Fe Pacific Pipeline
Partners, L.P. for an aggregate of approximately $1.4 billion, that consisted of
approximately 26.6 million units, $84.4 million in cash and the assumption of
various liabilities. Kinder Morgan Energy Partners financed the $84.4 million
cash portion of the purchase price and a portion of the transaction expenses
through its credit facility.
KINDER MORGAN BULK TERMINALS, INC. Kinder Morgan Energy Partners, effective
July 1, 1998, acquired Kinder Morgan Bulk Terminals, Inc. for approximately $100
million, consisting of approximately 2.1 million units and the assumption of
approximately $23 million of indebtedness. Kinder Morgan Energy Partners later
repaid the indebtedness with funds borrowed under its credit facility.
PLANTATION PIPE LINE COMPANY. On September 15, 1998, Kinder Morgan Energy
Partners acquired 24% of Plantation Pipe Line Company for $110 million. Kinder
Morgan Energy Partners borrowed $100 million under its credit facility, and paid
$10 million from its cash accounts. Kinder Morgan Energy Partners intends to
fund its purchase of an additional 27% of Plantation Pipe Line Company by
borrowing the approximately $124.2 million purchase price under its credit
facility.
PIER IX TERMINAL AND SHIPYARD RIVER TERMINAL. On December 18, 1998, Kinder
Morgan Energy Partners acquired the Pier IX Terminal, located in Newport News,
Virginia, and the Shipyard River Terminal, located in Charleston, South
Carolina, for $35 million, which Kinder Morgan Energy Partners borrowed under
the credit facility.
YEAR 2000
Kinder Morgan Energy Partners has begun to implement a five phase program
to achieve Year 2000 compliance. Kinder Morgan Energy Partners is in the process
of the evaluation of both information technology systems and non-related systems
including those that contain embedded technology.
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<PAGE> 44
Kinder Morgan Energy Partners has completed the system inventory phase. In
the system inventory phase, all hardware and critical software was inventoried
and a database of systems that needed further assessment was created.
Kinder Morgan Energy Partners has begun the assessment phase. In the
assessment phase, specific Year 2000 issues and solutions will be identified.
Kinder Morgan Energy Partners anticipates completing the assessment phase by the
end of May 1999.
Kinder Morgan Energy Partners has begun the system testing phase. In the
system testing phase, real world tests on critical systems are run to ensure
that they will operate properly after the Year 2000. Kinder Morgan Energy
Partners anticipates completing the system testing phase by the end of August
1999.
Kinder Morgan Energy Partners has begun the remediation phase. In the
remediation phase, problems that arise in Kinder Morgan Energy Partners'
assessment and system testing phases are fixed. Kinder Morgan Energy Partners
anticipates completing the remediation of critical systems by the end of August
1999, and all other remediation by the end of October 1999.
Kinder Morgan Energy Partners has begun the contingency planning phase.
Kinder Morgan Energy Partners currently has plans in place for non-Year 2000
related contingencies and will modify these plans to address any specific
contingencies related to the Year 2000 problem. Initial drills of contingency
operations were held in the first quarter of 1999. Refinement of contingency
plans and employee training will continue throughout the year and be completed
in the fourth quarter of 1999.
Kinder Morgan Energy Partners does not believe it has material exposure to
third parties' failures to remediate the Year 2000 problem. Kinder Morgan Energy
Partners has not sought and does not intend to seek information from material
suppliers, customers, or service providers to determine the exact extent to
which Kinder Morgan Energy Partners would be affected by third parties' failures
to remediate the Year 2000 problem.
While Kinder Morgan Energy Partners has budgeted funds to address the Year
2000 problem, Kinder Morgan Energy Partners does not believe that any material
expenditures will be required to address the Year 2000 problem as it relates to
existing systems. However, uncertainty exists concerning the potential costs and
effects associated with any Year 2000 compliance. Therefore, Kinder Morgan
Energy Partners cannot assure you that unexpected Year 2000 compliance problems
of either Kinder Morgan Energy Partners or its vendors, customers, and service
providers would not materially and adversely affect Kinder Morgan Energy
Partners' business, financial condition or operating results.
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<PAGE> 45
BUSINESS OF KINDER MORGAN, INC.
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, L.P., a publicly-traded limited
partnership that manages a diversified portfolio of midstream energy assets. We
acquired Enron Liquids Pipeline Company, the predecessor company to Kinder
Morgan G.P., Inc. in February 1997. We plan to implement an aggressive growth
strategy to pursue strategic acquisitions of energy related assets and
businesses, both on our own and in cooperation with Kinder Morgan Energy
Partners. Although we have not yet reached a definitive agreement for any
acquisition, we have had discussions with several potential acquisition
candidates and intend to move quickly toward the advancement of these
discussions and the implementation of an acquisition strategy.
Our current earnings and cash flow are generated solely from cash
distributions received from Kinder Morgan G.P., Inc., which are in turn
generated by the operations of Kinder Morgan Energy Partners, its operating
limited partnerships and subsidiaries. Kinder Morgan G.P., Inc. owns and
receives quarterly distributions for:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units representing limited partner
interests in Kinder Morgan Energy Partners;
- a 1.0101% general partner interest in each of four subsidiary operating
partnerships of Kinder Morgan Energy Partners; and
- a cash incentive distribution based on the amount of available cash of
Kinder Morgan Energy Partners distributed to the holders of its common
units.
We believe that the stable cash flows of Kinder Morgan Energy Partners will
continue to provide us a secure source of revenues.
We also expect our revenues to grow due to Kinder Morgan Energy Partners'
growth-oriented strategy and the terms of its partnership agreement. Kinder
Morgan G.P., Inc. has a strong incentive to increase Kinder Morgan Energy
Partners' unitholder distributions. The partnership agreement generally provides
Kinder Morgan G.P., Inc. a percentage of cash distributions made by Kinder
Morgan Energy Partners, that increases, up to 50%, as distributions to the
common unitholders of Kinder Morgan Energy Partners increase. Kinder Morgan
Energy Partners has announced raises in its quarterly distribution six times in
nine quarters since we acquired the predecessor company to Kinder Morgan G.P.,
Inc. During that time, we have increased the per unit quarterly cash
distribution to the common unitholders of Kinder Morgan Energy Partners by over
120%, from $0.315 to $0.70. At Kinder Morgan Energy Partners' current per unit
distribution, Kinder Morgan G.P., Inc., in its capacity as general partner of
Kinder Morgan Energy Partners:
- receives approximately 29% of the cash distributed by Kinder Morgan
Energy Partners;
- shares equally, at the 50% level, with the common units in any increases
in Kinder Morgan Energy Partners' per unit cash distribution; that
results in Kinder Morgan G.P., Inc.'s receipt of an additional $488,157
for each $0.01 increase in the per common unit distribution of Kinder
Morgan Energy Partners based on the 48,815,690 common units currently
outstanding.
Our management, in its capacity as the management of Kinder Morgan G.P.,
Inc., has an established track record of acquisitions and efficient management
of the operations of Kinder Morgan Energy Partners. We intend to implement the
same strategy of strategic acquisitions, cost cuts and enhanced use of assets.
Since we are a business corporation with different cash distribution
requirements and tax characteristics than a publicly-traded limited partnership
like Kinder Morgan Energy Partners, we believe we will have the added
flexibility to pursue acquisitions which may not be suitable for or available to
Kinder Morgan Energy Partners. For example, we may pursue acquisitions of
companies that
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<PAGE> 46
Kinder Morgan Energy Partners could not pursue due to:
- the nature of the target companies' income jeopardizing Kinder Morgan
Energy Partners' partnership tax status; or,
- the target companies' stockholders unwillingness to accept Kinder Morgan
Energy Partners' limited partnership units.
We may divide purchased assets between us and Kinder Morgan Energy Partners
as appropriate after we consider each entity's different characteristics and
strategies. We intend for this shared approach to allow us and Kinder Morgan
Energy Partners to combine acquisition resources and strategies so that both
entities potentially share the associated costs and maximize the value of the
acquired assets or businesses. This enhanced flexibility should permit Kinder
Morgan Energy Partners:
- to make acquisitions it could not otherwise make; and
- to increase its asset base to generate cash for its distributions to its
partners.
These actions may result in larger cash distributions by Kinder Morgan
Energy Partners to Kinder Morgan G.P., Inc. that would allow Kinder Morgan G.P.,
Inc. to make larger cash distributions to us.
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<PAGE> 47
BUSINESS OF KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partners manages a diversified portfolio of midstream
energy assets, including six refined product/liquids pipeline systems containing
over 5,000 miles of trunk pipeline and over 20 truck loading terminals. Kinder
Morgan Energy Partners also operates 24 bulk terminal facilities that transload
over 40 million tons of coal, petroleum coke and other products annually. In
addition, Kinder Morgan Energy Partners owns 24% of Plantation Pipe Line
Company, 20% of Shell CO(2) Company and a 25% interest in a Y-grade
fractionation facility.
Kinder Morgan Energy Partners' operations are grouped into three reportable
business segments:
- Pacific Operations;
- Mid-Continent Operations; and
- Bulk Terminals.
The following table reflects revenues and earnings for Kinder Morgan Energy
Partners' segments for the periods indicated. Earnings exclude interest and debt
expense, general and administrative expense, minority expense and other
insignificant items. Kinder Morgan Energy Partners acquired the Pacific
Operations on March 6, 1998. The amounts for the Pacific Operations reflect the
historical performance of the Pacific Operations and may not be indicative of
the results that would have occurred if the acquisition of the Pacific
Operations had been consummated on January 1, 1998, or that will be obtained in
the future. 1998 results of the Bulk Terminals segment include results of Kinder
Morgan Bulk Terminals, Inc. from July 1, 1998, and the Pier IX Terminal and the
Shipyard River Terminal from December 18, 1998.
<TABLE>
<CAPTION>
REVENUES EARNINGS
------------------------------- ------------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 1998 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific Operations........ $221.4 68.6% $ 60.7 60.7% $140.1 71.3% $42.4 69.1%
Mid-Continent Operations.. 38.3 11.9% 10.6 10.6% 37.2 18.9% 10.1 16.5%
Bulk Terminals............ 62.9 19.5% 28.7 28.7% 19.2 9.8% 8.8 14.4%
------ ----- ------ ----- ------ ----- ----- -----
Total........... $322.6 100.0% $100.0 100.0% $196.5 100.0% $61.3 100.0%
</TABLE>
Kinder Morgan Energy Partners' objective is to increase unitholder
distributions through:
- the reduction of operating expenses;
- better use and expansion of its asset base; and
- selective, strategic acquisitions that help increase distributions to its
partners.
Kinder Morgan G.P., Inc.'s cash incentive distributions provide it with a
strong incentive to increase unitholder distributions through successful
management and business growth of Kinder Morgan Energy Partners. With the
addition of the Pacific Operations, Kinder Morgan Energy Partners became the
largest pipeline publicly-traded limited partnership and the second largest
products pipeline system in the United States in terms of volumes delivered.
Generally, Kinder Morgan Energy Partners transports and/or handles products
for a fee and is not engaged in the purchase and resale of commodity products.
As a result, Kinder Morgan Energy Partners does not face risks relating to
shifts in commodity prices.
PRODUCTS TRANSPORTED ON KINDER MORGAN ENERGY PARTNERS' PIPELINES
Products transported on Kinder Morgan Energy Partners' pipelines include
refined petroleum products, natural gas liquids and carbon dioxide.
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<PAGE> 48
Refined petroleum products and their related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
- ------- ---
<S> <C>
Gasoline................ Transportation
Jet/Kerosene............ Commercial and
military air
transportation
Distillate.............. Transportation (auto,
rail, marine), farm,
industrial and
commercial
Residual Fuels.......... Marine transportation
and power generation
</TABLE>
Natural gas liquids are typically extracted from natural gas in liquid form
under low temperatures and high pressure conditions. Natural gas liquids
products and their related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
- ------- ---
<S> <C>
Propane................. Residential heating,
agricultural uses and
petrochemical
feedstock
Isobutanes.............. Further processing
Natural Gasoline........ Further processing or
gasoline blending into
gasoline motor fuel
Ethane.................. Feedstock for
petrochemical plants
Normal Butane........... Feedstock for
petrochemical plants
</TABLE>
Carbon dioxide is used in enhanced oil recovery projects as a flooding
medium for recovering crude oil from mature oil fields.
PACIFIC OPERATIONS
Kinder Morgan Energy Partner's Pacific Operations include interstate common
carrier pipelines regulated by the Federal Energy Regulatory Commission,
intrastate pipeline systems regulated by the California Public Utilities
Commission in California and non-regulated terminal operations.
Kinder Morgan Energy Partners plans to expand its presence in the rapidly
growing refined products market in the Western United States through
acquisitions that increase unitholder distributions and incremental expansions
of the Pacific Operations. Since the acquisition of the Pacific Operations,
Kinder Morgan Energy Partners has reduced costs by over $20 million per year
through the elimination of redundant general, administrative and other expenses.
The Pacific Operations are split into a South Region and a North Region.
Combined, the two regions consist of five segments that serve six western states
with approximately 3,300 miles of refined petroleum products pipeline and
related terminal facilities.
The Pacific Operations pipelines transport over one million barrels per day
of refined petroleum products. The three main product types transported are
gasoline (63%), diesel fuel (20%) and jet fuel (17%). The Pacific Operations
also include 13 truck-loading terminals and provide pipeline service to
approximately 44 customer-owned terminals, three commercial airports and 12
military bases.
These pipeline assets provide refined petroleum products to some of the
fastest growing populations in the United States. Significant population gains
have occurred in the southern California and San Francisco Bay areas, as well as
Las Vegas, Nevada and the Tucson-Phoenix, Arizona region. Pipeline
transportation of gasoline and jet fuel has a direct correlation with increases
or decreases in population. Kinder Morgan Energy Partners and we believe that
the increase in populations associated with the markets served by the Pacific
Operations will continue in the future. Kinder Morgan Energy Partners intends to
expand the Pacific Operations to meet increased demand resulting from these
positive demographic trends.
SOUTH REGION. The South Region consists of three pipeline segments, the
West Line, the East Line and the San Diego Line.
The West Line consists of approximately 555 miles of primary pipeline and
currently transports products for approximately 50 shippers from seven
refineries and three pipeline terminals in the Los Angeles Basin to Phoenix and
Tucson, Arizona and various intermediate commercial and military delivery
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<PAGE> 49
points. Also, a significant portion of West Line volumes are transported to
Colton, California for local distribution and for delivery to Calnev Pipeline,
an unaffiliated common carrier of refined petroleum products to Las Vegas,
Nevada and intermediate points. The West Line serves Kinder Morgan Energy
Partners' terminals located in Colton and Imperial, California as well as in
Phoenix and Tucson.
The East Line is comprised of two parallel lines originating in El Paso,
Texas and continuing approximately 300 miles west to the Tucson terminal and one
line continuing northwest approximately 130 miles from Tucson to Phoenix,
Arizona. All products received by the East Line at El Paso come from a refinery
in El Paso or are delivered through connections with non-affiliated pipelines
from refineries in Odessa and Dumas, Texas and Artesia, New Mexico. The East
Line serves Kinder Morgan Energy Partners' terminals located in Tucson and
Phoenix, Arizona.
In May 1998, Kinder Morgan Energy Partners announced an expansion of its
Southern California products pipeline system. The expansion will involve
construction of 13 miles of 16-inch diameter pipeline from Carson, California to
Norwalk, California. The new pipeline will connect to an existing 16-inch
diameter pipeline from Norwalk to Colton and provide additional capacity between
Carson and Colton. The existing pipeline between Carson and Colton is currently
operating at maximum capacity. The additional pipe will increase the capacity of
the system from 340,000 barrels per day to 520,000 barrels per day, an increase
of over 50%. The project will cost approximately $25-$30 million and should be
in service by the middle of 1999.
The San Diego Line is a 135-mile pipeline serving major population areas in
Orange County, immediately south of Los Angeles, and San Diego. The same
refineries and terminals that supply the West Line also supply the San Diego
Line. This line extends south to serve Kinder Morgan Energy Partners' terminals
in the cities of Orange and San Diego. On February 25, 1999, Kinder Morgan
Energy Partners announced an expansion of the San Diego Line. The expansion
project will cost approximately $18 million and consists of the construction of
23 miles of 16 inch diameter pipe, and other related facilities. The new
facilities will increase capacity on the San Diego Line by approximately 25% and
will increase the Pacific Operation's capability to transport gasoline, diesel
and jet fuel to customers in the rapidly growing Orange County and San Diego,
California markets. Permitting for the project is underway with approval
expected in the fall of 1999.
NORTH REGION. The North Region consists of two pipeline segments, the North
Line and the Oregon Line.
The North Line consists of approximately 1,700 miles of pipeline in six
segments originating in Richmond, Concord and Bakersfield, California. This line
serves Kinder Morgan Energy Partners' terminals located in Brisbane, Bradshaw,
Chico, Fresno and San Jose, California, and Sparks, Nevada. The products
delivered through the North Line come from refineries in the San Francisco Bay
and Bakersfield areas. The North Line receives a small percentage of product
transported from various pipeline and marine terminals that deliver products
from foreign and domestic ports. A refinery located in Bakersfield supplies
substantially all of the products shipped through the Bakersfield-Fresno segment
of the North Line. In October 1998, Kinder Morgan Energy Partners announced an
expansion of the Northern California products pipeline system serving the
Sacramento and Chico, California, and Reno, Nevada market areas. The expansion
will include the installation of incremental horsepower at various pumping
facilities and reconfiguration of manifold piping and related facilities. This
segment of the pipeline currently operates at its maximum capacity and the
incremental facilities will increase the capacity and throughput on the system
by 20%. The project will cost approximately $5 million and is projected to be in
service by September 1999.
The Oregon Line is a 114-mile pipeline serving approximately ten shippers.
The Oregon Line receives products from marine
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<PAGE> 50
terminals in Portland, Oregon and from Olympic Pipeline. Olympic Pipeline is a
non-affiliated carrier that transports products from the Puget Sound, Washington
area to Portland. From its origination point in Portland, the Oregon Line
extends south and serves Kinder Morgan Energy Partners' terminal located in
Eugene, Oregon.
TRUCK LOADING TERMINALS. The Pacific Operations include 13 truck-loading
terminals with an aggregate usable tankage capacity of approximately 8.2 million
barrels. Terminals are located at destination points on each of the lines as
well as at various intermediate points along each line. The simultaneous
truck-loading capacity of each terminal ranges from 2 to 12 trucks. Kinder
Morgan Energy Partners provides the following services at these terminals:
- short-term product storage;
- truck loading;
- vapor recovery;
- deposit control additive injection;
- dye injection;
- oxygenate blending; and
- quality control.
The capacity of terminaling facilities varies throughout Kinder Morgan
Energy Partners' pipeline systems. Kinder Morgan Energy Partners does not own
terminal facilities at all pipeline delivery locations. At some locations,
Kinder Morgan Energy Partners makes product deliveries to facilities owned by
shippers or independent terminal operators. Kinder Morgan Energy Partners
provides truck loading and other terminal services as an additional service, and
charges a separate fee in addition to pipeline tariffs.
MARKETS. Currently the Pacific Operations serve in excess of 100 shippers
in the refined products market, with the largest customers consisting of:
- major petroleum companies;
- independent refineries;
- the United States military; and
- independent marketers and distributors of products.
A substantial portion of product volume transported is gasoline. Demand for
gasoline depends on factors including prevailing economic conditions and
demographic changes in the markets served. Kinder Morgan Energy Partners and we
expect the majority of the Pacific Operations' markets to maintain population
growth rates that exceed the national average for the foreseeable future.
Currently, the California gasoline market is approximately 900,000 barrels
per day. The Arizona gasoline market is served primarily by Kinder Morgan Energy
Partners at a market demand of 135,000 barrels per day. Nevada's gasoline market
is currently in excess of 50,000 barrels per day and Oregon's is approximately
98,000 barrels per day. The distillate (diesel and jet fuel) market is
approximately:
- 377,000 barrels per day in California;
- 78,000 barrels per day in Arizona;
- 72,000 barrels per day in Nevada; and
- 62,000 barrels per day in Oregon.
In the aggregate, Kinder Morgan Energy Partners transports over 1 million
barrels of petroleum products per day.
The volume of products transported is directly affected by the level of
end-user demand for those products in the geographic regions served. Some
product volumes can experience seasonal variations and overall volumes may be
slightly lower during the first and fourth quarters of each year.
SUPPLY. The majority of refined products supplied to the Pacific Operations
come from the major refining centers around Los Angeles, San Francisco and Puget
Sound, as well as waterborne terminals. The waterborne terminals have three
central locations on the Pacific Coast:
- terminals operated by GATX, Mobil and others on the Washington/Oregon
coast;
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<PAGE> 51
- the Shore Terminal on the Northern California Coast; and
- terminals operated by GATX, Equilon and ATSC on the Southern California
Coast.
COMPETITION. The most significant competitors to the Pacific Operations
pipeline system are proprietary pipelines owned and operated by major oil
companies in the area where the pipeline system delivers products as well as
refineries within Kinder Morgan Energy Partners' market areas with related
trucking arrangements. Kinder Morgan Energy Partners and we believe that high
capital costs, tariff regulation and environmental permitting considerations
make it unlikely that a competing pipeline system comparable in size and scope
will be built in the foreseeable future. However, the possibility of pipelines
being constructed to serve specific markets is a continuing competitive factor.
Trucks may competitively deliver products in some short-haul markets. Increased
use of trucking by major oil companies has caused minor but notable reductions
in product volumes delivered to various shorter-haul destinations, primarily to
Orange and Colton, California. We cannot predict whether this trend towards
increased short-haul trucking will continue in the future.
Longhorn Partners Pipeline is a proposed joint venture project that would
begin transporting refined products from refineries on the Gulf Coast to El Paso
and other destinations in Texas. Increased product supply in the El Paso area
could result in some shift of volumes transported into Arizona from the West
Line to the East Line. While increased movements into the Arizona market from El
Paso would displace higher tariff volumes supplied from Los Angeles on the West
Line, the shift of supply sourcing has not had, and we do not expect it to have,
a material adverse effect on operating results.
MID-CONTINENT OPERATIONS
The Mid-Continent Operations include:
- ownership of 24% of Plantation Pipe Line Company, with a definitive
agreement executed to purchase an additional 27% of Plantation Pipe Line
Company, subject to a right of first refusal by Plantation Pipe Line
Company's other stockholder;
- the North System;
- ownership of 20% of Shell CO(2) Company;
- the Cypress Pipeline;
- ownership of 50% of Heartland Pipeline Company;
- ownership of 25% of a natural gas liquids fractionator; and
- a gas processing plant.
Plantation Pipe Line Company
Kinder Morgan Energy Partners owns 24% of Plantation Pipe Line Company,
which owns and operates a 3,100 mile pipeline system throughout the southeastern
United States. In addition, Kinder Morgan Energy Partners has entered into a
definitive agreement to purchase from Chevron Pipe Line Company an additional
27% ownership interest in Plantation Pipe Line Company. The purchase is subject
to standard closing conditions and a right of first refusal by Plantation Pipe
Line Company's other stockholder. We anticipate that the closing will occur in
the second quarter of 1999. Plantation Pipe Line Company serves the southeastern
United States. Kinder Morgan Energy Partners and we believe population increases
in the southeastern United States will lead to increased use and expansion of
Plantation Pipe Line Company's pipeline system.
MARKETS. Plantation Pipe Line Company ships products for approximately 50
shipper companies to terminals throughout the southeastern United States. Pipe
Line Company's principal customers are Gulf Coast refining and marketing
companies, fuel wholesalers and the United States Department of Defense. In
addition, Plantation Pipe Line Company services the Atlanta, Georgia; Charlotte,
North Carolina; and Washington, D.C. airports (National and Dulles), where it
delivers jet fuel to major airlines.
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<PAGE> 52
SUPPLY. Products shipped on Plantation Pipe Line Company's pipelines
originate at various Gulf Coast refineries from which major integrated oil
companies and independent refineries and wholesalers ship refined petroleum
products. Plantation Pipe Line Company's pipelines can transport over 600,000
barrels of refined petroleum products per day.
COMPETITION. Plantation Pipeline Company competes primarily with the
Colonial Pipeline, which also runs from Gulf Coast refineries throughout the
southeastern United States and extends into the northeastern states.
North System
The North System is an approximate 1,600-mile interstate common carrier
pipeline of natural gas liquids and refined petroleum products. Natural gas
liquids are typically extracted from natural gas in liquid form under low
temperature and high pressure conditions.
Because the North System serves a relatively mature market, Kinder Morgan
Energy Partners intends to focus on the increase of throughput by remaining a
reliable, cost-effective provider of transportation services and by continuing
to increase the range of products transported and services offered.
The North System extends from south central Kansas to the Chicago area.
South central Kansas is a major hub for producing, gathering, storing,
fractionating and transporting natural gas liquids.
This table shows volumes in thousands of barrels of natural gas liquids
transported on the North System for delivery to the various markets for the
periods indicated. The category "other" includes natural gas liquid gathering
systems and Chicago originations other than long-haul volumes of refinery
butanes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Petrochemicals................................. 2,861 1,125 684 1,200 1,040
Refineries and line reversal................... 10,478 9,765 9,536 10,600 10,489
Fuels.......................................... 10,039 7,763 10,500 7,976 6,150
Other.......................................... 6,551 7,114 8,126 7,399 5,532
------ ------ ------ ------ ------
Total................................ 29,929 25,767 28,846 27,175 23,211
</TABLE>
The North System has approximately 7.3 million barrels of storage capacity,
which includes caverns, steel tanks, pipeline volume and leased storage
capacity. This storage capacity provides operating efficiencies and flexibility
in meeting seasonal demand of shippers as well as propane storage for the
truck-loading terminals.
TRUCK-LOADING TERMINALS. The North System has seven propane truck-loading
terminals and one multi-product complex at Morris, Illinois, in the Chicago
area. The Morris terminal complex can load propane, normal butane, isobutane and
natural gasoline.
MARKETS. The North System currently serves approximately 50 shippers in the
upper Midwest market, including both users and wholesale marketers of natural
gas liquids. These shippers include all four major refineries in the Chicago
area. Wholesale marketers of natural gas liquids primarily make direct large
volume sales to major end-users, including propane marketers, refineries,
petrochemical plants, and industrial concerns. Market demand for natural gas
liquids varies according to the different end uses to which natural gas liquid
products may be applied. Demand for transportation services is influenced not
only by demand for natural gas liquids but also by the available supply of
natural gas liquids.
SUPPLY. Natural gas liquids extracted or fractionated at the Bushton gas
processing plant operated by KN Processing, Inc. have historically accounted for
a significant portion,
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<PAGE> 53
approximately 40-50% of the natural gas liquids transported through the North
System. Other sources of natural gas liquids transported in the North System
include major independent oil companies, marketers, end-users and natural gas
processors that use interconnecting pipelines to transport natural gas liquids.
COMPETITION. The North System competes with other liquids pipelines and to
a lesser extent rail carriers. In most cases, established pipelines are
generally the lowest cost alternative for the transportation of natural gas
liquids and refined petroleum products. Therefore, pipelines owned and operated
by others represent Kinder Morgan Energy Partners' primary competition. In the
Chicago area, the North System competes with other natural gas liquid pipelines
that deliver into the area and with rail car deliveries primarily from Canada.
Other Midwest pipelines and area refineries compete with the North System for
propane terminal deliveries. The North System also competes indirectly with
pipelines that deliver product to markets that the North System does not serve,
including the Gulf Coast market area.
Shell CO(2) Company
On March 5, 1998, Kinder Morgan Energy Partners and affiliates of Shell Oil
Company agreed to combine their carbon dioxide activities and assets into a
partnership, Shell CO(2) Company, operated by Shell Oil. Kinder Morgan Energy
Partners acquired, through a newly created limited liability company, a 20%
interest in Shell CO(2) Company in exchange for contributing its Central Basin
Pipeline and approximately $25 million in cash. Shell Oil contributed the
following assets in exchange for an 80% interest in Shell CO(2) Company:
- an approximate 45% interest in the McElmo Dome carbon dioxide reserves;
- an 11% interest in the Bravo Dome carbon dioxide reserves;
- an indirect 50% interest in the Cortez pipeline;
- a 13% interest in the Bravo pipeline; and
- various other related assets.
This combination of Kinder Morgan Energy Partners' and Shell Oil's assets
facilitates the marketing of carbon dioxide by the delivery of a complete
package of carbon dioxide supply, transportation and technical expertise to the
customer. Carbon dioxide is used in enhanced oil recovery projects as a flooding
medium for recovering crude oil from mature oil fields. By creating an area of
mutual interest in the continental United States, Kinder Morgan Energy Partners
will have the opportunity to participate with Shell Oil in various new carbon
dioxide projects in the region. Altura, Shell Oil's joint venture with Amoco, is
a major user of carbon dioxide in its West Texas fields.
Within the Permian Basin, the strategy of Shell CO(2) Company is to offer
customers "one-stop shopping" for carbon dioxide supply, transportation and
technical support service. Outside the Permian Basin, Shell CO(2) Company
intends to compete aggressively for new supply and transportation projects.
Kinder Morgan Energy Partners believes these projects will arise as other United
States oil producing basins mature and make the transition from primary
production to enhanced recovery methods.
Under the terms of the Shell CO(2) Company partnership agreement, Kinder
Morgan Energy Partners will receive a priority distribution of $14.5 million per
year from 1998 through 2001. To the extent the amount paid to Kinder Morgan
Energy Partners over this period is in excess of Kinder Morgan Energy Partners'
percentage share, currently 20%, of Shell CO(2) Company's distributable cash
flow for that period, discounted at 10%, Shell Oil will receive a priority
distribution in equal amounts of the overpayment during 2002 and 2003.
COMPETITION. Shell CO(2) Company's primary competitors for the sale of
carbon dioxide include suppliers that have an ownership interest in McElmo Dome,
Bravo Dome and Sheep Mountain Dome carbon dioxide reserves. Shell CO(2)
Company's
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ownership interests in the Cortez and Bravo pipelines are in direct competition
with Sheep Mountain pipeline. Shell CO(2) Company and Sheep Mountain pipeline
compete with one another for transportation of carbon dioxide to the Denver
City, Texas market area. We cannot assure you that new carbon dioxide source
fields will not be discovered which could compete with Shell CO(2) Company or
that new methodologies for enhanced oil recovery may not replace carbon dioxide
flooding.
Cypress Pipeline
The Cypress Pipeline is an interstate common carrier pipeline system
originating at storage facilities in Mont Belvieu, Texas and extending 104 miles
east to 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 Cypress Pipeline was built to service a major petrochemical
producer 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 and in 1997, the producer agreed to ship a minimum of an
additional 13,700 barrels per day for five years. Also in 1997, Kinder Morgan
Energy Partners expanded the Cypress Pipeline's capacity by 25,000 barrels per
day to 57,000 barrels per day. Kinder Morgan Energy Partners continues to pursue
projects that could increase throughput on the Cypress Pipeline.
SUPPLY. The Cypress Pipeline originates in Mont Belvieu, Texas 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.
Heartland Pipeline Company
The Heartland Pipeline Company pipeline was completed in the fall of 1990.
Kinder Morgan Energy Partners and Conoco each own 50% of Heartland Pipeline
Company. Kinder Morgan Energy Partners operates the pipeline and Conoco operates
Heartland Pipeline Company's Des Moines terminal and serves as its managing
partner. In April 1999, Heartland Pipeline Company commenced a $3.4 million
expansion to Omaha, Nebraska and Council Bluffs, Iowa.
MARKETS. Heartland Pipeline Company provides transportation of refined
petroleum products from refineries in the Kansas and Oklahoma area to a Conoco
terminal in Lincoln, Nebraska and Heartland Pipeline Company's Des Moines
terminal. The demand for, and supply of, refined petroleum products in the
geographic regions served by Heartland Pipeline Company directly affect the
volume of refined petroleum products transported by Heartland Pipeline Company.
SUPPLY. Refined petroleum products transported by Heartland Pipeline
Company on the North System are supplied primarily from the National Cooperative
Refinery Association crude oil refinery in McPherson, Kansas and the Conoco
crude oil refinery in Ponca City, Oklahoma.
COMPETITION. Heartland Pipeline Company competes with other refined product
carriers in the geographic market it serves. Heartland Pipeline Company's
principal competitor is Williams Pipeline Company.
Mont Belvieu Fractionator
Kinder Morgan Energy Partners owns a 25% interest in the Mont Belvieu
Fractionator, located approximately 20 miles east of Houston in Mont Belvieu,
Texas. The fractionator is a 200,000-barrel per day full-service fractionating
facility that produces a range of specification products, including ethane,
propane, normal butane, isobutane and natural gasoline from a raw stream of
natural gas liquids (Y-grade). Enterprise Products Company operates the
facility, which was built in 1980.
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MARKETS. The fractionator is located in proximity to major end-users of its
specification products, ensuring consistent access to the largest domestic
market for natural gas liquid products. In addition, the Mont Belvieu hub has
access to deep-water port loading facilities via the Port of Houston, allowing
access to import and export markets.
SUPPLY. The Mont Belvieu Fractionator is fed by six major Y-grade
pipelines, through several pipeline interconnects and unloading facilities. The
Mont Belvieu Fractionator also can access supply from a variety of other
sources. Supply can either be brought directly into the facility or into
underground salt dome storage.
COMPETITION. The Mont Belvieu Fractionator competes for volumes of Y-grade
with three other fractionators located in the Mont Belvieu hub and surrounding
areas. Competitive factors for customers include primarily the level of
fractionation fees charged and the relative amount of available capacity.
Painter Gas Processing Plant
The Painter Plant, located near Evanston, Wyoming, is leased to Amoco Oil
Company, which operates the Painter Plant fractionator and the associated Millis
terminal and storage facilities for its own account. Amoco also owns and
operates the nearby Amoco Painter Complex gas plant.
Bulk Terminals
Kinder Morgan Energy Partners' Bulk Terminals consist of 24 bulk terminals,
which handle over 40 million tons of dry and liquid bulk products annually. The
Bulk Terminals include:
- five coal terminals;
- eight petroleum coke terminals; and
- eleven other bulk terminals.
Kinder Morgan Energy Partners plans to grow its bulk terminals business by:
- the expansion of the use of its existing facilities, particularly those
facilities which handle low-sulfur western coal;
- the design, construction and operation of new facilities for current and
prospective customers; and
- acquisitions that will allow Kinder Morgan Energy Partners to use its
operational expertise and customer relationships to improve the
performance of the acquired business.
We believe two additional trends will provide opportunity for growth in
Kinder Morgan Energy Partners' Bulk Terminals:
- increased demand for imported cement due to federally legislated highway
construction and limited domestic cement production may lead to higher
volumes at our import cement terminals; and
- increased imports of various foreign crude oils, which generates more
petroleum coke than domestic crude, may lead to opportunities for Kinder
Morgan Energy Partners' Bulk Terminals to operate additional coke units
at import facilities.
Coal Terminals
The Cora Terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, the terminal is located on approximately 480 acres of
land along the upper Mississippi River near Cora, Illinois, about 80 miles south
of St. Louis. The terminal has a throughput capacity of about 15 million tons
per year that can be expanded to 20 million tons with capital additions. The
terminal currently is equipped to store up to 1.0 million tons of coal. This
storage provides customers the flexibility to coordinate their supplies of coal
with the demand at power plants. Storage capacity at the Cora Terminal can be
doubled with additional capital investment.
On September 4, 1997, Kinder Morgan Energy Partners acquired at a cost of
approximately $20 million the assets of BRT Transfer Terminal, Inc. and other
assets which now comprise the Grand Rivers Terminal. Grand Rivers is a coal
transloading and storage facility located on the Tennessee River just above the
Kentucky Dam. The
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Grand Rivers Terminal is operated on land under easements with an initial
expiration of July 2014. The terminal has current annual throughput capacity of
approximately 12-15 million tons with a storage capacity of approximately 2
million tons. With capital improvements, the terminal could handle 25 million
tons annually.
On December 18, 1998, Kinder Morgan Energy Partners acquired the Pier IX
Terminal, located in Newport News, Virginia. The terminal originally opened in
1983 and has the capacity to transload approximately 12 million tons of coal
annually. It can store 1.3 million tons of coal on its 30-acre storage site and
can blend multiple coals to meet an individual customer's requirements. In
addition, the Pier IX Terminal operates a cement facility, which has the
capacity to transload over 400,000 tons of cement annually.
Kinder Morgan Energy Partners also operates the LAXT Coal Terminal in Los
Angeles, California and a smaller coal terminal in Mt. Vernon, Indiana.
MARKETS. Coal continues to dominate as the fuel for electric generation,
accounting for more than 55% of United States generation feedstock. Forecasts of
overall coal usage and power plant usage for the next 20 years show an increase
of about 1.5% per year. Current domestic supplies are predicted to last for
several hundred years. Most of Kinder Morgan Energy Partners' coal terminals'
volume is destined for use in coal-fired electric generation.
Kinder Morgan Energy Partners believes that obligations to comply with the
Clean Air Act Amendments of 1990 will cause shippers to increase the use of
low-sulfur coal from the western United States. Approximately 80% of the coal
loaded through the Cora and Grand Rivers Terminals is low sulfur coal
originating from mines located in the western United States, including the Hanna
and Powder River basins in Wyoming, western Colorado and Utah. In 1998, four
major customers accounted for approximately 90% of all the coal loaded through
the Cora and Grand Rivers Terminals.
Both the Pier IX Terminal and the LAXT Coal Terminal export coal to foreign
markets. Substantial portions of the coal transloaded at these facilities are
covered by long term contracts. In addition, the Pier IX Terminal serves power
plants on the eastern seaboard of the United States and imports cement under a
long term contract.
SUPPLY. Historically, the Cora and Grand Rivers Terminals have moved coal
that originated in the mines of southern Illinois and western Kentucky. Many
shippers, however, particularly in the East, are now using western coal loaded
at the terminals or a mixture of western coal and other coals as a means of
satisfying environmental restrictions on the use of high-sulphur coal. Kinder
Morgan Energy Partners believes that Illinois and Kentucky coal producers and
shippers will continue to be important customers, but anticipates that growth in
volume through the terminals will be primarily due to western low sulfur coal
originating in Wyoming, Colorado and Utah.
The Cora Terminal sits on the mainline of the Union Pacific Railroad and is
well positioned to receive coal shipments from the West. The Grand Rivers
Terminal provides easy access to the Ohio-Mississippi River network, the
Tennessee-Tombigbee System and major trucking routes on the interstate highway
system. The Paducah & Louisville Railroad, a short line railroad, also serves
the Grand Rivers Terminal with connections to seven rail lines including the
Union Pacific, CSX, Illinois Central and Burlington Northern. The Pier IX
Terminal is served by the CSX Railroad, which transports coal from Appalachian
and other coal basins. Cement imported at the Pier IX Terminal primarily
originates in Europe. The Union Pacific railroad serves the LAXT Coal Terminal.
Petroleum Coke Terminals
With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
Kinder Morgan Energy Partners owns or operates 8 petroleum coke terminals in the
United States. Petroleum coke is a by-product of the refining process and has
characteristics similar to coal. Petroleum coke supply in the United
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States has increased in the last several years due to the increased use of
coking units by domestic refineries. Petroleum coke is used in domestic utility
and industrial steam generation facilities and is exported to foreign markets.
Most of Kinder Morgan Energy Partners' petroleum coke customers are large
integrated oil companies who choose to outsource the storage and loading of
petroleum coke for a fee.
Other Bulk Terminals
With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
and the Shipyard River Terminal on December 18, 1998, Kinder Morgan Energy
Partners owns or operates an additional 11 bulk terminals located primarily on
the Mississippi River and the West Coast. The other bulk terminals serve
customers in the alumina, cement, soda ash, ilminite, fertilizer, ore and other
industries seeking specialists who can build, own and operate bulk terminals.
Competition
CORA AND GRAND RIVERS TERMINALS. The Cora Terminal and Grand Rivers
Terminal compete with several coal terminals located in the general geographic
area, however, no significant new coal terminals have been constructed near the
Cora Terminal or the Grand Rivers Terminal in the last ten years. There are
significant barriers to entry for the construction of new coal terminals,
including the requirement for significant capital expenditures and restrictive
environmental permitting requirements. Kinder Morgan Energy Partners believes
the Cora Terminal and the Grand Rivers Terminal can compete successfully with
other terminals because of their favorable location, independent ownership,
available capacity, modern equipment and large storage area.
PIER IX TERMINAL. The Pier IX Terminal competes primarily with two modern
coal terminals located in the same Virginia port complex as the Pier IX
Terminal.
OTHER TERMINALS. Kinder Morgan Energy Partners' other bulk terminals
compete with numerous independent terminal operators and with other terminals
owned by oil companies and other industrial companies that chose not to
outsource terminal services and with numerous independent bulk terminal
operators. However, many of the other bulk terminals were constructed under
long-term contracts for specific customers. As a result, Kinder Morgan Energy
Partners believes other terminal operators would face a significant disadvantage
in competing for other business.
MAJOR CUSTOMERS
The following customers accounted for more than 10% of Kinder Morgan Energy
Partners' 1998 consolidated revenues:
<TABLE>
<S> <C>
- - Equilon Enterprises...... 13.2%
- - Tosco Group.............. 12.3%
- - Chevron.................. 10.9%
- - Arco..................... 10.9%
</TABLE>
Amoco Corporation accounted for more than 10% of Kinder Morgan Energy
Partners' 1996 and 1997 consolidated revenues and Mobil Corporation accounted
for more than 10% of Kinder Morgan Energy Partners' 1996 consolidated revenues.
Due to Kinder Morgan Energy Partner's acquisition of the Pacific Operations in
March 1998, Amoco Corporation and Mobil Corporation's percentage of Kinder
Morgan Energy Partners' consolidated revenues has decreased significantly.
EMPLOYEES
As of March 31, 1999, our operations, together with Kinder Morgan G.P.,
Inc. employed approximately 1,100 employees. The bulk of these are employed by
Kinder Morgan G.P., Inc. Upon completion of the offering and prior to an
acquisition, we will have four employees, our executives. We may add employees
as appropriate, when we acquire operating assets.
Approximately 150 hourly personnel at various terminals are represented by
four labor unions. No other employees of Kinder Morgan G.P., Inc. are members of
a union or have a collective bargaining agreement, and no union labor spends
time on our behalf. We
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and Kinder Morgan G.P., Inc. consider our relations with our employees to be
good.
LITIGATION
We are not a party to any litigation at this time.
Kinder Morgan G.P., Inc. is a defendant in two proceedings (one by the
State of Illinois and one by the Department of Transportation) relating to
alleged environmental violations for events relating to a fire that occurred at
the Morris storage field in September 1994.
Kinder Morgan Energy Partners, in the ordinary course of business, is a
defendant in various lawsuits relating to its assets. Kinder Morgan Energy
Partners believes, based on its experience to date, that the ultimate resolution
of these items will not have a material adverse impact on its financial position
or results of operations.
EXECUTIVE OFFICES
The address of our principal executive offices is 1301 McKinney Street,
Suite 3450, Houston, Texas 77010 and our telephone number at this address is
(713) 844-9500.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth specific information for our executive
officers and members of our board of directors. Directors are elected for
three-year staggered terms. The Class I directors will serve until our annual
meeting in 2000. The Class II directors will serve until our annual meeting in
2001. The Class III directors will serve until our annual meeting in 2002.
Executive officers are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- --- ----------------
<S> <C> <C>
Richard D. Kinder......................... 54 Director (Class III), Chairman and Chief
Executive Officer
William V. Morgan......................... 56 Director (Class III), Vice Chairman and
President
David G. Dehaemers, Jr. .................. 38 Treasurer
Michael C. Morgan......................... 30 Vice President
</TABLE>
In addition, the following individuals will be elected (and have agreed to
serve upon their election) as members of our Board of Directors upon the
completion of this offering:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- ---- ----------------
<S> <C> <C>
Fayez Sarofim............................ 69 Director (Class II)
Ted A. Gardner........................... 41 Director (Class I)
Gary Hultquist........................... 55 Director (Class II)
</TABLE>
Richard D. Kinder was elected as our Chairman and Chief Executive Officer
and as one of our directors in February 1997. He was simultaneously elected to
the same position with Kinder Morgan G.P., Inc. From October 1990 until December
1996, Mr. Kinder was President and Chief Operating Officer of Enron Corp. Mr.
Kinder was employed by Enron and its affiliates and predecessors for over 16
years. Mr. Kinder is also a director of TransOcean Offshore Inc., Baker Hughes
Incorporated, KN Energy, Inc. and Waste Management, Inc.
William V. Morgan was elected as our President and as a director in October
1996. In February 1997, he was also elected as our Vice Chairman. In addition,
Mr. Morgan was elected Director of Kinder Morgan G.P., Inc. in June 1994, Vice
Chairman of Kinder Morgan G.P., Inc. in February 1997 and President of Kinder
Morgan G.P., Inc. in November 1998. Mr. Morgan has held legal and management
positions in the energy industry since 1975, including the presidencies of three
major interstate natural gas companies which are now part of Enron: Florida Gas
Transmission Company, Transwestern Pipeline Company and Northern Natural Gas
Company. Prior to joining Florida Gas in 1975, Mr. Morgan was engaged in the
private practice of law in Washington, D.C.
David G. Dehaemers, Jr. was elected as our Vice President and Treasurer in
February 1997 and will be Chief Financial Officer upon the completion of this
offering. Mr. Dehaemers has been the Treasurer of Kinder Morgan G.P., Inc. since
February 1997 and Vice President and Chief Financial Officer of Kinder Morgan
G.P., Inc. since July 1997. He served as Secretary of Kinder Morgan G.P., Inc.
from February 1997 to August 1997. From October 1992 to January 1997, he was
Chief Financial Officer of Morgan Associates, Inc., an energy investment and
pipeline management company. Mr. Dehaemers was previously employed by the
national certified public accounting firms of Ernst & Whinney and Arthur Young.
He is a certified public accountant and received his undergraduate Accounting
degree from Creighton University in Omaha, Nebraska. Mr. Dehaemers received his
law degree from the University of
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Missouri-Kansas City and is a member of the Missouri Bar.
Michael C. Morgan was elected as our Vice President in February 1997, and
will be a Vice President of Corporate Development upon completion of this
offering. Mr. Morgan has been the Vice President, Corporate Development and
Investments of Kinder Morgan G.P., Inc. since February 1997. From August 1995
until February 1997, Mr. Morgan was an associate with McKinsey & Company, an
international management consulting firm. In 1995, Mr. Morgan received a Masters
in Business Administration from the Harvard Business School. From March 1991 to
June 1993, Mr. Morgan held various positions at PSI Energy, Inc., an electric
utility, including Assistant to the Chairman. Mr. Morgan received a Bachelor of
Arts in Economics and a Masters of Arts in Sociology from Stanford University in
1990. Mr. Morgan is the son of William V. Morgan.
Fayez Sarofim is President and Chairman of the Board of Fayez Sarofim &
Co., an investment advisory firm he founded in 1958. Mr. Sarofim is a director
of Argonaut Group, Inc., Unitrin, Inc. and Imperial Holly Corporation.
Ted A. Gardner is a Managing Partner of First Union Capital Partners and
has been a Senior Vice President of First Union Corporation since 1990.
Gary Hultquist is the founder and has been the managing director of
Hultquist Capital, LLC, an investment and consulting firm based in San
Francisco, California, since 1995. Since 1996, Mr. Hultquist has served as
Chairman of the Board of Directors and Chief Executive Officer of TitaniumX
Corporation, a manufacturer of titanium storage disks and other products for the
Internet infrastructure and enterprise network markets. Prior thereto, Mr.
Hultquist served in management and as a partner at two San Francisco area law
firms where he specialized in intellectual property and business litigation.
OPERATING OFFICERS OF KINDER MORGAN G.P., INC.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- --- ----------------
<S> <C> <C>
William V. Allison........................ 51 President, Pipelines Operations
Thomas B. Stanley......................... 48 Vice President, Bulk Terminals
Dixon B. Betz............................. 50 Chief Executive Officer, River Consulting,
Inc., Subsidiary
Roger M. Knouse........................... 47 Vice President, Houston Commercial
Operations, Pipelines
Mary F. Morgan............................ 45 Vice President, Pacific Customer Service
William W. White.......................... 52 Vice President, Pipeline Field Operations
</TABLE>
William V. Allison was elected President, Pipeline Operations of Kinder
Morgan G.P., Inc. in February 1999. Prior to that, he served as Vice President
and General Counsel of Kinder Morgan, G.P., Inc. since April 1998. From 1977 to
April 1998, Mr. Allison was employed at Enron Corp. where he held various
executive positions, including President of Enron Liquid Services Corporation,
Florida Gas Transmission Company and Houston Pipeline Company and Vice President
and Associate General Counsel of Enron Corp. Prior to joining Enron Corp., he
was an attorney at the Federal Energy Regulatory Commission.
Mr. Stanley was elected President of Hall-Buck Marine, Inc. (now known as
Kinder Morgan Bulk Terminals, Inc.) in 1993, for which he has worked since 1980.
Mr. Stanley is a CPA with ten years' experience in public accounting, banking,
and insurance accounting prior to joining Hall-Buck. He received his bachelor's
degree from Louisiana State University in 1972.
Mr. Betz founded River Consulting, Inc., a subsidiary of Kinder Morgan Bulk
Terminals,
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Inc., in 1981 and has since served as its Chief
Executive Officer. Mr. Betz received a Bachelor of Science degree in Mathematics
from Louisiana State University in 1971.
Roger M. Knouse was elected Vice President, Houston Commercial Operations,
Pipelines of Kinder Morgan G.P., Inc. in March 1998. Prior to that, he served as
Director of Business Development for Kinder Morgan G.P., Inc. from February 1997
until March 1998. Mr. Knouse was Director of Pipeline Services for Enron Liquid
Service Corp. from July 1995 until February 1997 and Director of Pipeline
Transportation for Enron Liquids Pipeline Company from January 1987 until July
1995. He held various operations and commercial positions with Enron Liquids
Pipeline Company from November 1973 until January 1987.
Mary F. Morgan was elected Vice President, Pacific Customer Service of
Kinder Morgan G.P., Inc. in March 1998. Prior to that, she was Director,
Customer Service Center for the former general partner of Santa Fe Pacific
Pipeline Partners, L.P. since 1997. Prior to this assignment, Ms. Morgan served
as Director, Products Movement and District Manager, Western District for the
former general partner of Santa Fe Pacific Pipeline Partners, L.P. Over the past
twenty years, she also served in various engineering and operations assignments
with the former general partner of Santa Fe, Exxon Pipeline Company, and Amoco
Production Company.
William M. White was elected Vice President, Pipeline Field Operations of
Kinder Morgan G.P., Inc. in March 1998. Previously, Mr. White served as Vice
President of Engineering for the former general partner of Santa Fe Pacific
Pipeline Partners, L.P. from 1993 until March 1998. Prior to that, he held
various engineering and operation positions with the former general partner of
Santa Fe Pacific Pipeline Partners, L.P. since December 1974. Mr. White
graduated from the University of Kentucky with a degree in Electrical
Engineering and he completed graduate work in Business Administration at the
University of Tulsa.
COMPENSATION OF DIRECTORS
We intend to compensate non-employee directors with stock option grants and
reimbursement of expenses relating to the conduct of their roles as directors.
Messrs. Kinder and Morgan each received $40,000 in 1998 and 1999 as compensation
for services as our directors.
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SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to our directors and
the highest paid executive officers of Kinder Morgan G.P., Inc. for each of the
past two fiscal years. Bonus amounts were earned in the year shown and paid the
following year. All other compensation from us represents directors fees. All
other compensation from Kinder Morgan Energy Partners represents Kinder Morgan
G.P., Inc.'s contributions to its Savings Investment Plan, a 401(k) plan, the
imputed value of group term life insurance paid by Kinder Morgan G.P., Inc.
exceeding $50,000 and compensation attributable to allowed taxable moving
expenses. Prior to our acquisition of Enron Liquids Pipeline Company, the
predecessor to Kinder Morgan G.P., Inc., Mr. Allison served as President of
Enron Liquids Pipeline Company from January 1, 1997 until February 14, 1997.
<TABLE>
<CAPTION>
ANNUAL
ANNUAL COMPENSATION
COMPENSATION FROM KINDER
FROM KINDER MORGAN ALL OTHER
MORGAN, INC. ENERGY PARTNERS COMPENSATION
----------------- ----------------- ------------------
FROM
KINDER
MORGAN
SALARY BONUS SALARY BONUS FROM ENERGY
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) US PARTNERS
- --------------------------- ---- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D. Kinder............. 1998 280,000 180,000 200,004 -- 40,000 $13,584
Director, Chairman and Chief
Executive Officer 1997 280,000 180,000 175,664 -- 40,000 12,757
William V. Morgan............. 1998 100,000 60,200 200,004 -- 40,000 64,562
Director, Vice Chairman 1997 100,000 60,200 175,685 -- 40,000 12,757
and President
William V. Allison............ 1998 -- -- 99,998 200,000 -- 11,366
President, Pipeline 1997 -- -- 22,917 -- -- --
Operations of Kinder
Morgan G.P., Inc.
David G. Dehaemers, Jr. ...... 1998 -- -- 141,247 200,000 -- 34,393
Vice President and Treasurer 1997 -- -- 101,910 130,000 -- 7,598
Michael C. Morgan............. 1998 -- -- 141,247 200,000 -- 50,421
Vice President 1997 -- -- 101,910 130,000 -- 7,539
</TABLE>
1999 STOCK AWARDS PLAN
Our 1999 Stock Awards Plan provides both our and our affiliated companies'
directors, officers and employees with an opportunity to acquire an economic
interest in us and additional incentive and reward opportunities based on our
profitable growth. In addition, the 1999 Stock Awards Plan aids us to attract
and retain outstanding personnel. The 1999 Stock Awards Plan provides for the
grant of options, either incentive stock options within the meaning of Section
422(b) of the Internal Revenue Code of 1986, as amended, or nonqualified stock
options that do not constitute incentive stock options, restricted stock awards,
stock appreciation rights, performance awards, and phantom stock awards or any
combination thereof. The aggregate number of shares of our common stock that may
be issued under the 1999 Stock Awards Plan may not exceed
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2,000,000 shares. Shares of our common stock which are attributable to awards
which have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.
GRANTS. We intend to grant, effective with the closing of this offering,
stock options to certain key officers and employees of Kinder Morgan, Inc. and
Kinder Morgan G.P., Inc.
The options will be granted at exercise prices equal to the public offering
price of our common stock in this offering.
ADMINISTRATION. The 1999 Stock Awards Plan is administered by a
compensation committee of our board of directors. The compensation committee has
the power to determine which individuals will receive an award, the time or
times when the award will be made, the type of the award and the number of
shares of common stock to be issued under the award or the value of the award.
Only persons who at the time of the award are our employees, officers or
directors or of any of our subsidiaries will be eligible to receive an award
under the 1999 Stock Awards Plan.
OPTIONS. The 1999 Stock Awards Plan provides for two types of options:
incentive stock options and nonqualified stock options. The compensation
committee will designate the individuals to receive the options, the number of
shares subject to the options and the terms and conditions of each option
granted under the 1999 Stock Awards Plan. The term of any option granted under
the 1999 Stock Awards Plan shall be determined by the compensation committee;
provided, however, that the term of any incentive stock option cannot exceed ten
years from the date of the grant and any incentive stock option granted to an
employee who possesses more than 10% of the total combined voting power of all
classes of our shares or of our subsidiaries within the meaning of Section
422(b)(6) of the Internal Revenue Code must not be exercisable after the
expiration of five years from the date of grant.
The exercise price of options granted under the 1999 Stock Awards Plan is
determined by our compensation committee; provided, however, that an option's
exercise price cannot be less than the fair market value of a share of common
stock on the date the option is granted, subject to adjustments. Further, the
exercise price of any incentive stock option granted to an employee who
possesses more than 10% of the total combined voting power of all classes of our
shares or of our subsidiaries within the meaning of Section 422(b)(6) of the
Internal Revenue Code must be at least 110% of the fair market value of the
share at the time the option is granted. The exercise price of options granted
under the 1999 Stock Awards Plan will be paid in full in a manner prescribed by
our compensation committee.
RESTRICTED STOCK AWARDS. Under a restricted stock award, common stock will
be issued or delivered to the grantee at the time the award is made without any
cash payment to us, except to the extent otherwise provided by our compensation
committee or required by law; provided, however, that the shares will be subject
to restrictions on the disposition thereof and obligations to forfeit the shares
to us as may be determined in the discretion of our compensation committee. The
restrictions on disposition may lapse based upon:
- our attainment of specific performance targets established by the
compensation committee that are based on:
-- the price per share of the common stock;
-- our earnings per share;
-- our revenue;
-- the revenue of one of our business units designated by the committee;
-- the return on stockholders' equity that we achieve; or
-- our pre-tax cash flow from operations;
- the grantee's tenure with us; or
- a combination of both factors.
We will retain custody of the common stock issued under a restricted stock award
until
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the disposition restrictions lapse. A grantee may not sell, transfer, pledge,
exchange, hypothecate, or otherwise dispose of the shares until the expiration
of the restriction period. However, upon the issuance to the grantee of common
stock under a restricted share award, except for the foregoing restrictions, the
grantee will have all the rights of one of our stockholders for those shares,
including the right to vote those shares and to receive all dividends and other
distributions paid to those shares.
STOCK APPRECIATION RIGHTS. A stock appreciation right permits the holder
thereof to receive an amount, in cash, common stock, or a combination thereof,
as determined by the compensation committee, equal to the number of stock
appreciation rights exercised by the holder multiplied by the excess of the fair
market value of common stock on the exercise date over the stock appreciation
rights' exercise price. Stock appreciation rights may or may not be granted in
connection with the grant of an option. A stock appreciation right may be
exercised in whole or in installments and at the time as determined by the
compensation committee.
PERFORMANCE AND PHANTOM STOCK AWARDS. The 1999 Stock Awards Plan permits
grants of performance awards and phantom stock awards, which may be paid in
cash, common stock, or a combination thereof as determined by the compensation
committee. Performance awards granted under the 1999 Stock Awards Plan will have
a maximum value established by the compensation committee at the time of the
grant. A grantee's receipt of that amount will be contingent upon our
satisfaction, or any subsidiary, division or department thereof, of future
performance conditions established by the compensation committee prior to the
beginning of the performance period. The performance awards, however, are
subject to later revisions as the compensation committee deems appropriate to
reflect significant unforeseen events or changes. A performance award will
terminate if the grantee's employment or service with us terminates during the
applicable performance period except as otherwise provided by the compensation
committee at the time of grant.
Phantom stock awards granted under the 1999 Stock Awards Plan are awards of
common stock or rights to receive amounts equal to stock appreciation over a
specific period of time. The awards vest over a period of time or upon the
occurrence of a specific event(s) (including, without limitation, a change of
control) established by the compensation committee, without payment of any
amounts by the holder thereof (except to the extent required by law) or
satisfaction of any performance criteria or objectives. A phantom stock award
will terminate if the grantee's employment or service with us terminates during
the applicable vesting period or, if applicable, the occurrence of a specific
event(s), except as otherwise provided by the compensation committee at the time
of grant. In determining the value of performance awards or phantom stock
awards, the compensation committee must take into account the grantee's
responsibility level, performance, potential, other awards under the 1999 Stock
Awards Plan, and other consideration as it deems appropriate. Payment may be
made in a lump sum or in installments as prescribed by the compensation
committee. Any payment made in common stock will based upon the fair market
value of the common stock on the payment date.
RETIREMENT SAVINGS PLAN. Effective July 1, 1997, Kinder Morgan G.P., Inc.
established the Kinder Morgan Retirement Savings Plan, a defined contribution
401(k) plan, that permits all full-time employees of Kinder Morgan G.P., Inc. to
contribute 1% to 15% of base compensation, on a pre-tax or after-tax basis, into
participant accounts. In addition to a mandatory contribution equal to 4% of
base compensation per year for each plan participant, Kinder Morgan G.P., Inc.
may make discretionary contributions in years when specific performance
objectives are met. Any discretionary contributions are made during the first
quarter following the performance year. On March 1, 1999, an additional 2%
discretionary contribution was made to individual accounts based on 1998
financial targets to unitholders. All contributions, together with earnings
thereon,
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are immediately vested and not subject to forfeiture. Participants may direct
the investment of their contributions into a variety of investments. Plan assets
are held and distributed under a trust agreement. Because levels of future
compensation, participant contributions and investment yields cannot be reliably
predicted over the span of time contemplated by a plan of this nature, it is
impractical to estimate the annual benefits payable at retirement to the
individuals listed in the Summary Compensation Table above.
EXECUTIVE COMPENSATION PLAN. Under Kinder Morgan Energy Partners' Executive
Compensation Plan, executive officers of Kinder Morgan G.P., Inc. are eligible
for awards equal to a percentage of the incentive compensation value, which is
defined as cash distributions to Kinder Morgan G.P., Inc. during the four
calendar quarters preceding the date of redemption times eight (less a
participant adjustment factor, if any). Under the executive plan, no eligible
employee may receive a grant in excess of 2%, and total awards under the
executive plan may not exceed 10%. In general, participants may redeem vested
awards in whole or in part from time to time by written notice. Kinder Morgan
Energy Partners may, at its option, pay the participant in units, provided,
however, the unitholders approve the plan prior to issuing those units, or in
cash. Kinder Morgan Energy Partners may not issue more than 200,000 units in the
aggregate under the executive plan. Units will not be issued to a participant
unless the units have been listed for trading on the principal securities
exchange on which the units are then listed. The executive plan terminates
January 1, 2007, and any unredeemed awards will be automatically redeemed. The
board of directors of Kinder Morgan G.P., Inc. may, however, terminate the
executive plan before that date, and upon early termination, Kinder Morgan
Energy Partners will redeem all unpaid grants of compensation at an amount equal
to the highest Incentive Compensation Value, using as the determination date any
day within the previous twelve months, multiplied by 1.5. The executive plan was
established in July 1997 and on July 1, 1997, the board of directors of Kinder
Morgan G.P., Inc. granted awards totaling 2% of the incentive compensation value
to each of Thomas King, David G. Dehaemers, Jr. and Michael C. Morgan.
Originally, 50% of the awards were to vest on each of January 1, 2000 and
January 1, 2002. No awards were granted during 1998.
All of Mr. King's awards were forfeited when he resigned as President of
Kinder Morgan G.P., Inc. on November 20, 1998. On January 4, 1999, after year
end, the awards granted to Mr. Dehaemers and Mr. Morgan were amended to provide
for the immediate vesting and pay-out of 50% of their awards, or 1% of the
incentive compensation value. The board of directors of Kinder Morgan G.P., Inc.
believed that accelerating the vesting and pay-out of the awards was in the best
interest of Kinder Morgan Energy Partners because it capped the total payment
the participants were entitled to receive for 50% of their awards.
UNIT OPTION PLAN. Under Kinder Morgan Energy Partners' Unit Option Plan,
key personnel of Kinder Morgan Energy Partners and its affiliates are eligible
to receive grants of options to acquire units. The total number of units
available under the Unit Option Plan is 250,000. None of the options granted
under the Unit Option Plan may be incentive stock options under Section 422 of
the Internal Revenue Code. If an option expires, or is otherwise terminated,
without being exercised, the number of units covered by that option will be
available for a future award. The exercise price for an option may not be less
than the fair market value of a unit on the date of grant. Either the board of
directors of Kinder Morgan G.P., Inc. or a committee of the board of directors
will administer the Option Plan. The Unit Option Plan terminates on March 5,
2008.
No individual employee may be granted options for more than 10,000 units in
any year. The board of directors of Kinder Morgan G.P., Inc. or its compensation
committee will determine the duration and vesting of the options to employees at
the time of grant. At December 31, 1998, options for 194,500 units were granted
to 89 employees of Kinder Morgan G.P., Inc. Forty percent of the options
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will vest on the first anniversary of the date of grant and twenty percent on
each anniversary, thereafter. The options expire seven years from the date of
grant.
The Option Plan also granted to each non-employee director of Kinder Morgan
G.P., Inc. as of April 1, 1998, an option to acquire 5,000 units at an exercise
price equal to the fair market value of the units on that date. In addition,
each new non-employee director will receive options to acquire 5,000 units on
the first day of the month following his or her election. Forty percent of the
options will vest on the first anniversary of the date of grant and twenty
percent on each anniversary thereafter. The non-employee director options will
expire seven years from the date of grant.
The following tables show various information at December 31, 1998, and for
the fiscal year then ended for unit options to Kinder Morgan Energy Partners
granted to and exercised by the individuals named in the summary compensation
table above. Mr. Allison is the only person named in the Summary Compensation
Table that has been granted options in Kinder Morgan Energy Partners units. No
options have been granted at an option price below fair market value on the date
of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER % OF TOTAL ANNUAL RATES OF
OF OPTIONS UNIT PRICE
UNITS GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO PRICE OPTION TERM(1)
OPTIONS EMPLOYEES PER EXPIRATION ---------------------
NAME GRANTED IN 1998 UNIT DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William V. Allison....... 10,000 5.14 $33.125 8/26/2005 $134,852 $314,263
</TABLE>
AGGREGATED OPTION EXERCISES IN 1998,
AND 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
UNITS UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 1998 YEAR-END AT 1998 YEAR END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William V. Allison... -- -- -- 10,000 -- $31,250
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying Kinder
Morgan Energy Partners units at year-end, minus the exercise price.
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SPECIFIC RELATIONSHIPS AND RELATED TRANSACTIONS
On , 1999, we entered into an exchange agreement with all of our
then existing stockholders. Under that agreement, the stockholders agreed:
- to the amendment and restatement of our certificate of incorporation and
bylaws (the form of each can be found as exhibits to the registration
statement of which this prospectus is a part) to increase our authorized
shares of capital stock to 215 million shares and to include the
provisions described in the "Description of our Capital Stock;" and
- to the exchange of the then outstanding shares of Class A Common Stock
and Class B Common Stock held by our stockholders for an aggregate of
29,646,023 shares of common stock and 3,103,977 shares of non-voting
convertible common stock.
On May 7, we entered into our credit facility with First Union National
Bank, as the administrative agent. The credit facility provides for a $150
million term loan and a $15 million revolving loan commitment. In connection
with such credit facility, we paid First Union National Bank usual and customary
fees. First Union National Bank is an affiliate of First Union Corporation. For
a more complete description of the credit facility, please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Kinder Morgan, Inc. -- Credit Facilities."
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SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common stock
that will be issued upon the completion of the transactions contemplated in this
prospectus and held by:
- beneficial owners of 5% or more of our common stock and our non-voting
convertible common stock;
- our directors and those individuals indicated in this prospectus who will
be directors after the completion of this offering;
- our executive officers who are listed in the summary compensation table
in this prospectus; and
- our directors and executive officers as a group.
The shares shown below beneficially owned by William V. Morgan are owned by
Morgan Associates, Inc., a Kansas corporation, wholly-owned by Mr. Morgan.
The shares shown below beneficially owned by First Union Corporation
consist of 3,103,977 shares of non-voting convertible common stock and 1,807,905
shares of common stock. Upon completion of the offering, First Union Corporation
will own approximately 4.9% of our outstanding voting common stock. "Percent of
Class" shown in the table below is the percent of our outstanding aggregate
shares of common stock and non-voting convertible common stock.
The shares beneficially owned include both outstanding common stock and
common stock a person has the right to acquire within 60 days after the date of
this prospectus by exercise of non-voting convertible common stock, subject to
specific restrictions with respect to holders subject to the Bank Holding
Company Act of 1956, as amended, and stock options to be outstanding as of the
completion of this offering. Shares of common stock that will be subject to
exercisable stock options include . The asterisks in the table mean
that the person holds less than 1% of the shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS
SHARES -------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
First Union Corporation................................... 4,911,882 15.00% 12.28%
One First Union Center
Charlotte, North Carolina 28288
Richard D. Kinder......................................... 19,319,035 58.99% 48.30%
William V. Morgan......................................... 7,291,113 22.26% 18.23%
Fayez Sarofim............................................. -- -- --
Ted A. Gardner............................................ 182,494 * *
Gary Hultquist............................................ -- -- --
David G. Dehaemers, Jr.................................... -- -- --
Michael C. Morgan......................................... -- -- --
All directors and executive officers as a group (6
persons)................................................ 26,792,642 81.81% 66.98%
========== ===== =====
</TABLE>
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DESCRIPTION OF OUR CAPITAL STOCK
Upon completion of the offering, our common stock will be registered under
the Securities Act of 1933, as amended, and we will be subject to the reporting
and other requirements of the Securities Exchange Act of 1934, as amended. We
will be required to file periodic reports containing financial and other
information with the SEC.
COMMON STOCK
Our restated certificate of incorporation authorizes our board of directors
to issue up to 215,000,000 shares of capital stock each with a par value of
$0.01 per share, of which:
- 5,000,000 shares are designated as preferred stock;
- 200,000,000 shares are designated as common stock, 36,896,023 shares of
which will be outstanding as of the completion of the offerings, not
including any shares of common stock to be issued upon exercise of stock
options to be issued upon completion of the offering; and
- 10,000,000 shares are designated as non-voting convertible common stock,
3,103,977 shares of which will be outstanding as of the completion of the
offerings.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Each holder of non-voting convertible common stock is not entitled to
any voting rights. Each share of non-voting convertible common stock is
convertible, at the holder's option, subject to specific restrictions with
respect to holders subject to the Bank Holding Company Act of 1956, as amended,
into one share of common stock, subject to adjustments for recapitalizations.
Other than voting and conversion rights, the rights of the common stock and
non-voting convertible common stock are identical.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, holders of common stock and non-voting convertible
common stock are entitled to receive dividends ratably, if any, as may be
declared from time to time by the board of directors out of funds legally
available therefor. In the event of our liquidation, dissolution or winding up,
holders of common stock and non-voting convertible common stock would be
entitled to share in our assets remaining after the payment of liabilities and
liquidation preferences on any outstanding preferred stock.
Holders of common stock and non-voting convertible common stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock or the non-
voting convertible common stock. All outstanding shares of common stock and
non-voting convertible common stock are, and the shares of common stock offered
by us in this offering, when issued and paid for, will be, fully paid and
nonassessable.
The rights of the holders of the common stock may be modified by the board
of directors who may amend our restated bylaws by a majority vote at any regular
or special meeting of our board of directors or by written consent.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, up to 5,000,000
shares of preferred stock with dividend, redemption, conversion and exchange
provisions as are provided in the particular series. Except as expressly
provided by law or as may be provided by resolution of our board of directors,
the preferred stock shall have no right or power to vote on any question or in
any proceeding or to be represented at, or to receive notice of, any meeting of
our stockholders. The issuance of preferred stock, or the perception that an
issuance might occur, could have the effect of delaying or preventing a change
in control transaction related to us.
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We have established and designated two series of our preferred stock known
as:
- Series A Junior Participating Preferred Stock, par value $0.01 per share,
consisting of an aggregate of 200,000 shares; and
- Series B Junior Participating Preferred Stock, par value $0.01 per share,
consisting of an aggregate of 15,000 shares.
None of these series of preferred stock or any other shares of preferred stock
are issued or outstanding and our board of directors has no present plans to
issue any of the preferred stock other than the preferred stock subject to the
rights agreement described below.
REGISTRATION RIGHTS
According to the terms of an amended and restated registration rights
agreement, Richard D. Kinder, William V. Morgan or the holders of a majority of
our common stock issued and outstanding prior to this offering (excluding shares
held by Mr. Kinder and Mr. Morgan) will be entitled to demand registration
rights any time after we become eligible to file a registration statement on
Form S-3. We shall not be required to effect more than two registration
statements for the holders of that majority or more than two registration
statements for Messrs. Kinder and Morgan; however, we are not required to effect
more than one registration statement in any six month period. If our board of
directors determines a demand registration would have an adverse effect on us,
we may delay any demand registration for a single period not to exceed 90 days.
In addition, these stockholders may participate in any public offering, other
than an offering under a registration statement on Form S-4 or Form S-8 or any
other forms not available for registering capital stock for sale to the public,
by us of our common stock, subject to marketing considerations as determined by
our managing underwriter for that offering.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CHARTER AND BYLAW PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents a Delaware corporation
from engaging under some circumstances, in a "business combination," which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder," or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any of those persons, for three years following the date that stockholder became
an interested stockholder unless:
- the transaction in which that stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
interested stockholder attained that status;
- upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by various
employee benefit plans or persons who are directors and also officers; or
- on or after the date the interested stockholder attains that status, the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 of the Delaware General Corporation Law by amending its certificate
of incorporation or bylaws by action of its stockholders to exempt itself from
coverage, provided that the charter or bylaw amendment shall not become
effective until 12 months after the date it is adopted or apply to an interested
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stockholder who attained that status before the amendment. We have not adopted
that charter or bylaw amendment.
The terms of our restated certificate of incorporation, as well as the
concentration of ownership of the common stock and our ability to issue up to
five million "blank check" shares of preferred stock may have the effect of
discouraging proposals by third parties to acquire a controlling interest in us,
which could deprive our stockholders of the opportunity to consider an offer to
acquire their shares at a premium price to them.
These provisions of our restated certificate of incorporation include:
- a classified board of directors consisting of three classes of directors
with each class to be elected separately in succeeding years;
- our directors may fix the number of our directors and any newly created
directorship resulting from an increase in the number of directors or a
vacancy on our board of directors shall generally be filled only by vote
of a majority of the remaining directors then in office, even though less
than a quorum;
- special meetings of our stockholders may be called only by our chairman
of the board or by a majority of our entire board of directors and no
stockholder or group of stockholders may call a special meeting of our
stockholders;
- the exclusive authority of our chairman to determine the procedures and
order of any stockholder meeting;
- subject to the rules of the New York Stock Exchange and for as long as
Richard D. Kinder and William V. Morgan own a majority of the outstanding
shares of common stock, the ability of a majority of our stockholders to
act by written consent;
- the power of our board of directors to make all decisions for any rights
plan adopted by our board of directors; and
- the requirement of a vote of 80% of our outstanding stockholders voting
as a single class to amend many of these anti-takeover provisions of our
restated certificate of incorporation.
In addition, our restated bylaws also include anti-takeover provisions
which include specific procedures for a stockholder to propose a nomination of
directors or proposals for other business for action at a stockholders meeting.
The existence of these provisions in our restated certificate of
incorporation and in our restated bylaws may have a depressive effect on the
market price of the common stock in some situations.
The foregoing provisions of our restated certificate of incorporation, our
restated bylaws and of Section 203 of the Delaware General Corporation Law,
together with the ability of the board of directors to issue stock without
further stockholder action, could delay or frustrate the removal of incumbent
directors or the assumption of control by the holder of a large block of common
stock even if the removal or assumption would be beneficial, in the short term,
to our stockholders. The provisions could also discourage or make more difficult
a merger, tender offer or proxy contest even if the event would be favorable to
the interests of our stockholders.
The foregoing is a summary of the provisions of our restated certificate of
incorporation and restated bylaws. You are directed to the full text of these
documents which are attached as exhibits to the registration statement of which
this prospectus is part.
RIGHTS TO PURCHASE PREFERRED STOCK
Each share of our common stock and non-voting convertible common stock has
attached to it a right to purchase a share of our preferred stock. The rights
initially are represented only by the certificates for the common stock and
non-voting convertible common stock and will not trade separately from the
common stock and non-voting convertible common stock unless and until:
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<PAGE> 72
- the public announcement that a person or group (that person or group
referred to as an acquiring person) has become the beneficial owner of
15% or more of our outstanding common stock other than various
grandfathered stockholders; or
- ten business days (or any later date as our board of directors may fix by
resolution) after the date a person or group commences a tender or
exchange offer that would result in such person or group becoming an
acquiring person.
If and when the rights separate and prior to the date of our announcement
that any person or group has become an acquiring person, each right will entitle
the holder to purchase, in the case of a right relating to the common stock,
1/1000 of a share of Series A Junior Participating Preferred Stock or, in the
case of a right relating to our non-voting convertible common stock, 1/1000 of a
share of Series B Junior Participating Preferred Stock, in each case, for an
exercise price of $ . Each 1/1000 of a share of Series A Junior
Participating Preferred Stock and Series B Junior Participating Preferred Stock
would have economic and voting terms equivalent to one share of our common stock
or non-voting convertible common stock, respectively.
Upon the date of the public announcement that any person or group has
become an acquiring person, each right, other than rights beneficially owned by
the acquiring person or their transferees, which rights become void, will
entitle its holder to purchase, for the exercise price, a number of shares of
common stock, or in the case of rights relating to non-voting convertible common
stock, a number of shares of non-voting convertible common stock, that have a
market value of twice the exercise price.
If, after the date of the public announcement that any person or group has
become an acquiring person, we are involved in a merger or other business
combination transaction or 50% or more of our consolidated assets or earning
power are sold, proper provision will be made so that each holder of a right
will thereafter have the right to receive, upon the exercise of that right at
the then current exercise price of the right, that number of shares of common
stock or non-voting convertible common stock, as applicable, of the acquiring
company which at the time of that transaction will have a market value of two
times the exercise price of the right.
At any time after any person becomes an acquiring person and prior to the
acquisition by any person or group of a majority of the outstanding common
stock, our board of directors may exchange the rights (other than rights owned
by that person or group which have become void), in whole or in part, at an
exchange ratio of one share of common stock per right (subject to adjustment).
The rights may be redeemed by our board of directors for $0.01 per right at
any time prior to the date of the public announcement that any person has become
an acquiring person. Our restated certificate of incorporation permits this
redemption right to be exercised by our board of directors or various directors
specified or qualified by the terms of the instrument governing the rights.
The terms of the rights may be amended by our board of directors without
the consent of the holders of the rights, except that from and after the time
that any person becomes an acquiring person, no amendment may adversely affect
the interests of the holders of the rights, other than the acquiring person and
its affiliates and associates. Until a right is exercised, the holder will have
no rights as our stockholder based on that right.
The rights will not prevent our takeover. However, the rights may cause
substantial dilution to a person or group that acquires 15% or more of our
common stock unless the rights are first redeemed by our board of directors.
This is just a summary of the rights and is qualified in its entirety by
reference to the rights agreement, which is attached as an exhibit to the
registration statement to which this prospectus is a part.
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TRANSFER AGENT AND REGISTRAR
EquiServe has agreed to serve as registrar and transfer agent for the
common stock and will receive a fee from us for serving in those capacities. All
fees charged by the transfer agent for transfers of common stock will be borne
by us and not by the holders of common stock, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of common stock and other similar fees or charges
will be borne by the affected holder. There will be no charge to the holders of
our common stock for disbursements by us of cash distributions. We will
indemnify the transfer agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities,
except for any liability due to any negligence, gross negligence, bad faith or
intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may at any time resign, by notice to us, or be removed
by us, that resignation or removal to become effective upon the appointment by
us of a successor transfer agent and registrar and its acceptance of that
appointment. If no successor has been appointed and accepted that appointment
within 30 days after notice of that resignation or removal, we are authorized to
act as the transfer agent and registrar until a successor is appointed.
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RELEVANT PROVISIONS OF
KINDER MORGAN ENERGY PARTNERS' PARTNERSHIP AGREEMENT
The following paragraphs are a summary of relevant provisions of Kinder
Morgan Energy Partners' partnership agreement which could impact our results of
operations and/or those of Kinder Morgan Energy Partners. A copy of the
partnership agreement is filed as an exhibit to the registration statement of
which this prospectus is a part. Unless otherwise specifically described,
references in this prospectus to the term "partnership agreement" constitute
references to the partnership agreements of Kinder Morgan Energy Partners and
its operating partnerships collectively. The following discussion is qualified
in its entirety by reference to the partnership agreements for Kinder Morgan
Energy Partners and its operating partnerships.
ORGANIZATION AND DURATION
Kinder Morgan Energy Partners and each of the operating partnerships are
Delaware limited partnerships. Unless liquidated or dissolved at an earlier
time, under the terms of the partnership agreement, Kinder Morgan Energy
Partners and each of the operating partnerships will dissolve on December 31,
2082.
PURPOSE
The purpose of Kinder Morgan Energy Partners under the partnership
agreement is to serve as the limited partner in the operating partnerships and
to conduct any other business that may be lawfully conducted by a Delaware
limited partnership.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER
The authority of the general partner is limited in some respects under the
partnership agreement. The general partner is prohibited, without the prior
approval of holders of record of a majority of the outstanding units from, among
other things, selling or exchanging all or substantially all of Kinder Morgan
Energy Partners' assets in a single transaction or a series of related
transactions (including by way of merger, consolidation or other combination) or
approving on behalf of Kinder Morgan Energy Partners the sale, exchange or other
disposition of all or substantially all of the assets of Kinder Morgan Energy
Partners, provided that Kinder Morgan Energy Partners may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of Kinder
Morgan Energy Partners' assets without that approval. Kinder Morgan Energy
Partners may sell all or substantially all of its assets under a foreclosure or
other realization upon the foregoing encumbrances without that approval. Except
as provided in the partnership agreement, any amendment to a provision of the
partnership agreement generally will require the approval of the holders of at
least 66 2/3% of the units. The general partner's ability to sell or otherwise
dispose of Kinder Morgan Energy Partners' assets is restricted by the terms of
Kinder Morgan Energy Partners' credit facility.
In general, the general partner may not take any action, or refuse to take
any reasonable action, without the consent of the holders of at least a majority
of the outstanding units of Kinder Morgan Energy Partners, (other than units
owned by the general partner and its affiliates), that would cause Kinder Morgan
Energy Partners to be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The general partner has agreed not to voluntarily withdraw as general
partner of Kinder Morgan Energy Partners prior to January 1, 2003 (with limited
exceptions described below) without the approval of at least a majority of the
outstanding units (excluding for purposes of that determination units held by
the general partner and its affiliates) and furnishing an opinion of counsel
that the withdrawal will not cause Kinder Morgan Energy Partners to be treated
as an association taxable as a corporation or
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otherwise taxed as an entity for federal income tax purposes or result in the
loss of the limited liability of any limited partner.
On or after January 1, 2003, the general partner may withdraw as general
partner by giving 90 days' written notice (without first obtaining approval from
the holders of units), and the withdrawal will not constitute a breach of the
partnership agreement. If an opinion of counsel cannot be obtained to the effect
that (following the selection of a successor) the general partner's withdrawal
would not result in the loss of limited liability of the holders of units or
cause Kinder Morgan Energy Partners to be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax purposes,
Kinder Morgan Energy Partners will be dissolved after the withdrawal. However,
the general partner may withdraw without approval of the holders of units upon
90 days' notice to the limited partners if more than 50% of the outstanding
units (other than those held by the withdrawing general partner and its
affiliates) are held or controlled by one person and its affiliates. In
addition, the partnership agreement does not restrict Kinder Morgan, Inc.'s
ability to sell directly or indirectly, all or any portion of the capital stock
of the general partner to a third party without the approval of the holders of
units.
The general partner may not be removed unless the removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units
(excluding units held by the general partner and its affiliates) provided that
specific other conditions are satisfied. Any removal is subject to the approval
of the successor general partner by the same vote and receipt of an opinion of
counsel that the removal and the approval of a successor will not result in the
loss of limited liability of any limited partner or cause Kinder Morgan Energy
Partners to be treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes.
If the withdrawal of the general partner where the withdrawal violates the
partnership agreement or removal of the general partner by the limited partners
under circumstances where cause exists, a successor general partner will have
the option to acquire the general partner interest of the departing general
partner in Kinder Morgan Energy Partners for a cash payment equal to the fair
market value of the interest. Under all other circumstances where the general
partner withdraws or is removed by the limited partners, the departing partner
will have the option to require the successor general partner to acquire the
general partner interest of the departing partner for that amount. In each case
the fair market value will be determined by agreement between the departing
partner and the successor general partner, or if no agreement is reached, by an
independent investment banking firm or other independent expert selected by the
departing partner and the successor general partner (or if no expert can be
agreed upon, by the expert chosen by agreement of the expert selected by each of
them). In addition, Kinder Morgan Energy Partners would also be required to
reimburse the departing partner for all amounts due the departing partner,
including without limitation all employee related liabilities, including
severance liabilities, incurred in connection with the termination of the
employees employed by the departing partner for the benefit of Kinder Morgan
Energy Partners.
If the above-described option is not exercised by either the departing
partner or the successor general partner, as applicable, the departing partner's
general partner interest in Kinder Morgan Energy Partners will be converted into
units equal to the fair market value of the interest as determined by an
investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
The general partner may transfer all, but not less than all, of its general
partner interest in Kinder Morgan Energy Partners without the approval of the
limited partners to one of its affiliates or upon its merger or consolidation
into another entity or the transfer of all or substantially all of its assets to
another entity, provided in either case that entity:
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- assumes the rights and duties of the general partner;
- agrees to be bound by the provisions of the partnership agreement; and
- furnishes an opinion of counsel that the transfer would not result in the
loss of the limited liability of any limited partner or cause Kinder
Morgan Energy Partners to be treated as an association taxable as a
corporation or otherwise cause Kinder Morgan Energy Partners to be
subject to entity level taxation for federal income tax purposes.
In the case of any other transfer of the general partner interest in Kinder
Morgan Energy Partners, in addition to the foregoing requirements, the approval
of at least a majority of the units is required, excluding for those purposes
those interests held by the general partner and its affiliates.
Upon the withdrawal or removal of the general partner, Kinder Morgan Energy
Partners will be dissolved, wound up and liquidated, unless:
- the withdrawal or removal takes place following the approval of a
successor general partner; or
- within 180 days after the withdrawal or removal a majority of the holders
of units agree in writing to continue the business of Kinder Morgan
Energy Partners and to the appointment of a successor general partner.
ANTI-TAKEOVER AND RESTRICTED VOTING RIGHT PROVISIONS
The partnership agreement contains various provisions that are intended to
discourage a person or group from attempting to remove the general partner or
otherwise change the management of Kinder Morgan Energy Partners If any person
or group other than the general partner and its affiliates acquires beneficial
ownership of 20% or more of the units, that person or group loses any and all
voting rights for all of the units beneficially owned or held by that person.
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement allows the general partner to issue additional
limited or general partner interests and authorizes the general partner to cause
Kinder Morgan Energy Partners to issue additional securities of Kinder Morgan
Energy Partners for consideration and on terms and conditions as the general
partner establishes in its sole discretion without the approval of any limited
partners. In accordance with Delaware law and the partnership agreement, the
general partner may issue additional partnership interests, which, in its sole
discretion, may have special voting rights to which the units are not entitled.
LIMITED PRE-EMPTIVE RIGHT OF GENERAL PARTNER
The general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase units or other equity
securities of Kinder Morgan Energy Partners from Kinder Morgan Energy Partners
whenever, and on the same terms that, Kinder Morgan Energy Partners issues
securities to persons other than the general partner and its affiliates, to the
extent necessary to maintain the percentage interest of the general partner and
its affiliates in Kinder Morgan Energy Partners to that which existed
immediately prior to each that issuance.
LIMITED CALL RIGHT
If at any time 80% or more of the units are held by the general partner and
its affiliates, the general partner will have the right, which it may assign and
transfer to any of its affiliates or to Kinder Morgan Energy Partners, to
purchase all of the remaining units as of a record date to be selected by the
general partner, on at least 10 but not more than 60 days' notice. The purchase
price in the event of that purchase shall be the greater of:
- the average fair market price of limited partner interests of that class
as of the date five days prior to the mailing of
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written notice of its election to purchase limited partner interests of
that class; and
- the highest cash price paid by the general partner or any of its
affiliates for any units purchased within the 90 days preceding the date
the general partner mails notice of its election to purchase those units.
AMENDMENT OF PARTNERSHIP AGREEMENT AND
OTHER AGREEMENTS
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner. In order to adopt a proposed amendment, the
general partner is required to seek written approval of the holders of the
number of units required to approve that amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below. Proposed amendments (other than those described below) must be
approved by holders of at least 66 2/3% of the outstanding units, except that no
amendment may be made which would:
- enlarge the obligations of any limited partner, without its consent;
- enlarge the obligations of the general partner, without its consent,
which may be given or withheld in its sole discretion;
- restrict in any way any action by or rights of the general partner as
described in the partnership agreement;
- modify the amounts distributable, reimbursable or otherwise payable by
Kinder Morgan Energy Partners to the general partner;
- change the term of Kinder Morgan Energy Partners; or
- give any person the right to dissolve Kinder Morgan Energy Partners other
than the general partner's right to dissolve Kinder Morgan Energy
Partners with the approval of a majority of the outstanding units or
change the right of the general partner in any way.
The general partner may make amendments to the partnership agreement
without the approval of any limited partner or assignee of Kinder Morgan Energy
Partners to reflect:
- a change in the name of Kinder Morgan Energy Partners, the location of
the principal place of business of Kinder Morgan Energy Partners, the
registered agent or the registered office of Kinder Morgan Energy
Partners;
- admission, substitution, withdrawal or removal of partners in accordance
with the partnership agreement;
- a change that, in the sole discretion of the general partner, is
reasonable and necessary or appropriate to qualify or continue the
qualification of Kinder Morgan Energy Partners as a partnership in which
the limited partners have limited liability or that is necessary or
advisable in the opinion of the general partner to ensure that Kinder
Morgan Energy Partners will not be treated as an association taxable as a
corporation or otherwise subject to taxation as an entity for federal
income tax purposes;
- an amendment that is necessary, in the opinion of counsel to Kinder
Morgan Energy Partners, to prevent Kinder Morgan Energy Partners or the
general partner or their respective directors or officers from in any
manner being subjected to the provisions of the Investment Company Act of
1940, as amended, the Investment Advisors Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, as amended, whether or not substantially similar to
plan asset regulations currently applied or proposed by the United States
Department of Labor;
- an amendment that in the sole discretion of the general partner is
necessary or desirable in connection with the authorization of additional
limited or general partner interests;
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- any amendment expressly permitted in the partnership agreement to be made
by the general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of the partnership agreement; and
- any other amendments substantially similar to the foregoing.
In addition, the general partner may make amendments to the partnership
agreement without the consent if the amendments:
- do not adversely affect the limited partners in any material respect;
- are necessary or desirable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, ruling or regulation of
any federal or state agency or judicial authority or contained in any
federal or state statute;
- are necessary or desirable to facilitate the trading of the units or to
comply with any rule, regulation, guideline or requirement of any
securities exchange on which the units are or will be listed for trading,
compliance with any of which the general partner deems to be in the best
interests of Kinder Morgan Energy Partners and the holders of units; or
- are required to effect the intent of, or as contemplated by, the
partnership agreement.
The general partner will not be required to obtain an opinion of counsel as
to the tax consequences or the possible effect on limited liability of
amendments described in the two immediately preceding paragraphs. No other
amendments to the partnership agreement will become effective without the
approval of at least 95% of the units unless Kinder Morgan Energy Partners
obtains an opinion of counsel to the effect that amendment:
- will not cause Kinder Morgan Energy Partners to be treated as an
association taxable as a corporation or otherwise cause Kinder Morgan
Energy Partners to be subject to entity level taxation for federal income
tax purposes; and
- will not affect the limited liability of any limited partner in Kinder
Morgan Energy Partners or the limited partner of the operating
partnerships.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or the general partner
interests will require the approval of at least 66 2/3% of the type or class of
limited partner interests so affected.
MANAGEMENT
The general partner will manage and operate the activities of Kinder Morgan
Energy Partners, and the general partner's activities will be limited to the
management and operation. Holders of units will not direct or participate in the
management or operations of Kinder Morgan Energy Partners or any of the
operating partnerships. The general partner will owe a fiduciary duty to the
holders of units. Regardless of any limitation on obligations or duties, the
general partner will be liable, as the general partner of Kinder Morgan Energy
Partners, for all the debts of Kinder Morgan Energy Partners (to the extent not
paid by Kinder Morgan Energy Partners), except to the extent that indebtedness
incurred by Kinder Morgan Energy Partners is made specifically non-recourse to
the general partner.
Kinder Morgan Energy Partners does not currently have any directors,
officers or employees. As is commonly the case with publicly-traded limited
partnerships, Kinder Morgan Energy Partners does not currently contemplate that
it will directly employ any of the persons responsible for managing or operating
Kinder Morgan Energy Partners' business or for providing it with services, but
will instead reimburse the general partner or its affiliates for the services of
those persons.
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REIMBURSEMENT OF EXPENSES. The general partner will receive no management
fee or similar compensation for its management of Kinder Morgan Energy Partners
(other than cash distributions). However, the general partner is entitled under
the partnership agreement to reimbursement on a monthly basis, or other basis as
the general partner may determine in its sole discretion, for all direct and
indirect expenses it incurs or payments it makes on behalf of Kinder Morgan
Energy Partners and all other necessary or appropriate expenses allocable to
Kinder Morgan Energy Partners or otherwise reasonably incurred by the general
partner in connection with operating Kinder Morgan Energy Partners' business.
The partnership agreement provides that the general partner will determine the
fees and expenses that are allocable to Kinder Morgan Energy Partners in any
reasonable manner determined by the general partner in its sole discretion. The
reimbursement for costs and expenses will be in addition to any reimbursement to
the general partner and its affiliates as a result of the indemnification
provisions of the partnership agreement.
INDEMNIFICATION. The partnership agreement provides that Kinder Morgan
Energy Partners will indemnify the general partner, any departing partner and
any person who is or was an officer or director of the general partner or any
departing partner, to the fullest extent permitted by law. Kinder Morgan Energy
Partners also may indemnify, to the extent deemed advisable by the general
partner, to the fullest extent permitted by law, any person who is or was an
affiliate of the general partner or any departing partner, any person who is or
was an officer, director, employee, partner, agent or trustee of the general
partner, any departing partner or any affiliate, or any person who is or was
serving at the request of the general partner or any affiliate of the general
partner or any departing partner as an officer, director, employee, partner,
agent, or trustee of another person ("indemnitees") from and against any and all
losses, claims, damages, liabilities (joint or several), expenses (including,
without limitation, legal fees and expenses), judgments, fines, penalties,
interest, settlement and other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which any indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, by reason of its status as:
- the general partner, a departing partner or affiliate of either;
- an officer, director, employee, partner, agent or trustee of the general
partner, any departing partner or affiliate of either; or
- a person serving at the request of Kinder Morgan Energy Partners in
another entity in a similar capacity.
In each case the indemnitee must have acted in good faith and in a manner
which the indemnitee believed to be in or not opposed to the best interests of
Kinder Morgan Energy Partners and, for any criminal proceeding, had no
reasonable cause to believe its conduct was unlawful. Any indemnification under
the partnership agreement will only be paid out of the assets of Kinder Morgan
Energy Partners, and the general partner will not be personally liable for, or
have any obligation to contribute or loan funds or assets to Kinder Morgan
Energy Partners to enable it to effectuate, that indemnification. Kinder Morgan
Energy Partners is authorized to purchase (or to reimburse the general partner
or its affiliates for the cost of) insurance, purchased on behalf of the general
partner and other persons as the general partner determines, against liabilities
asserted against and expenses incurred by those persons in connection with
Kinder Morgan Energy Partners' activities, whether or not Kinder Morgan Energy
Partners would have the power to indemnify that person against liabilities under
the provisions described above.
CONFLICTS AND AUDIT COMMITTEE. One or more directors who are neither
officers nor employees of the general partner or any of its affiliates will
serve as a conflicts and audit committee of the board of directors of the
general partner and will, at the request of the general partner, review specific
matters as to
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which the general partner believes there may be a conflict of interest in order
to determine if the resolution of that conflict proposed by the general partner
is fair and reasonable to Kinder Morgan Energy Partners. The conflicts and audit
committee will only review matters at the request of the general partner, which
has sole discretion to determine which matters to submit to that committee. Any
matters approved by the conflicts and audit committee will be conclusively
deemed to be fair and reasonable to Kinder Morgan Energy Partners, approved by
all partners of Kinder Morgan Energy Partners and not a breach by the general
partner of the partnership agreement or any duties it may owe to Kinder Morgan
Energy Partners Additionally, it is possible that the procedure in itself may
constitute a conflict of interest.
TERMINATION AND DISSOLUTION
Kinder Morgan Energy Partners will continue until December 31, 2082, unless
sooner terminated under the partnership agreement. Kinder Morgan Energy Partners
will be dissolved upon:
- the election of the general partner to dissolve Kinder Morgan Energy
Partners, if approved by a majority of the units;
- the sale of all or substantially all of the assets and properties of
Kinder Morgan Energy Partners and its operating partnerships;
- the bankruptcy or dissolution of the general partner; or
- the withdrawal or removal of the general partner or any other event that
results in its ceasing to be the general partner (other than by reason of
a transfer in accordance with the partnership agreement or withdrawal or
removal following approval of a successor).
However, Kinder Morgan Energy Partners will not be dissolved upon the
removal of a general partner if within 90 days after that event the partners
agree in writing to continue the business of Kinder Morgan Energy Partners and
to the appointment, effective as of the date of that event, of a successor
general partner. Upon a dissolution under bankruptcy, dissolution of the general
partner or withdrawal or removal of the general partner, at least a majority of
the units may also elect, within some time limitations, to reconstitute Kinder
Morgan Energy Partners and continue its business on the same terms and
conditions described in the partnership agreement by forming a new limited
partnership on terms identical to those described in the partnership agreement
and having as a general partner an entity approved by at least a majority of the
units, subject to receipt by Kinder Morgan Energy Partners of an opinion of
counsel that the exercise of that right will not result in the loss of the
limited liability of holders of units or cause Kinder Morgan Energy Partners or
the reconstituted limited partnership to be treated as an association taxable as
a corporation or otherwise subject to taxation as an entity for federal income
tax purposes.
CASH DISTRIBUTION POLICY
A principal objective of Kinder Morgan Energy Partners is to generate cash
from Kinder Morgan Energy Partners operations and to distribute Available Cash
to its partners in the manner described herein. "Available Cash" generally
means, for any calendar quarter, all cash received by Kinder Morgan Energy
Partners from all sources, less all of its cash disbursements and net additions
to reserves. For purposes of cash distributions to holders of units, the term
Available Cash excludes the amount paid in respect of the 0.5% special limited
partner interest in SFPP, L.P. owned by the former general partner of SFPP,
L.P., which amount will equal 0.5% of the total cash distributions made each
quarter by SFPP, L.P. to its partners.
The general partner's decisions regarding amounts to be placed in or
released from reserves may have a direct impact on the amount of Available Cash.
This is because increases and decreases in reserves are taken into account in
computing Available Cash. The general partner may, in its reasonable discretion
(subject to various
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limits), determine the amounts to be placed in or released from reserves each
quarter.
Cash distributions will be characterized as either distributions of cash
from operations or cash from interim capital transactions. This distinction
affects the amounts distributed to holders of units relative to the general
partner.
"Cash from operations" generally refers to the cash balance of Kinder
Morgan Energy Partners on the date Kinder Morgan Energy Partners commenced
operations, plus all cash generated by the operations of Kinder Morgan Energy
Partners' business, after deducting related cash expenditures, reserves, debt
service and various other items.
"Cash from Interim Capital Transactions" will generally be generated only
by borrowings, sales of debt and equity securities and sales or other
dispositions of assets for cash (other than inventory, accounts receivable and
other current assets and assets disposed of in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by Kinder Morgan Energy Partners is Cash from Operations or Cash
from Interim Capital Transactions, all Available Cash distributed by Kinder
Morgan Energy Partners from any source will be treated as Cash from Operations
until the sum of all Available Cash distributed as Cash from Operations equals
the cumulative amount of Cash from Operations actually generated from the date
Kinder Morgan Energy Partners commenced operations through the end of the
calendar quarter prior to that distribution. Any excess Available Cash
(irrespective of its source) will be deemed to be Cash from Interim Capital
Transactions and distributed accordingly.
If cash from interim capital transactions is distributed in respect of each
unit in an aggregate amount per unit equal to $11.00 per unit (the initial
public offering price of the units adjusted to give effect to the 2-for-1 split
of units effective October 1, 1997), (the "Initial Unit Price") the distinction
between cash from operations and cash from interim capital transactions will
cease, and both types of Available Cash will be treated as cash from operations.
The general partner does not anticipate that there will be significant amounts
of cash from interim capital transactions distributed.
The discussion below indicates the percentages of cash distributions
required to be made to the general partner and the holders of units. In the
following general discussion of how Available Cash is distributed, references to
Available Cash, unless otherwise stated, mean Available Cash that constitutes
Cash from Operations.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH. Kinder Morgan Energy Partners
will make distributions to its partners for each calendar quarter prior to
liquidation in an amount equal to 100% of its Available Cash for that quarter.
DISTRIBUTIONS OF CASH FROM OPERATIONS. Distributions by Kinder Morgan
Energy Partners of Available Cash constituting Cash from Operations for any
quarter will be made in the following manner:
- first, 98% to the holders of units pro rata and 2% to the general partner
until the holders of units have received a total of $0.3025 per unit for
that quarter in respect of each unit (the "First Target Distribution");
- second, 85% of any Available Cash then remaining to the holders of units
pro rata and 15% to the general partner until the holders of units have
received a total of $0.3575 per unit for that quarter in respect of each
unit (the "Second Target Distribution");
- third, 75% of any Available Cash then remaining to all holders of units
pro rata and 25% to the general partner until the holders of units have
received a total of $0.4675 per unit for that quarter in respect of each
unit (the "Third Target Distribution"); and
- fourth, 50% of any Available Cash then remaining to all holders of units
pro rata and 50% to the general partner.
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In addition, if the First, Second and Third Target Distribution levels are
reduced to zero, as described below under "-- Quarterly Distributions of
Available Cash -- Adjustment of Target Distribution Levels," all remaining
Available Cash will be distributed as Cash from Operations, 50% to the holders
of units pro rata and 50% to the general partner. These provisions are
inapplicable upon the dissolution and liquidation of Kinder Morgan Energy
Partners
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. Distributions on
any date by Kinder Morgan Energy Partners of Available Cash that constitutes
Cash from Interim Capital Transactions will be distributed 98% to all holders of
units pro rata and 2% to the general partner until Kinder Morgan Energy Partners
shall have distributed in respect of each unit Available Cash constituting Cash
from Interim Capital Transactions in an aggregate amount per unit equal to the
Initial Unit Price.
As Cash from Interim Capital Transaction is distributed, it is treated as
if it were a repayment of the initial public offering price. To reflect that
repayment, the First, Second and Third Target Distribution levels will be
adjusted downward by multiplying each amount by a fraction, the numerator of
which is the Unrecovered Initial Unit Price immediately after giving effect to
that repayment and the denominator of which is the Unrecovered Initial Unit
Price, immediately prior to giving effect to that repayment. "Unrecovered
Initial Unit Price" includes the amount by which the Initial Unit Price exceeds
the aggregate distribution of Cash from Interim Capital Transactions per unit.
When "Payback of Initial Unit Price" is achieved, i.e., when the
Unrecovered Initial Unit Price is zero, then in effect the First, Second and
Third Target Distribution levels each will have been reduced to zero. Thereafter
all distributions of Available Cash from all sources will be treated as if they
were Cash from Operations and Available Cash will be distributed 50% to all
holders of units pro rata and 50% to the general partner.
ADJUSTMENT OF TARGET DISTRIBUTION LEVELS. The First, Second and Third
Target Distribution levels will be proportionately adjusted upward or downward,
as appropriate, in the event of any combination or subdivision of units (whether
effected by a distribution payable in units or otherwise) but not by reason of
the issuance of additional units for cash or property. For example, in
connection with Kinder Morgan Energy Partners' 2-for-1 split of the units on
October 1, 1997, the First, Second and Third Target Distribution levels were
each reduced to 50% of its initial level. See "-- Quarterly Distributions of
Available Cash -- Distributions of Cash from Operations."
In addition, if a distribution is made of Available Cash constituting Cash
from Interim Capital Transactions, the First, Second and Third Target
Distribution levels will be adjusted downward proportionately, by multiplying
each amount, as the same may have been previously adjusted, by a fraction, the
numerator of which is the Unrecovered Initial Unit Price immediately after
giving effect to that distribution and the denominator of which is the
Unrecovered Initial Unit Price immediately prior to that distribution. For
example, assuming the Unrecovered Initial Unit Price is $11.00 per unit and if
Cash from Interim Capital Transactions of $5.50 per unit is distributed to
holders of units (assuming no prior adjustments), then the amount of the First,
Second and Third Target Distribution levels would each be reduced to 50% of its
initial level. If and when the Unrecovered Initial Unit Price is zero, the
First, Second and Third Target Distribution levels each will have been reduced
to zero, and the general partner's share of distributions of Available Cash will
increase, in general, to 50% of all distributions of Available Cash.
The First, Second and Third Target Distribution levels may also be adjusted
if legislation is enacted which causes Kinder Morgan Energy Partners to become
taxable as a corporation or otherwise subjects Kinder Morgan Energy Partners to
taxation as an entity for federal income tax purposes. In that event, the First,
Second, and Third Target Distribution levels for each quarter thereafter
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would be reduced to an amount equal to the
product of:
- each of the First, Second and Third Target Distribution levels multiplied
by;
- one minus the sum of:
- the maximum marginal federal income tax rate to which Kinder Morgan
Energy Partners is subject as an entity; plus
- any increase that results from that legislation in the effective overall
state and local income tax rate to which Kinder Morgan Energy Partners is
subject as an entity for the taxable year in which that quarter occurs
(after taking into account the benefit of any deduction allowable for
federal income tax purposes for the payment of state and local income
taxes).
For example, assuming Kinder Morgan Energy Partners was not previously
subject to state and local income tax, if Kinder Morgan Energy Partners were to
become taxable as an entity for federal income tax purposes and Kinder Morgan
Energy Partners became subject to a maximum marginal federal, and effective
state and local, income tax rate of 38%, then each of the Target Distribution
levels, would be reduced to 62% of the amount thereof immediately prior to that
adjustment.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of Kinder Morgan Energy Partners, unless Kinder Morgan
Energy Partners is reconstituted and continued as a new limited partnership, the
person authorized to wind up the affairs of Kinder Morgan Energy Partners (the
"Liquidator") will, acting with all of the powers of the general partner that
the Liquidator deems necessary or desirable in its good faith judgment in
connection therewith, liquidate Kinder Morgan Energy Partners' assets and apply
the proceeds of the liquidation as follows:
- first towards the payment of all creditors of Kinder Morgan Energy
Partners and the creation of a reserve for contingent liabilities; and
- then to all partners in accordance with the positive balances in their
respective capital accounts.
Under some circumstances and subject to various limitations, the Liquidator
may defer liquidation or distribution of Kinder Morgan Energy Partners' assets
for a reasonable period of time and/or distribute assets to partners in kind if
it determines that a sale would be impractical or would cause undue loss to the
partners.
Generally, any gain will be allocated between the holders of units and the
general partner in a manner that approximates their sharing ratios in the
various Target Distribution levels. Holders of units and the general partner
will share in the remainder of Kinder Morgan Energy Partners' assets in
proportion to their respective capital account balances in Kinder Morgan Energy
Partners.
Any loss or unrealized loss will be allocated to the general partner and
the holders of units: first, in proportion to the positive balances in the
partners' capital accounts until all the balances are reduced to zero; and
thereafter, to the general partner.
79
<PAGE> 84
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market or the availability of those shares for sale, could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon the closing of this offering, we will have an aggregate of 40,000,000
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options to purchase common
stock.
Of the 40,000,000 shares of common stock to be outstanding upon the closing
of this offering, the 7,250,000 shares offered in this prospectus will be
eligible for immediate sale in the public market without restriction, unless the
shares are purchased by our "affiliates" within the meaning of Rule 144
promulgated under the Securities Act of 1933. The remaining 32,750,000 shares of
common stock held by existing stockholders upon the closing of this offering
will be "restricted securities," as that term is defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701 under
the Securities Act of 1933. All of our directors, officers and stockholders have
agreed that, subject to specific limited exceptions, they will not sell,
directly or indirectly, any common stock without the prior consent of the
representatives of the underwriters for a period of 180 days (except for Richard
D. Kinder and William V. Morgan who have agreed to a period of two years and
First Union Corporation who has agreed to a period of one year) from the date of
this prospectus.
Subject to the provisions of Rules 144, 144(k) and 701, the following
amounts of shares of our common stock will be available for sale in the public
market (subject in the case of shares held by affiliates, to compliance with
specific volume restrictions):
- 1,227,970 shares, 180 days from the date of this prospectus;
- 4,911,882 shares, one year from the date of this prospectus; and
- 26,610,148 shares, two years from the date of this prospectus.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate who has beneficially owned shares for at
least one year is entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
- 1% of the number of shares of our outstanding common stock; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of sale is filed,
subject to specific restrictions.
In addition, a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from our affiliate, that
affiliate's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
As of the completion of this offering, there will be outstanding under our
1999 Stock Awards Plan options to purchase shares of our common stock which
will be eligible for sale in the public market from time to time subject to the
expiration of lock-up agreements and Rule 144. These stock options have exercise
prices equal to the initial public offering price of our common stock. The
possible sale of a significant number of shares by the holders thereof may have
an adverse effect on the price of our common stock.
We are unable to estimate the number of shares of our common stock that
will be sold under Rule 144, as this will depend on the market price for our
common stock, the
80
<PAGE> 85
personal circumstances of the sellers and other factors. We cannot assure that a
significant public market for our common stock will develop or be sustained
after this offering. Any future sale of substantial amounts of common stock in
the open market may adversely affect the market price of the common stock
offered in this prospectus.
We will file a registration statement on Form S-8 under the Securities Act
of 1933 to register the shares of common stock reserved for issuance under our
1999 Stock Awards Plan. As a result, shares issued upon exercise of stock
options granted under our 1999 Stock Awards Plan will be available, subject to
special rules for affiliates, for resale in the public market after the
effective date of the registration statement.
Under a registration rights agreement, after the closing of this offering,
subject to specific conditions, the holders of 32,750,000 shares of our
outstanding common stock will be entitled to specific demand and piggyback
registration rights. If those shares are registered under the Securities Act of
1933, those shares would be freely tradable without restriction under the
Securities Act of 1933 (except for shares then purchased by affiliates). For a
more detailed description of this agreement, please see "Description of Our
Capital Stock -- Registration Rights."
LEGAL MATTERS
The validity of the common stock will be passed upon for us by the law firm
of Bracewell & Patterson, L.L.P., Houston, Texas. Various legal matters in
connection with the common stock offered by this prospectus are being passed
upon for the underwriters by the law firm of Andrews & Kurth L.L.P., New York,
New York.
EXPERTS
The consolidated financial statements of Kinder Morgan, Inc. and its
subsidiary as of and for the year ended December 31, 1998 and for the period
from February 14, 1997 to December 31, 1997, included in this Prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Enron Liquids Pipeline Company Inc. as of and
for the year ended December 31, 1996, and for the period ended February 14,
1997, included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Kinder Morgan Energy Partners and
its subsidiaries as of December 31, 1998 and 1997 and for each of the two years
in the period ended December 31, 1998, included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accounts, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Kinder Morgan Energy Partners and
its subsidiaries for the year ended December 31, 1996 and included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
81
<PAGE> 86
FORWARD-LOOKING STATEMENTS
Some information in this prospectus or any prospectus supplement may
contain forward-looking statements. Those statements use forward-looking words
including "anticipate," "believe," "intend," "continue," "estimate," "expect,"
"may," "will" or other similar words. These statements discuss future
expectations or contain projections. Specific factors which could cause actual
results to differ from those in the forward-looking statements, include:
- price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, and coal in the United States.
Economic activity, weather, alternative energy sources, conservation and
technological advances may affect price trends and demand;
- if the Federal Energy Regulatory Commission or the California Public
Utilities Commission changes the tariff rates applicable to Kinder Morgan
Energy Partners' pipelines;
- our ability and Kinder Morgan Energy Partners' ability to integrate any
acquired operations into our existing operations;
- if railroads experience difficulties or delays in delivering products to
Kinder Morgan Energy Partners' bulk terminals;
- our ability and Kinder Morgan Energy Partners' ability to successfully
identify and close strategic acquisitions and make cost saving changes in
operations;
- shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use Kinder Morgan
Energy Partners' services;
- the condition of the capital markets and equity markets in the United
States; and
- the political and economic stability of the oil producing nations of the
world.
In addition, Kinder Morgan Energy Partners' classification as a partnership
for federal income tax purposes means that generally it does not pay federal
income taxes on its net income. Kinder Morgan Energy Partners does, however, pay
taxes on the net income of subsidiaries that are corporations. Kinder Morgan
Energy Partners relies on a legal opinion from its counsel, and not a ruling
from the Internal Revenue Service, as to its proper classification for federal
income tax purposes. If Kinder Morgan Energy Partners were to be classified as a
corporation for tax purposes, its tax payment would decrease the amount of cash
available for distribution to its partners, including Kinder Morgan G.P., Inc.,
thus limiting the ability of Kinder Morgan G.P., Inc. to make distributions to
us.
When considering forward-looking statements, you 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. 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.
You should consider the above information when reading any forward looking
statements in:
- this prospectus;
- press releases; or
- oral statements made by us or any of our officers or other persons acting
on our behalf.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, regarding
the common stock offered by this prospectus. This prospectus does not contain
all of the
82
<PAGE> 87
information included in the registration statement. For further information
about us and the common stock offered in this prospectus by this prospectus, you
may desire to review the registration statement, including its exhibits and
schedules. You may desire to review the full text of any contracts, agreements
or other documents filed as exhibits to the registration statement for a more
complete description of the matter involved. The registration statement
(including the exhibits and schedules) may be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Copies of this material can also be obtained
upon written request from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or
from the SEC's website on the internet at http://www.sec.gov. The SEC's
telephone number is 1-800-SEC-0330.
As a result of the offering, we will file periodic reports and other
information with the SEC. These reports and other information may be inspected
and copies at the public reference facilities at the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates or from the SEC's website on
the internet at http://www.sec.gov.
We intend to furnish our stockholders annual reports containing audited
financial statements.
83
<PAGE> 88
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Kinder Morgan, Inc. Consolidated Financial Statements:
Report of Independent Accountants......................... F-2
Report of Independent Accountants......................... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Income......................... F-5
Consolidated Statements of Stockholders' Equity........... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
Kinder Morgan Energy Partners, L.P. Consolidated Financial
Statements:
Report of Independent Accountants......................... F-14
Report of Independent Public Accountants.................. F-15
Consolidated Balance Sheets............................... F-16
Consolidated Statements of Income......................... F-17
Consolidated Statements of Partners' Capital.............. F-18
Consolidated Statements of Cash Flows..................... F-19
Notes to Consolidated Financial Statements................ F-20
</TABLE>
F-1
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kinder Morgan, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Kinder
Morgan, Inc. and its subsidiary (the Company) at December 31, 1997 and 1998 and
the results of their operations and their cash flows for the period from
February 14, 1997 to December 31, 1997 and for the year ended December 31, 1998
in conformity with generally accepted accounting principles. 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
generally accepted auditing standards which 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 31, 1999
F-2
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kinder Morgan, Inc.
In our opinion, the statements of income and of cash flows of Enron Liquids
Pipeline Company present fairly, in all material respects, the results of its
operations and its cash flows for the year ended December 31, 1996 and the
period from January 1, 1997 to February 14, 1997 in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
May 10, 1999
F-3
<PAGE> 91
KINDER MORGAN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHARES)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
------------------- --------------
1997 1998 (UNAUDITED)
------- ------- --------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 165 $13,873 $ 3,967
Accounts receivable -- related party (Note 8).... 510 13,645 6,179
Prepaid expenses................................. 283 1,126 3,479
------- ------- --------
Total current assets..................... 958 28,644 13,625
Investment in Partnership.......................... 22,300 41,959 44,141
Deferred charges and other assets.................. 1,089 3,679 4,801
------- ------- --------
Total assets............................. $24,347 $74,282 $ 62,567
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 291 $ 1,387 $ 2,974
Accrued liabilities (Note 8)..................... 641 13,634 6,711
Accrued taxes.................................... 948 1,556 5,545
------- ------- --------
Total current liabilities................ 1,880 16,577 15,230
Long-term debt..................................... 2,500 100,000 81,500
Deferred income taxes.............................. 185 205
------- ------- --------
Total liabilities........................ 4,565 116,577 96,935
------- ------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Series A Common Stock, par value $.01, 25,000
shares authorized, 8,047 issued and
outstanding................................... * * *
Series B Common Stock, par value $.01, 25,000
shares authorized, 2,541 issued and
outstanding................................... * * *
Additional paid-in capital....................... 18,144 (34,368)
Retained earnings (deficit)(Note 9).............. 1,638 (42,295)
------- ------- --------
Total stockholders' equity (deficit)..... 19,782 (42,295) (34,368)
------- ------- --------
Total liabilities and stockholders'
equity................................. $24,347 $74,282 $ 62,567
======= ======= ========
</TABLE>
- ------------
* Rounds to zero.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 92
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
---------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14,
YEAR ENDED 1997 TO 1997 TO YEAR ENDED THREE MONTHS
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31, ENDED
1996 1997 1997 1998 MARCH 31, 1999
------------ ------------ ------------ ------------ --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Partnership income.............. $1,886 $ 234 $ 4,577 $ 37,575 $14,220
------ ------- ------- --------- -------
Operating expenses:
Depreciation and amortization
expense.................... 182 21 67 603 256
General and administrative
expenses................... 2,658 332 1,025 877 124
------ ------- ------- --------- -------
Total operating
expenses............ 2,840 353 1,092 1,480 380
------ ------- ------- --------- -------
Operating income (loss)......... (954) (119) 3,485 36,095 13,840
Other income (expense):
Interest expense.............. -- -- (831) (4,507) (1,965)
Interest income............... 4,492 740 49 740 48
Other, net.................... (21) -- -- -- --
------ ------- ------- --------- -------
Income before tax............... 3,517 621 2,703 32,328 11,923
Income tax expense.............. 869 5,002 1,065 11,661 4,412
------ ------- ------- --------- -------
Net income (loss)............... $2,648 $(4,381) $ 1,638 $ 20,667 7,511
------ ------- ------- --------- -------
Net income (loss) per common
share -- basis and diluted.... $ 2.65 $ 14.38 $154.70 $1,951.93 $709.39
====== ======= ======= ========= =======
Number of common shares used in
calculation................... 1,000,000 1,000,000 10,588 10,588 10,588
======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 93
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B
COMMON STOCK SERIES A VOTING NONVOTING ADDITIONAL RETAINED
---------------- ---------------- ---------------- PAID-IN EARNINGS
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS CAPITAL (DEFICIT) TOTAL
------ ------- ------ ------- ------ ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 14,
1997.................. 1,160 $ * $ 5 $ 5
Issuance of common
stock.............. 6,887 * 2,541 $ * 8,950 8,950
Contributed capital... 9,189 9,189
Net income.............. $ 1,638 1,638
----- ---- ----- ---- -------- -------- --------
Balance at December 31,
1997.................. 8,047 2,541 18,144 1,638 19,782
Issuance of common
stock..............
Contributed capital...
Dividends............. (18,144) (64,600) (82,744)
Net income............ 20,667 20,667
----- ---- ----- ---- -------- -------- --------
Balance at December 31,
1998.................. 8,047 $ -- 2,541 $ -- $ -- $(42,295) $(42,295)
===== ==== ===== ==== ======== ======== ========
</TABLE>
- ------------
* Rounds to zero.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 94
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
---------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14, THREE MONTHS
YEAR ENDED 1997 TO 1997 TO YEAR ENDED ENDED
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1999
------------ ------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities: --
Net income (loss).................... $ 2,648 $ (4,381) $ 1,638 $ 20,667 $ 7,511
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 182 21 67 603 256
Distributions from investment in
Partnership...................... 2,604 4,753 30,715 12,035
Equity in earnings of
Partnership...................... (1,886) (4,577) (37,575) (14,220)
Deferred income taxes and other.... (1,275) 4,381 (435) (1,809) (852)
Changes in components of working
capital:
Accounts receivable.............. 366 828 (510) (13,135) 7,466
Prepaid expense.................. 48 16 (283) (843) (2,353)
Accounts payable................. (29) (145) 291 388 1,586
Accrued liabilities.............. 641 12,993 (6,924)
Accrued taxes.................... 18 (103) 948 608 3,989
Other, net....................... (167) (374) (416) 621 (321)
------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities......... 2,509 243 2,117 13,233 8,173
------- -------- -------- -------- --------
Cash flows from investing activities:
Acquisition of business.............. -- -- (21,745) -- --
Capital contributions to Partnership
investments........................ -- (223) (732) (12,487) --
(Increase) decrease in intercompany
receivable from Enron.............. (2,509) -- -- -- --
Property additions................... -- (20) -- -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................... (2,509) (243) (22,477) (12,487) --
------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock.............................. -- -- 8,955 -- --
Proceeds from contributed capital.... -- -- 9,189 -- 421
Proceeds from borrowings............. -- -- 15,000 112,050 --
Payment of long-term debt............ -- -- (12,500) (14,550) (18,500)
Dividends paid....................... -- -- -- (82,744) --
Debt issuance costs.................. -- -- (119) (1,794) --
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities......... -- -- 20,525 12,962 (18,079)
------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents.......................... -- -- 165 13,708 (9,906)
Cash and cash equivalents, beginning of
period............................... -- -- -- 165 13,873
------- -------- -------- -------- --------
Cash and cash equivalents, end of
period............................... $ -- $ -- $ 165 $ 13,873 $ 3,967
======= ======== ======== ======== ========
Cash paid for:
Interest............................. $ -- $ -- $ 799 $ 2,668 $ 2,487
Income taxes......................... -- -- 522 693 87
</TABLE>
SUPPLEMENTARY INFORMATION OF NONCASH OPERATING AND INVESTING ACTIVITIES:
Prior to the purchase of Enron Liquids Pipeline Company on February 14,
1997, deferred tax liabilities of $28,478, affiliate receivables of $84,291, and
other working capital items were deemed paid through noncash contributions and
distributions with the predecessor company's parent.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 95
KINDER MORGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Kinder Morgan, Inc. (KMI or the Company), formerly KC Liquids Holding
Corporation, was formed in October 1996. From October 1996 to February 1997, the
Company had no operations or activities. Effective February 14, 1997, KMI
acquired all of the issued and outstanding stock of Enron Liquids Pipeline
Company (ELPC or the Predecessor Company) and renamed it Kinder Morgan G.P.,
Inc. (KMGP). Accordingly, the accompanying financial statements present: (a) the
financial position and results of operations of the Company as of and for the
year ended December 31, 1998 and (b) as of December 31, 1997 and for the period
February 14, 1997 to December 31, 1997; and the financial position and results
of operations of the Predecessor Company (a) for the period January 1, 1997 to
February 14, 1997 and (b) for the year ended December 31, 1996. KMGP owns
approximately 3.8% and 8.1% of Kinder Morgan Energy Partners, L.P. (the
Partnership) as of December 31, 1998 and 1997, respectively. At December 31,
1998 and 1997, the ownership interest consists of 2% general partner interests
and 862,000 common units of the Partnership. KMI's acquisition of KMGP was
accounted for under the purchase method of accounting. The purchase price of
KMGP was approximately $21,745,000. The financial statements of the Predecessor
Company do not include KMI's purchase accounting basis in KMGP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for 1998 and for the period February
14, 1997 to December 31, 1997 include the accounts of KMI and KMGP. The
financial statements for the year ended December 31, 1996 and for the period
January 1, 1997 to February 14, 1997 include the accounts of Enron Liquids
Pipeline Company, which is deemed to be the Predecessor Company to Kinder
Morgan, Inc. All intercompany transactions have been eliminated.
The following significant policies are followed by the Company in the
preparation of the consolidated financial statements:
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash and have an original maturity of three months or less at
date of acquisition.
Debt Issue Costs
Debt issue costs are amortized using the interest method over the term of
the financings for which they were incurred.
Interest Income
For the year ended December 31, 1996 and the period from January 1, 1996 to
February 14, 1997 interest income represents accruals for interest on
intercompany amounts receivable from the Predecessor Company's parent. Interest
was earned based upon the average monthly balance at the monthly average LIBOR
interest rate.
F-8
<PAGE> 96
Investment in Partnership
The investment in the Partnership is accounted for under the equity method.
At December 31, 1998 and 1997, the Company's investment in the Partnership
exceeded its share of the underlying equity in the net assets of the Partnership
by approximately $9,210,000 and $9,610,000, respectively. This excess is being
amortized on a straight-line basis over 25 years which approximates the useful
lives of the Partnership's assets ranging from 2.5% to 12.5%. Amortization of
this excess in the amount of $400,000 and $390,000 for the periods ended
December 31, 1998 and 1997, respectively, is reflected as a reduction in equity
earnings from the investment in the Partnership.
Income Taxes
Income taxes are based on KMI, KMGP and ELPC each filing separate federal
income tax returns and are accounted for under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes are determined based on temporary differences
between the financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect during the years in which the differences are
expected to reverse.
Partnership Income
Income is recognized based on KMGP's share of earnings, including incentive
distributions, of the Partnership.
3. INVESTMENT IN PARTNERSHIP
Summarized financial information of the Company's investment in the
Partnership is presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
-------- ----------
<S> <C> <C>
Current assets.............................................. $ 21,792 $ 81,401
Noncurrent assets........................................... 291,114 2,070,871
Current liabilities......................................... 11,376 57,482
Long-term debt and other liabilities........................ 151,306 734,127
Partners' capital........................................... 150,224 1,360,663
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenues............................................... $71,250 $73,932 $322,617
Costs, expenses and other.............................. 59,350 56,195 219,011
------- ------- --------
$11,900 $17,737 $103,606
======= ======= ========
</TABLE>
On September 2, 1997, KMGP approved a two-for-one unit split of the
Partnership's outstanding common units representing limited partner interests in
the Partnership. The unit split entitled common unitholders to one additional
common unit for each common unit held. The issuance and mailing of split units
occurred on October 1, 1997 to unitholders of record on September 15, 1997. All
references to the number of common units held by KMGP in the financial
statements and related notes have been restated to reflect the effect of the
split.
F-9
<PAGE> 97
4. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14,
YEAR ENDED 1997 TO 1997 TO YEAR ENDED
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Current:
---
Federal................ $ 1,890 $ 28,044 $1,320 $11,591
State.................. 332 4,524 180 2,286
------- -------- ------ -------
Total
current...... 2,222 32,568 1,500 13,877
------- -------- ------ -------
Deferred:
Federal................ (1,202) (23,766) (450) (2,201)
State.................. (151) (3,800) 15 (15)
------- -------- ------ -------
Total
deferred..... (1,353) (27,566) (435) (2,216)
------- -------- ------ -------
869 5,002 $1,065 $11,661
======= ======== ====== =======
</TABLE>
Income taxes, as reflected in the consolidated statement of income, differ
from the amounts computed by applying the statutory federal corporate tax rate
to income before income taxes. This difference is primarily due to state taxes,
net of the federal benefits.
Deferred taxes at December 31, 1998 and 1997 consist of a deferred tax
asset of $2,545,000 and $620,000, respectively, related to net operating losses
of KMI, and the deferred tax liability related to the difference between the tax
and book basis of the investment in the Partnership, principally due to
accelerated depreciation. Tax expense for the period from January 1, 1997 to
February 14, 1997 reflects the tax effects of the sale of the Predecessor
Company's common stock on a stand alone basis. This sale, which for tax purposes
was treated as an asset sale, resulted in a tax gain of approximately $85
million.
At December 31, 1998, KMI has a tax net operating loss carry forward of
approximately $7,500,000 which expires in the years 2012-2018.
5. DEBT
On February 14, 1997, KMI entered into a borrowing agreement with First
Union National Bank (First Union) in connection with the acquisition of the
common stock of KMGP. Pursuant to this agreement, KMI issued two notes in the
aggregate amount of $15,000,000, bearing interest, at KMI's option, at either
First Union's Base Rate plus one-half of 1% or LIBOR plus 2.5%. The notes are
payable August 31, 1999. Effective December 31, 1997, the borrowing agreement
was amended to provide a $15,000,000 facility note in place of the two notes
issued February 14, 1997. The interest rate and maturity date remained
unchanged. The borrowing agreement was amended in 1998 to provide a term loan
commitment for an additional $85 million. Along with the increased borrowing,
the interest rate and maturity date were changed to First Union's Base Rate plus
one-half of one percent or LIBOR plus three percent and to a maturity date of
May 31, 2000. KMI has pledged the stock of KMGP and KMGP's assets as collateral
for this term loan commitment. At December 31, 1998 and 1997, KMI had principal
amounts outstanding of $100 million and $2.5 million, respectively. The carrying
amounts of the long-term debt based upon prevailing interest rates available to
KMI at December 31, 1998 and 1997 approximated fair value.
6. COMMON STOCK
Common stock at December 31, 1998 and 1997 consisted of 25,000 Series A
voting shares authorized, of which 8,047 were issued and outstanding; and 25,000
Series B nonvoting shares authorized, of which 2,541 were issued and
outstanding. Both series have a par value of $0.01 and,
F-10
<PAGE> 98
with the exception of voting rights, have all of the same powers, preferences,
rights and qualifications.
7. LITIGATION, COMMITMENTS AND CONTINGENCIES
Through its investment in KMGP, in the ordinary course of business, the
Company is a defendant in various lawsuits relating to the Partnership's assets.
Although no assurance can be given, the Company believes, based on its
experience to date, that the ultimate resolution of such items will not have a
material, adverse impact on the Company's financial position.
Environmental
KMGP is a defendant in two proceedings (one by the State of Illinois and
one by the Department of Transportation) relating to alleged environmental
violations for events relating to a fire that occurred at the Morris storage
field in September 1994. Although no assurance can be given, the Company
believes the ultimate resolution of these matters will not have a material,
adverse effect on the Partnership's financial position, results of operations,
or its ability to pay cash distributions to KMGP.
The Partnership is subject to environmental cleanup and enforcement actions
from time to time. In particular, the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA or Superfund law) generally
imposes joint and several liability for cleanup and enforcement costs, without
regard to fault or the legality of the original conduct, on current or
predecessor owners and operators of a site. The operations of the Partnership
are also subject to federal, state and local laws and regulations relating to
protection of the environment. Although the Partnership believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and liabilities will
not be incurred by the Partnership. 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 the operations of the Partnership, could result in substantial
costs and liabilities to the Partnership which could affect future cash
distributions to KMGP.
The Partnership, along with several other respondents, is involved in a
cleanup in connection with an acquisition made in 1998. This cleanup, ordered by
the United States Environmental Protection Agency (EPA), related to ground water
contamination in the vicinity of the Partnership's storage facilities and truck
loading terminal at Sparks, Nevada. The EPA approved the respondents'
remediation plan in September 1992 and the remediation system began operation in
1995. In addition, the Partnership is presently involved in 18 ground water
hydrocarbon remediation efforts under administrative orders issued by the
California Regional Water Quality Control Board and two other state agencies.
Although no assurance can be given, KMGP believes the ultimate resolutions of
these matters will not have a material, adverse effect on the Partnership's
financial position, result of operations, or its ability to pay cash
distributions to KMGP.
FERC
The Partnership and certain of its subsidiaries are defendants in several
actions in which the plaintiffs protest pipeline transportation rates with the
Federal Energy Regulatory Commission (FERC). These actions are currently
pending. The Plaintiffs seek to recover transportation overpayments and
interests and in some cases treble and punitive damages.
The Company is not able to predict with certainty whether settlement
agreements will be completed with some or all of the complainants, the final
terms of any such settlement agreements that may be consummated, or the final
outcome of the FERC proceedings should they be carried through to their
conclusion, and it is possible that current or future proceedings could be
resolved in a manner adverse to the Partnership which could affect future cash
distributions to KMGP.
F-11
<PAGE> 99
Commitments
Pursuant to the Partnership agreement, general and administrative expenses
are paid by KMGP on behalf of the Partnership. These costs are reimbursable by
the Partnership.
Effective July 1, 1997, KMGP established the Kinder Morgan Retirement
Savings Plan, a defined contribution 401(k) plan, that permits all full-time
employees of KMGP to contribute 1% to 15% of base compensation, on a pre-tax or
after-tax basis, into participant accounts. In addition to a mandatory
contribution equal to 4% of base compensation per year for each plan
participant, KMGP may make discretionary contributions in years when specific
performance objectives are met. Any discretionary contributions are made during
the first quarter following the performance year. On March 1, 1999 (subsequent
to year-end), an additional 2% discretionary contribution was made to individual
accounts based on 1998 financial targets to unitholders. KMGP contributions
during 1998 were approximately $1.1 million. All KMGP contributions are
reimbursable by the Partnership. All contributions, together with earnings
thereon, are immediately vested and not subject to forfeiture. Participants may
direct the investment of their contributions into a variety of investments. Plan
assets are held and distributed pursuant to a trust agreement.
During 1998, KMGP established a unit option plan, which provides that key
personnel are eligible to receive grants of options to acquire units of the
Partnership. The number of units available under the option plan is 250,000.
Either the board of directors of KMGP or a committee of the board of directors
of the Partnership will administer the option plan. The option plan terminates
in March 2008. As of December 31, 1998, 194,500 options were granted to certain
personnel of KMGP with a term of seven years at exercise prices equal to the
market price of the units at the grant date ($34.56 weighted average price). In
addition, 10,000 options were granted to nonemployee directors of the
Partnership. The options granted generally vest forty percent in the first year
and twenty percent each year thereafter.
During 1997, the Partnership established an Executive Compensation Plan for
certain executive officers of KMGP. The Partnership may, at its option and with
the approval of the unitholders, pay the participants in units instead of cash.
Eligible awards are equal to a formula based upon the cash distributions paid to
KMGP during the four calendar quarters preceding the date of redemption
multiplied by eight (the Calculated Amount). Calculated amounts are accrued as
compensation expense and adjusted quarterly. Under the plan, no eligible
employee may receive a grant in excess of 2% and total awards under the Plan may
not exceed 10% of the Calculated Amount. The plan terminates January 1, 2007,
and any unredeemed awards will be automatically redeemed.
At December 31, 1998, certain executive officers of KMGP each had
outstanding awards totaling 2% of the Calculated Amount eligible to be granted
under the Plan. On January 4, 1999 (subsequent to year end) 50% of the awards
granted to these executive officers were vested and paid out. Each participant
continues to have a grant of 1% under the plan. All payments under the Plan are
reimbursable by the Partnership.
8. RELATED PARTY TRANSACTIONS
General and Administrative Expenses
Prior to the sale of ELPC to KMI, Enron and its affiliates were reimbursed
for certain corporate staff and support services rendered in managing and
operating the Predecessor Company. Such reimbursement was made pursuant to the
terms of the Omnibus Agreement executed among Enron and ELPC. After the sale of
ELPC to KMI, Enron and its affiliates are no longer affiliates to the Company
and general and administrative expenses incurred by the Company, through KMGP,
are all reimbursed by the Partnership as provided in the Partnership Agreement.
The Company and ELPC incurred approximately $38 million, $6.9 million, $0.3
million and $2.5 million of general and administrative expenses in 1998, the
period February 14, 1997 to December 31, 1997, the period January 1, 1997 to
February 14, 1997 and 1996, respectively, and are reflected net of the
F-12
<PAGE> 100
reimbursements from the Partnership in the accompanying statement of income. The
receivable from related party of $13,645,000 and $510,000 at December 31, 1998
and 1997, respectively, represents general and administrative expenses incurred
by the Company to be reimbursed by the Partnership. Accrued liabilities in the
amount of $12,682,000 and $610,000 at December 31, 1998 and 1997, respectively,
represent general and administrative expenses accrued by the Company to be
reimbursed by the Partnership upon payment of the expenses.
Partnership Distributions
The Partnership Agreement of the Partnership provides for incentive
distributions payable to KMGP out of the Partnership's available cash in the
event that quarterly distributions to unitholders exceed certain specified
targets. In general, subject to certain limitations, if a quarterly distribution
to unitholders exceeds a target of $0.3025 per unit, the Company will receive
incentive distributions equal to (1) 15% of the portion of the quarterly
distribution per unit that exceeds $0.3025 per unit but is not more than
$0.3575, plus (2) 25% of that portion of the quarterly distribution per unit
that exceeds the quarterly distribution amount of $0.3575 but is not more than
$0.4675, plus (3) 50% of that portion of the quarterly distribution per unit
that exceeds $0.4675. The Company and the Predecessor Company received incentive
distributions of $32,700,000, $3,900,000, $ and $101,000 during the
year ended December 31, 1998, the period February 14, 1997 to December 31, 1997,
the period January 1, 1997 to February 14, 1997 and the year ended December 31,
1996, respectively.
9. DIVIDENDS
During 1998, the Board of Directors declared and paid dividends to
shareholders of record in the amount of $82.7 million, which was greater than
the amount of accumulated earnings and additional paid-in capital. Based upon
the advice of legal counsel and receipt of an independent, third-party appraisal
of the Company's valuation, the Board of Directors concluded the fair value of
the consolidated assets of the Company and its subsidiary exceeded the
consolidated debt and liabilities (including contingent liabilities).
F-13
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kinder Morgan Energy Partners, L.P.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows, and of partners'
capital present fairly, in all material respects, the financial position of
Kinder Morgan Energy Partners, L.P. (a Delaware Limited Partnership) and
subsidiaries (the Partnership) at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership'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 generally accepted auditing standards which
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 the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 10, 1999
F-14
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Kinder Morgan Energy Partners, L.P.
(Formerly Enron Liquids Pipeline, L.P.)
We have audited the accompanying consolidated balance sheet of Kinder
Morgan Energy Partners, L.P. (a Delaware limited partnership) and subsidiaries
as of December 31, 1996, and the related consolidated statements of income, cash
flows and partners' capital for the year ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kinder Morgan Energy
Partners, L.P. as of December 31, 1996, and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 21, 1997
F-15
<PAGE> 103
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
----------------------- --------------
1997 1998 (UNAUDITED)
-------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents.................... $ 9,612 $ 31,735 $ 33,276
Accounts and notes receivable................ 8,569 44,125 47,480
Inventories
Products.................................. 1,901 2,901 4,192
Materials and supplies.................... 1,710 2,640 2,561
-------- ---------- ----------
21,792 81,401 87,509
-------- ---------- ----------
Property, Plant and Equipment, at cost......... 290,620 1,836,719 1,854,703
Less accumulated depreciation................ 45,653 73,333 83,890
-------- ---------- ----------
244,967 1,763,386 1,770,813
-------- ---------- ----------
Equity Investments............................. 31,711 238,608 237,536
-------- ---------- ----------
Intangibles.................................... 8,291 58,536 58,173
Deferred charges and other assets.............. 6,145 10,341 15,815
-------- ---------- ----------
TOTAL ASSETS......................... $312,906 $2,152,272 $2,169,846
======== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade..................................... $ 4,423 $ 11,690 $ 6,322
Related parties........................... 507 13,952 12,127
Accrued liabilities.......................... 3,585 18,230 31,679
Accrued benefits............................. -- 9,415 7,801
Accrued taxes................................ 2,861 4,195 4,610
-------- ---------- ----------
11,376 57,482 62,539
-------- ---------- ----------
Long-Term Liabilities and Deferred Credits
Long-term debt............................... 146,824 611,571 631,205
Other........................................ 2,997 104,789 99,671
-------- ---------- ----------
149,821 716,360 730,876
-------- ---------- ----------
Commitments and Contingencies
Minority Interest.............................. 1,485 17,767 17,895
-------- ---------- ----------
Partners' Capital
Common Units................................. 146,840 1,348,591 1,344,140
General Partner.............................. 3,384 12,072 14,396
-------- ---------- ----------
150,224 1,360,663 1,358,536
-------- ---------- ----------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL............................ $312,906 $2,152,272 $2,169,846
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 104
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ MARCH 31,
1996 1997 1998 1999
-------- -------- -------- -----------
(IN THOUSANDS EXCEPT (UNAUDITED)
PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.............................................. $ 71,250 $ 73,932 $322,617 $ 100,049
Costs and Expenses
Cost of products sold............................... 7,874 7,154 5,860 569
Operations and maintenance
Related party.................................... 6,558 -- -- --
Other............................................ 12,322 15,039 65,022 21,166
Fuel and power...................................... 4,916 5,636 22,385 7,184
Depreciation and amortization....................... 9,908 10,067 37,321 12,054
General and administrative.......................... 9,132 8,862 39,984 7,818
Taxes, other than income taxes...................... 3,467 2,943 12,140 4,271
-------- -------- -------- -----------
54,177 49,701 182,712 53,062
-------- -------- -------- -----------
Operating Income...................................... 17,073 24,231 139,905 46,987
Other Income (Expense)
Earnings from equity investments.................... 5,675 5,724 25,732 7,955
Interest, net....................................... (11,939) (12,078) (38,600) (11,799)
Other, net.......................................... 2,555 (701) (7,263) (11)
Minority Interest..................................... (121) (179) (985) (621)
-------- -------- -------- -----------
Income Before Income Taxes and Extraordinary charge... 13,243 16,997 118,789 42,511
Income Tax Benefit (Expense).......................... (1,343) 740 (1,572) (1,422)
-------- -------- -------- -----------
Income Before Extraordinary charge.................... 11,900 17,737 117,217 41,069
Extraordinary charge on early extinguishment of
debt................................................ -- -- (13,611) --
-------- -------- -------- -----------
Net Income............................................ $ 11,900 $ 17,737 $103,606 $ 41,069
======== ======== ======== ===========
Calculation of Limited Partners' Interest in Net
Income:
Income Before Extraordinary Charge.................... $ 11,900 $ 17,737 $117,217 $ 41,069
Less: General Partner's interest in Net Income........ (218) (4,074) (33,447) (13,363)
-------- -------- -------- -----------
Limited Partners' Income before extraordinary
charge.............................................. 11,682 13,663 83,770 27,706
Less: Extraordinary charge on early extinguishment of
debt................................................ -- -- (13,611) --
-------- -------- -------- -----------
Limited Partners' Net Income.......................... $ 11,682 $ 13,663 $ 70,159 $ 27,706
======== ======== ======== ===========
Net Income per Unit before extraordinary charge....... $ 0.90 $ 1.02 $ 2.09 $ 0.57
======== ======== ======== ===========
Net Income per Unit for extraordinary charge.......... -- $ -- $ 0.34 $ --
======== ======== ======== ===========
Net Income per Unit................................... $ 0.90 $ 1.02 $ 1.75 $ 0.57
======== ======== ======== ===========
Number of Units used in Computation................... 13,020 13,411 40,120 48,817
======== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 105
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMMON PARTICIPATION GENERAL PARTNERS'
UNITS UNITS PARTNER CAPITAL
---------- ------------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Partners' capital at December 31,
1995.................................. $ 105,100 $ 16,787 $ 1,229 $ 123,116
Net income............................ 10,136 1,546 218 11,900
Distributions......................... (14,236) (2,168) (268) (16,672)
---------- -------- -------- ----------
Partners' capital at December 31,
1996.................................. 101,000 16,165 1,179 118,344
Net income............................ 13,440 223 4,074 17,737
Transfer of deferred participation
units.............................. 16,388 (16,388) -- --
Net proceeds from issuance of common
units.............................. 33,678 -- -- 33,678
Capital contributions................. -- -- 345 345
Distributions......................... (17,666) -- (2,214) (19,880)
---------- -------- -------- ----------
Partners' capital at December 31,
1997.................................. 146,840 -- 3,384 150,224
Net income............................ 70,159 -- 33,447 103,606
Net proceeds from issuance of common
units.............................. 1,212,421 -- -- 1,212,421
Capital contributions................. 10,234 -- 2,678 12,912
Distributions......................... (91,063) -- (27,437) (118,500)
---------- -------- -------- ----------
Partners' capital at December 31,
1998.................................. $1,348,591 $ -- $ 12,072 $1,360,663
========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 106
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------
1996 1997 1998 1999
-------- -------- ---------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Reconciliation of net income to net cash provided by
operating activities
Net income......................................... $ 11,900 $ 17,737 $ 103,606 $ 41,069
Extraordinary charge on early extinguishment of
debt............................................ -- -- 13,611 --
Depreciation and amortization...................... 9,908 10,067 37,321 12,054
Earnings from equity investments................... (5,675) (5,724) (25,732) (7,955)
Distributions from equity investments.............. 6,791 9,588 19,670 7,816
Changes in components of working capital
Accounts receivable............................. (2,264) 3,791 1,203 (3,357)
Inventories..................................... 198 (902) (734) (1,211)
Accounts payable................................ 2,096 (5,102) 197 (7,193)
Accrued liabilities............................. (1,997) 2,774 (14,115) 11,834
Accrued taxes................................... 149 557 (1,266) 414
El Paso Settlement................................. -- -- (8,000) --
Other, net......................................... 1,670 (834) 8,220 (7,106)
-------- -------- ---------- ---------
Net Cash Provided by Operating Activities............ 22,776 31,952 133,981 46,365
-------- -------- ---------- ---------
Cash Flows From Investing Activities
Acquisitions of assets............................. -- (20,038) (107,144) --
Additions to property, plant and equipment for
expansion and maintenance projects.............. (8,575) (6,884) (38,407) (18,347)
Sale of property, plant and equipment.............. -- 162 64 --
Contributions to equity investments................ (546) (3,532) (136,234) (552)
-------- -------- ---------- ---------
Net Cash Used in Investing Activities................ (9,121) (30,292) (281,721) (18,899)
-------- -------- ---------- ---------
Cash Flows From Financing Activities
Issuance of debt................................... 5,000 43,400 492,612 249,683
Payment of debt.................................... (1,718) (58,496) (407,797) (230,063)
Cost of refinancing long-term debt................. -- -- (16,768) (1,916)
Proceeds from issuance of common units............. -- 33,678 212,303 --
Contributions from General Partner's Minority
Interest........................................ -- -- 12,349 --
Distributions to partners
Common Units.................................... (16,404) (21,768) (93,352) (31,171)
General Partner................................. (268) (2,280) (27,450) (11,598)
Minority Interest............................... (168) (245) (1,614) (493)
Other, net......................................... -- (636) (420) (367)
-------- -------- ---------- ---------
Net Cash Provided by (Used in) Financing
Activities......................................... (13,558) (6,347) 169,863 25,925
-------- -------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents..... 97 (4,687) 22,123 1,541
Cash and Cash Equivalents, Beginning of Period....... 14,202 14,299 9,612 31,735
-------- -------- ---------- ---------
Cash and Cash Equivalents, End of Period............. $ 14,299 $ 9,612 $ 31,735 $ 33,276
======== ======== ========== =========
Noncash Investing and Financing Activities
Contribution of net assets to partnership
investments..................................... $ -- $ -- $ 60,387 --
Assets acquired by the issuance of Common Units.... $ -- $ -- $1,003,202 --
Assets acquired by the assumption of liabilities... $ -- $ -- $ 569,822 --
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest (net of capitalized interest)............. $ 12,487 $ 12,611 $ 47,616 --
Income Taxes....................................... $ 397 $ 463 $ 1,354 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 107
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sale of the stock of the General Partner
Kinder Morgan Energy Partners, L.P. (the "Partnership", formerly Enron
Liquids Pipeline, L.P.), a Delaware limited partnership was formed in August
1992. Effective February 14, 1997, Kinder Morgan, Inc. ("KMI") acquired all of
the issued and outstanding stock of Enron Liquids Pipeline Company, the general
partner, from Enron Liquids Holding Corp. ("ELHC"). At the time of the
acquisition, the general partner and the Partnership's subsidiaries were renamed
as follows: Kinder Morgan G.P., Inc. (the "general partner", formerly Enron
Liquids Pipeline Company); Kinder Morgan Operating L.P. "A" ("OLP-A", formerly
Enron Liquids Operating Limited Partnership); Kinder Morgan Operating L.P. "B"
("OLP-B", formerly Enron Transportation Services, L.P.); and Kinder Morgan
Natural Gas Liquids Corporation ("KMNGL", formerly Enron Natural Gas Liquids
Corporation).
General
The Partnership is a publicly traded Master Limited Partnership that
manages a diversified portfolio of midstream energy assets. It operates through
four operating limited partnerships, OLP-A, OLP-B, Kinder Morgan Operating L.P.
"C" ("OLP-C") and Kinder Morgan Operating L.P. "D" ("OLP-D") (collectively, the
"Operating Partnerships"). Kinder Morgan Bulk Terminals, Inc. (formerly
Hall-Buck Marine, Inc.) and its consolidated subsidiaries are owned and
controlled by OLP-C. OLP-D owns 99.5% of and controls SFPP, L.P.
Kinder Morgan G.P., Inc. is a wholly owned subsidiary of KMI and serves as
the sole general partner of the Partnership and the Operating Partnerships. The
Partnership and the Operating Partnerships are governed by Amended and Restated
Agreements of Limited Partnership and certain other agreements (collectively,
the "partnership agreements").
Prior to 1998, the Partnership reported three business segments: Liquids
Pipelines; Coal Transfer, Storage and Services; and Gas Processing and
Fractionation. Due to the acquisitions made in 1998, the Partnership now
competes in the following three reportable business segments: Pacific
Operations; Mid-Continent Operations; and Bulk Terminals. For the periods prior
to 1998, the previous Liquids Pipelines and Gas Processing and Fractionation
segments have been combined to present the current Mid-Continent Operations
segment.
The "Pacific Operations" include four common carrier refined petroleum
products pipelines covering approximately 3,300 miles and transporting
approximately one million barrels per day of refined petroleum products such as
gasoline, diesel and jet fuel. The Pacific Operations also include 13 truck
loading terminals. These operations serve approximately 44 customer-owned
terminals, three commercial airports and 12 military bases in six western
states.
The "Mid-Continent Operations" include two interstate common carrier
natural gas liquids ("NGL" or "NGLs") pipelines ("North System" and "Cypress
Pipeline"), a 20% equity interest in Shell CO(2) Company, a 24% equity interest
in Plantation Pipe Line Company, a gas processing plant ("Painter Plant") and a
25% indirect interest in an NGL fractionator in Mont Belvieu, Texas. The North
System includes a 1,600 mile common carrier pipeline that transports, stores and
delivers a full range of NGLs and refined products from South Central Kansas to
markets in the Midwest and has interconnects, using third-party pipelines in the
Midwest, to the eastern United States. Additionally, the North System has eight
truck loading terminals, which primarily deliver propane throughout the upper
Midwest. The Cypress Pipeline is a 100 mile pipeline that transports ethane from
Mont Belvieu, Texas, to the Lake Charles, Louisiana area. Shell CO(2) Company
produces, markets and delivers CO(2) for enhanced oil recovery throughout the
continental United States.
F-20
<PAGE> 108
Plantation Pipe Line Company owns and operates a 3,100 mile common carrier
refined petroleum products pipeline serving the southeastern United States.
Amoco Oil Company operates the Painter Plant assets under an operating lease
agreement.
The "Bulk Terminals" segment consists of 24 bulk terminals that handle
approximately 50 million tons of coal, petroleum coke and other products
annually. The Partnership itself, or through Kinder Morgan Bulk Terminals, Inc.,
owns or operates these 24 bulk terminals located primarily on the Mississippi
River and the West Coast. The segment also includes two modern high speed
rail-to-barge coal transfer facilities ("Cora Terminal" and "Grand Rivers
Terminal"). The Cora Terminal transfers coal from rail to barge on the banks of
the Mississippi River near Cora, Illinois. The Grand Rivers Terminal is a coal
transfer, storage, and blending facility located on the Tennessee River near
Paducah, Kentucky. Other activities included in Bulk Terminals include the "Red
Lightning" energy services unit, which performs specialized coal services for
both the Cora Terminal and the Grand Rivers Terminal. River Consulting, Inc., a
major engineering and construction management company specializing in designing
and construction services for dry bulk material handling terminals is also
included in the Bulk Terminals segment. On December 18, 1998 the Partnership
acquired the Pier IX Terminal, located in Newport News, Virginia, and the
Shipyard River Terminal, located in Charleston, South Carolina.
Two-for-one Common Unit Split
On September 2, 1997, the Partnership's general partner approved a
two-for-one unit split of the Partnership's outstanding units representing
limited partner interests in the Partnership. The unit split entitled common
unitholders to one additional unit for each unit held. The issuance and mailing
of split units occurred on October 1, 1997 to unitholders of record on September
15, 1997. All references to the number of units and per unit amounts in the
consolidated financial statements and related notes have been restated to
reflect the effect of the split for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the assets, liabilities, and
results of operations of the Partnership and its majority-owned subsidiaries.
All significant intercompany items have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are defined as all highly liquid short-term investments
with original maturities of three months or less.
Inventories
Inventories of products consist of natural gas liquids, refined petroleum
products and coal. These assets are valued at the lower of cost
(weighted-average cost method) or market. Materials and supplies are stated at
the lower of cost or market.
Property, Plant and Equipment
Property, plant and equipment is stated at its acquisition cost.
Expenditures for maintenance and repairs are charged to operations in the period
incurred. The cost of property, plant and
F-21
<PAGE> 109
equipment sold or retired and the related depreciation are removed from the
accounts in the period of sale or disposition. The provision for depreciation is
computed using the straight-line method based on estimated economic lives.
Generally, composite depreciation rates are applied to functional groups of
property having similar economic characteristics and range from 2.0% to 12.5%,
excluding certain short-lived assets such as vehicles. The original cost of
property retired is charged to accumulated depreciation and amortization, net of
salvage and cost of removal. No retirement gain or loss is included in income
except in the case of extraordinary retirements or sales.
Equity Method of Accounting
Investments in significant 20-50% owned affiliates are accounted for by the
equity method of accounting, whereby the investment is carried at cost of
acquisition, plus the Partnership's equity in undistributed earnings or losses
since acquisition.
Excess of Cost Over Fair Value
The excess of the Partnership's cost over its underlying net assets is
being amortized using the straight-line method over the estimated remaining life
of the assets over a period not to exceed 40 years. Such amortization is
reflected primarily as amortization expense. The unamortized excess was
approximately $162.3 million and $8.3 million as of December 31, 1998 and 1997,
respectively, and such amounts are included within intangibles and equity
investments on the accompanying balance sheet.
The Partnership periodically evaluates the propriety of the carrying amount
of the excess of cost over fair value of net assets of businesses acquired, as
well as the amortization period, to determine whether current events or
circumstances warrant adjustments to the carrying value and/or revised estimates
of useful lives. At this time, the Partnership believes no such impairment has
occurred and no reduction in estimated useful lives is warranted.
Revenue Recognition
Revenues for the pipeline operations are generally recognized based on
delivery of actual volume transported. Bulk terminal transfer service revenues
are recognized based on volumes loaded. Recognition of gas processing revenues
is based on volumes processed or fractionated. Revenues from energy related
product sales of the Red Lightning energy services unit are based on delivered
quantities of product.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Partnership's commitment to a formal
plan of action.
Minority Interest
Minority interest consists of the approximate 1% general partner interest
in the Operating Partnerships, the 0.5% special limited partner interest in
SFPP, L.P. and the 50% interest in Globalplex Partners, a Louisiana joint
venture owned 50% and controlled by Kinder Morgan Bulk Terminals, Inc.
F-22
<PAGE> 110
Income Taxes
The Partnership is not a taxable entity for Federal income tax purposes. As
such, no Federal income tax will be paid by the Partnership. Each partner will
be required to report on its tax return its allocable share of the taxable
income or loss of the Partnership. Taxable income or loss may vary substantially
from the net income or net loss reported in the consolidated statement of income
primarily because of accelerated tax depreciation.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. Individual partners will have different investment bases
depending upon the timing and prices of acquisition of partnership units.
Further, each partner's tax accounting, which is partially dependent upon the
partner's individual tax position, may differ from the accounting followed in
the financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and the partner's proportionate
share of the net assets reported in the financial statements. FAS 109 requires
disclosure by a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting purposes. However, the
Partnership does not have access to information about each individual partner's
tax attributes in the Partnership, and the aggregate tax bases cannot be readily
determined. In any event, management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.
Net Income Per Unit
Net Income per Unit was computed by dividing limited partner's interest in
net income by the weighted average number of units outstanding during the
period.
3. ACQUISITIONS AND JOINT VENTURES
With respect to the following acquisitions and joint ventures, the results
of operations are included in the consolidated financial statements from the
effective date of acquisition.
Santa Fe
Kinder Morgan Operating L.P. "D" ("OLP-D"), a Delaware limited partnership,
acquired on March 6, 1998, 99.5% of SFPP, L.P. ("SFPP"), the operating limited
partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"). The
transaction was accounted for under the purchase method of accounting and was
valued at more than $1.4 billion inclusive of liabilities assumed. The
Partnership acquired the interest of Santa Fe's common unit holders in SFPP in
exchange for approximately 26.6 million units (1.39 units of the Partnership for
each Santa Fe common unit). The Partnership paid $84.4 million to Santa Fe
Pacific Pipelines, Inc. (the "former SF General Partner") in exchange for the
general partner interest in Santa Fe. The $84.4 million was borrowed under the
Credit Facility (see Note 8). Also on March 6, 1998, SFPP redeemed from the
former SF General Partner a 0.5% interest in SFPP for $5.8 million. The
redemption was paid from SFPP's cash reserves. After the redemption, the former
SF General Partner continues to own a .5% special limited partner interest in
SFPP.
Assets acquired in this transaction comprise the Partnership's Pacific
Operations, which include over 3,300 miles of pipeline and thirteen owned and
operated terminals.
Shell CO(2) Company
On March 5, 1998, the Partnership and affiliates of Shell Oil Company
("Shell") agreed to combine their CO(2) activities and assets into a
partnership, Shell CO(2) Company, Ltd. ("Shell CO(2) Company"), to be operated
by a Shell affiliate. The Partnership acquired, through a newly created limited
liability company, a 20% interest in Shell CO(2) Company in exchange for
contributing the Central Basin Pipeline and approximately $25 million in cash.
The $25 million was borrowed under the Credit Facility (see Note 8). The
Partnership accounts for its partnership interest in Shell CO(2)
F-23
<PAGE> 111
Company under the equity method. The investment is included as part of the
Mid-Continent Operations.
Under the terms of the Shell CO(2) Company partnership agreement, the
Partnership will receive a priority distribution of $14.5 million per year
during 1998 through 2001. To the extent the amount paid to the Partnership over
this period is in excess of the Partnership's percentage share (currently 20%)
of Shell CO(2) Company's distributable cash flow for such period (discounted at
10%), Shell will receive a priority distribution in equal amounts of such
overpayment during 2002 and 2003.
Hall-Buck Marine, Inc.
Effective July 1, 1998, the Partnership acquired Hall-Buck Marine, Inc.
("Hall-Buck") for approximately $100 million. The transaction was accounted for
under the purchase method of accounting. Hall-Buck, headquartered in Sorrento,
Louisiana, is one of the nation's largest independent operators of dry bulk
terminals, operating twenty terminals on the Mississippi River, the Ohio River,
and the Pacific Coast. In addition, Hall-Buck owns all of the common stock of
River Consulting Incorporated, a nationally recognized leader in the design and
construction of bulk material facilities and port related structures.
The $100 million of consideration consisted of approximately 2.1 million
units and assumed indebtedness of $23 million. After the acquisition, the
Partnership changed the name of Hall-Buck Marine, Inc. to Kinder Morgan Bulk
Terminals, Inc. and accounts for its activity as part of the Bulk Terminals
business segment.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the twelve months ended December 31, 1998 and 1997, assumes the
Partnership's acquisition of SFPP, Hall-Buck and its interest in Shell CO(2)
Company had occurred as of January 1, 1997. The unaudited Pro Forma financial
results have been prepared for comparative purposes only and may not be
indicative of the results that would have occurred if the Partnership had
acquired the assets of SFPP, Hall-Buck and its interest in Shell CO(2) Company
on the dates indicated or which will be attained in the future.
Net Income for each of the Pro Forma periods does not include the
annualized effects of all the cost saving measures the company has achieved
since its acquisition of SFPP. Amounts presented below are in thousands, except
for per Common Unit amounts:
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Income Statement
Revenues.................................................... $371,033 $395,963
Operating Income............................................ 135,816 155,057
Net Income before extraordinary charge...................... 87,997 126,122
Net Income.................................................. 87,997 112,511
Net Income per unit before extraordinary charge............. $ 1.78 $ 1.89
Net Income per unit......................................... $ 1.78 $ 1.60
</TABLE>
Other Acquisitions
Cardlock Fuels System, Inc.
On August 26, 1998, the Partnership signed a series of definitive
agreements to form a joint venture with Cardlock Fuels System, Inc ("CFS"), an
affiliate of Southern Counties Oil Co., for the purpose of constructing
unattended, automated fueling stations adjacent to the Partnership's
F-24
<PAGE> 112
terminal facilities within its Pacific Operations. The Partnership will provide
the terminal sites, and CFS will contribute its unattended, automated fueling
station expertise including marketing and electronic transaction processing
services. At December 31, 1998, the joint venture had selected and signed lease
agreements for activity at the Pacific Operations' Bradshaw and Reno terminals.
The joint venture has a target of up to ten sites within the next three years.
Plantation Pipe Line Company
On September 15, 1998, the Partnership acquired a 24% interest in
Plantation Pipe Line Company for $110 million. Plantation Pipe Line Company owns
and operates a 3,100 mile pipeline system throughout the southeastern United
States which serves as a common carrier of refined petroleum products to various
metropolitan areas, including Atlanta, Georgia; Charlotte, North Carolina; and
the Washington, D.C. area. The Partnership will account for its investment in
Plantation Pipe Line Company under the equity method of accounting and includes
its activity as part of the Mid-Continent Operations.
Pier IX and Shipyard River Terminals
On December 18, 1998, the Partnership acquired the Pier IX Terminal,
located in Newport News, Virginia, and the Shipyard River Terminal, located in
Charleston, South Carolina for $35 million. The Pier IX Terminal has the
capacity to transload approximately 12 million tons of coal annually. It can
store 1.3 million tons of coal on its 30 acre storage site and can blend
multiple coals to meet an individual customer's requirements. In addition, the
Pier IX Terminal operates a cement facility, which has the capacity to transload
over 400,000 tons of cement annually.
The Shipyard River Terminal is a 52 acre import-export dry and liquid bulk
product handling facility which can transload coal, asphalt, fertilizer and
other aggregates. Annual throughput capacity at Shipyard River Terminal is 2.5
million tons, with ground storage capacity of 250,000 tons.
The Partnership includes the activities of both terminals as part of the
Bulk Terminals business segment.
4. INCOME TAXES
Certain operations of the Partnership are conducted through wholly-owned
corporate subsidiaries, which are taxable. Income/(Loss) before income tax
expense attributable to corporate operations was $(1.3) million, $2.5 million
and $3.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively. For the periods ended December 31, 1998, 1997, and 1996,
respectively, the provision for income taxes consists of deferred income tax of
$0.0 million, $(1.1) million, and $0.9 million, respectively, and current income
tax of $1.6 million, $0.3 million and $0.4 million, respectively. The 1998
income tax provision includes $1.7 million related to the Partnership's share of
Plantation Pipe Line Company's income taxes. The net deferred tax liability of
$0.5 million and $2.1 million at December 31, 1998 and 1997, respectively,
consists of deferred tax liabilities of $1.3 million and $4.6 million,
respectively, and deferred tax assets of $0.8 million and $2.5 million,
respectively.
Reconciling items between income tax expense computed at the statutory rate
and actual income tax expense primarily include for the year ended: December 31,
1998, intercompany income and expense items eliminated in the consolidation of
the Partnership, amortization of certain intangibles, a change in estimate of
prior years' provision, former Hall-Buck Marine, Inc. employees' exercise of
stock options prior to acquisition by the Partnership and inclusion of the
Partnership's share of income tax expense from Plantation Pipe Line Company;
December 31, 1997, the effect of a change in estimate of prior years' provision,
a partial liquidating distribution and state income taxes; and December 31,
1996, state income taxes.
F-25
<PAGE> 113
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ----------
<S> <C> <C>
Pacific Operations.......................................... $ -- $1,533,741
Mid-Continent Operations.................................... 249,092 187,235
Bulk Terminals.............................................. 41,528 115,743
-------- ----------
Total............................................. $290,620 $1,836,719
======== ==========
</TABLE>
6. EQUITY INVESTMENTS
The Partnership's significant equity investments consist of Plantation Pipe
Line Company (24%), Shell CO(2) Company (20%), Mont Belvieu Associates (50%),
Colton Transmix Processing Facility (50%) and Heartland Pipeline Company (50%).
Total equity investments consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Plantation Pipe Line Company................................ $ -- $109,401
Shell CO(2) Company......................................... -- 86,688
Mont Belvieu Associates..................................... 27,157 27,568
Colton Transmix Processing Facility......................... -- 5,187
Heartland Pipeline Company.................................. 4,554 4,348
All Others.................................................. -- 5,416
------- --------
Total............................................. $31,711 $238,608
======= ========
</TABLE>
The Partnership's earnings from equity investments is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Plantation Pipe Line Company................................ $ -- $ -- $ 4,421
Shell CO(2) Company......................................... -- -- 14,500
Mont Belvieu Associates..................................... 4,968 5,009 4,577
Colton Transmix Processing Facility......................... -- -- 803
Heartland Pipeline Company.................................. 707 715 1,394
All Others.................................................. -- -- 37
------ ------ -------
Total............................................. $5,675 $5,724 $25,732
====== ====== =======
</TABLE>
Summarized combined unaudited financial information for the Partnership's
significant equity investments is reported below (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Income Statement
Revenues............................................... $31,534 $38,299 $236,534
Earnings before income taxes........................... 11,971 12,259 110,050
Net income............................................. 11,971 12,259 87,918
</TABLE>
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C> <C>
Current assets......................................... $ 7,353 $117,582
Non-current Assets..................................... 53,842 398,073
Current liabilities.................................... 4,885 50,669
Non-current liabilities................................ 11,790 159,318
Partners'/Owners' equity............................... 44,520 305,668
</TABLE>
F-26
<PAGE> 114
7. GAS PROCESSING AND FRACTIONATION TRANSACTIONS
Chevron Contract Buyout
In 1996, the Partnership was notified by Chevron, the only gas processing
customer of the Painter Plant, that it was terminating the gas processing
agreement effective as of August 1, 1996. The gas processing agreement with
Chevron allowed for early termination by Chevron, subject to an approximate $2.9
million one time termination payment. On June 14, 1996, a force majeure event
occurred and the Painter Plant gas processing facilities were shut down. Chevron
subsequently disputed its obligation to pay the early termination payment. The
Partnership negotiated with Chevron to settle all claims between the two parties
under the gas processing agreement for $2.5 million.
Gas Processing and Terminal Lease to Amoco
On February 14, 1997, the Partnership executed an operating lease agreement
with Amoco Oil Company ("Amoco") for Amoco's use of the Painter Plant
fractionator and the Partnership's Millis Terminal and Storage Facility
("Millis") with the nearby Amoco Painter Complex Gas Plant. The lease generated
$1.0 million of cash flow in 1998 and 1997.
8. LONG-TERM DEBT
OLP-B
As of December 31, 1998, OLP-B has outstanding $23.7 million principal
amount of tax exempt bonds due 2024 issued by the Jackson-Union Counties
Regional Port District. Such bonds bear interest at a weekly floating market
rate. During 1998, the weighted-average interest rate on these bonds was
approximately 3.5% per annum. OLP-B has entered into an interest rate swap,
which fixes the interest rate at approximately 3.65% per annum during the period
from February 13, 1996 to December 31, 1999.
SFPP
SFPP's long-term debt primarily consists of its Series F first mortgage
notes and a bank credit facility. At December 31, 1998, the outstanding balances
under the Series F notes and bank credit facility were $244.0 million, and
$111.0 million, respectively. The annual interest rate on the Series F notes is
10.70%, the maturity is December 2004, and interest is payable semiannually in
June and December. The Series F notes are payable in annual installments of
$31.5 million in 1999, $32.5 million in 2000, $39.5 million in 2001, $42.5
million in 2002, and $37.0 million in 2003. The first mortgage notes may also be
prepaid beginning in 1999 in full or in part at a price equal to par plus, in
certain circumstances, a premium. The first mortgage notes are secured by
mortgages on substantially all of the properties of SFPP (the "Mortgaged
Property"). The notes contain certain covenants limiting the amount of
additional debt or equity that may be issued and limiting the amount of cash
distributions, investments, and property dispositions. The bank credit facility
provides for borrowings of up to $175 million due in August 2000 and interest,
at a short-term Eurodollar rate, payable quarterly. This bank credit facility is
used primarily for financing the first mortgage notes when due. Borrowings
($111.0 million at December 31, 1998) under this facility are also secured by
the Mortgaged Property and are generally subject to the same terms and
conditions as the first mortgage notes. At December 31, 1998, the interest rate
on the credit facility debt was 5.465%.
Credit Facilities and Senior Notes
In February 1998, the Partnership refinanced OLP-A's first mortgage notes
and existing bank credit facilities with a $325 million secured revolving credit
facility ("Credit Facility") expiring in February 2005. On December 1, 1998, the
Credit Facility was amended to release the collateral and the Credit Facility
became unsecured. The Credit Facility had an outstanding balance of $230 million
at December 31, 1998. The Credit Facility provides for principal payments equal
to the amount by
F-27
<PAGE> 115
which the outstanding balance is in excess of the amount available, which
reduces quarterly commencing in May 2000. The Credit Facility also provides, at
the Partnership's option, a floating interest rate equal to either the
administrative agent's base rate (but not less than the Federal Funds Rate plus
0.5% per year) or LIBOR plus a margin ranging from .75% to 1.25% per year based
on the Partnership's ratio of Funded Indebtedness to Cash Flow, as defined in
the Credit Facility. The Credit Facility contains certain restrictive covenants
including, but not limited to, the incurrence of additional indebtedness, the
making of investments, and making cash distributions other than quarterly
distributions from available cash as provided by the partnership agreement. The
Partnership has used the proceeds from the Credit Facility to refinance the
existing first mortgage notes of OLP-A, including a prepayment premium, to fund
the cash investments in Shell CO(2) Company and Plantation Pipe Line Company, to
refinance the debt associated with the Hall-Buck acquisition, to fund the
acquisition of the general partner interest in Santa Fe (Note 3), and to fund
the acquisition of the Pier IX Terminal and the Shipyard River Terminal. The
prepayment premium and the write-off of the associated unamortized debt issue
costs are reflected as an extraordinary charge in the accompanying consolidated
statement of income.
On November 6, 1998, the Partnership filed with the SEC a shelf
registration statement with respect to the sale from time to time of up to $600
million in debt and/or equity securities. On January 29, 1999, the Partnership
closed a public offering of $250 million in principal amount of 6.30% Senior
Notes due February 1, 2009 ("Notes") at a price to the public of 99.67% per
Note. In the offering, the Partnership received proceeds, net of underwriting
discounts and commissions, of approximately $248 million. The proceeds were used
to pay the outstanding balance on the Credit Facility and for working capital
and other proper partnership purposes. The Notes will be guaranteed on a full,
unconditional, and joint and several basis by all of the Partnership's
consolidating subsidiaries (excluding SFPP and the subsidiaries of Kinder Morgan
Bulk Terminals, Inc.) so long as any other debt obligations of the Partnership
are guaranteed by such subsidiaries. SFPP, which was acquired March 6, 1998,
will not be guaranteeing the public debt securities.
F-28
<PAGE> 116
Kinder Morgan Energy Partners, L.P., the parent company, has operations from
only investments in its subsidiaries. The following discloses the consolidating
financial information for the Partnership:
CONSOLIDATING STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ -- $101,187 $221,430 $ -- $322,617
Costs and Expenses
Cost of products sold.......... -- 5,860 -- -- 5,860
Operations and maintenance..... -- 39,318 25,704 -- 65,022
Fuel and power................. -- 6,069 16,316 -- 22,385
Depreciation and
amortization................. -- 12,144 25,177 -- 37,321
General and administrative..... -- 11,047 28,937 -- 39,984
Taxes, other than income
taxes........................ -- 3,592 8,548 -- 12,140
-------- -------- -------- --------- --------
-- 78,030 104,682 -- 182,712
-------- -------- -------- --------- --------
Operating Income................. -- 23,157 116,748 -- 139,905
Other Income (Expense)
Earnings from equity
investments.................. 103,563 109,355 803 (187,989) 25,732
Interest, net.................. 47 (12,365) (26,282) -- (38,600)
Other, net..................... -- (845) (6,418) -- (7,263)
Minority Interest................ -- 496 -- (1,481) (985)
-------- -------- -------- --------- --------
Income Before Taxes and
Extraordinary charge........... 103,610 119,798 84,851 (189,470) 118,789
Income Tax Benefit (Expense)..... -- (1,572) -- -- (1,572)
-------- -------- -------- --------- --------
Income Before Extraordinary
charge......................... 103,610 118,226 84,851 (189,470) 117,217
Extraordinary charge on early
extinguishment of debt......... (4) (13,607) -- -- (13,611)
-------- -------- -------- --------- --------
Net Income....................... $103,606 $104,619 $ 84,851 $(189,470) $103,606
======== ======== ======== ========= ========
</TABLE>
F-29
<PAGE> 117
CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........... $ 93 $ 16,980 $ 14,662 $ -- $ 31,735
Accounts and notes receivable....... 8,160 27,521 38,089 (29,645) 44,125
Inventories
Products.......................... -- 2,486 415 -- 2,901
Materials and supplies............ -- 1,850 790 -- 2,640
---------- ---------- ---------- ----------- ----------
8,253 48,837 53,956 (29,645) 81,401
---------- ---------- ---------- ----------- ----------
Property, Plant and Equipment, at
cost................................ -- 302,978 1,533,741 -- 1,836,719
Less accumulated depreciation....... -- 46,145 27,188 -- 73,333
---------- ---------- ---------- ----------- ----------
-- 256,833 1,506,553 -- 1,763,386
---------- ---------- ---------- ----------- ----------
Equity Investments.................... 1,356,643 1,293,478 10,534 (2,422,047) 238,608
---------- ---------- ---------- ----------- ----------
Intangibles........................... -- 58,536 -- -- 58,536
Deferred charges and other assets..... 233,066 5,548 1,958 (230,231) 10,341
---------- ---------- ---------- ----------- ----------
TOTAL ASSETS................. $1,597,962 $1,663,232 $1,573,001 $(2,681,923) $2,152,272
========== ========== ========== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade............................. $ -- $ 5,737 $ 5,953 $ -- $ 11,690
Related parties................... 7,046 20,950 15,601 (29,645) 13,952
Accrued liabilities................. 253 3,266 14,711 -- 18,230
Accrued benefits.................... -- 2,172 7,243 -- 9,415
Accrued taxes....................... -- 772 3,423 -- 4,195
---------- ---------- ---------- ----------- ----------
7,299 32,897 46,931 (29,645) 57,482
---------- ---------- ---------- ----------- ----------
Long-Term Liabilities and Deferred
Credits
Long-term debt...................... 230,000 256,293 355,509 (230,231) 611,571
Other............................... -- 4,921 99,868 -- 104,789
---------- ---------- ---------- ----------- ----------
230,000 261,214 455,377 (230,231) 716,360
---------- ---------- ---------- ----------- ----------
Minority Interest..................... -- (1,365) -- 19,132 17,767
---------- ---------- ---------- ----------- ----------
Partners' Capital
Limited Partner Interests........... -- 1,356,643 -- (1,356,643) --
General Partner Interests........... -- -- 1,065,404 (1,065,404) --
Special LP Interests................ -- -- 5,289 (5,289) --
Common Units........................ 1,348,591 -- -- -- 1,348,591
Kinder Morgan General Partner....... 12,072 13,843 -- (13,843) 12,072
---------- ---------- ---------- ----------- ----------
1,360,663 1,370,486 1,070,693 (2,441,179) 1,360,663
---------- ---------- ---------- ----------- ----------
TOTAL LIABILITIES AND
CAPITAL.................... $1,597,962 $1,663,232 $1,573,001 $(2,681,923) $2,152,272
========== ========== ========== =========== ==========
</TABLE>
F-30
<PAGE> 118
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by operating activities
Net income.................................. $ 103,606 $104,619 $ 84,851 $(189,470) $ 103,606
Extraordinary charge on early extinguishment
of debt................................... 4 13,607 -- -- 13,611
Depreciation and amortization............... -- 12,144 25,177 -- 37,321
Earnings from equity investments............ (103,563) (109,355) (803) 187,989 (25,732)
Distributions from equity investments....... 118,500 100,308 -- (199,138) 19,670
Changes in components of working capital
Accounts receivable....................... (193,033) 171,386 (9,682) 32,532 1,203
Inventories............................... -- (794) 60 -- (734)
Accounts payable.......................... 6,679 12,267 13,783 (32,532) 197
Accrued liabilities....................... 253 1,853 (16,221) -- (14,115)
Accrued taxes............................. -- (2,105) 839 -- (1,266)
El Paso Settlement........................ -- -- (8,000) -- (8,000)
Other, net................................ 322 9,240 (2,823) 1,481 8,220
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Operating
Activities................................ (67,232) 313,170 87,181 (199,138) 133,981
--------- --------- -------- --------- ---------
Cash Flows From Investing Activities
Acquisitions of assets.................... (225) (128,418) 21,499 -- (107,144)
Additions to property, plant and equipment
for expansion and maintenance
projects................................ -- (16,001) (22,406) -- (38,407)
Sale of property, plant and equipment..... -- 44 20 -- 64
Contributions to equity investments....... -- (145,743) (491) 10,000 (136,234)
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Investing
Activities................................ (225) (290,118) (1,378) 10,000 (281,721)
--------- --------- -------- --------- ---------
Cash Flows From Financing Activities
Issuance of debt.......................... 452,000 263,038 32,612 (255,038) 492,612
Payment of debt........................... (222,000) (157,863) (32,710) 4,776 (407,797)
Cost of refinancing long-term debt........ (3,160) (13,608) -- -- (16,768)
Proceeds from issuance of common units.... 212,303 -- -- -- 212,303
Contributions from GP interests........... -- 12,349 10,000 (10,000) 12,349
Distributions to partners
Limited Partner Interests................. -- (118,500) -- 118,500 --
General Partner Interests................. -- -- (80,638) 80,638 --
Special LP Interests...................... -- -- (405) 405 --
Common Units.............................. (93,352) -- -- -- (93,352)
Kinder Morgan General Partner............. (27,450) (1,209) -- 1,209 (27,450)
Minority Interest......................... -- -- -- (1,614) (1,614)
Other, net................................ (250,841) 159 -- 250,262 (420)
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Financing
Activities................................ 67,500 (15,634) (71,141) 189,138 169,863
--------- --------- -------- --------- ---------
Increase/(Decrease) in Cash and Cash
Equivalents............................... 43 7,418 14,662 -- 22,123
Cash and Cash Equivalents, Beginning of
Period.................................... 50 9,562 -- -- 9,612
--------- --------- -------- --------- ---------
Cash and Cash Equivalents, End of Period.... $ 93 $ 16,980 $ 14,662 $ -- $ 31,735
========= ========= ======== ========= =========
</TABLE>
F-31
<PAGE> 119
Fair Value of Financial Instruments
The estimated fair value of the long-term debt based upon prevailing
interest rates available to the Partnership at December 31, 1998 and 1997 is
disclosed below.
Fair value as used in SFAS No. 107 -- "Disclosures About Fair Value of
Financial Instruments" represents the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt............................... $146,824 $158,343 $611,571 $645,873
</TABLE>
9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Partnership adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which revises and standardizes the reporting
requirements for postretirement benefits. However, SFAS No. 132 does not change
the measurement and recognition of those benefits.
In connection with the acquisition of SFPP and Hall-Buck, the Partnership
acquired certain liabilities for pension and postretirement benefits. The
Partnership has a noncontributory defined benefit pension plan covering the
former employees of Hall-Buck. The benefits under this plan were based primarily
upon years of service and final average pensionable earnings. The Partnership
also provides medical and life insurance benefits to current employees, their
covered dependents and beneficiaries of SFPP and Kinder Morgan Bulk Terminals,
Inc. The Partnership also provides the same benefits to former salaried
employees of SFPP.
The SFPP postretirement benefit plan is frozen as no additional
participants may join the Plan. The Partnership will continue to fund the cost
associated with those employees currently in the Plan for medical benefits and
life insurance coverage during retirement.
Net periodic benefit costs for these plans include the following components
(in thousands):
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
1998 1998
---------------- --------------------
<S> <C> <C>
Net periodic benefit cost
Service cost....................................... $ 98 $ 636
Interest cost...................................... 76 983
Expected return on plan assets..................... (70) --
Amortization of prior service cost................. -- (493)
Actuarial loss (gain).............................. -- (208)
----- -----
Net periodic benefit cost.......................... $ 104 $ 918
===== =====
Additional amounts recognized for 1998
Curtailment (gain) loss............................ $(425) $ --
</TABLE>
F-32
<PAGE> 120
Information concerning benefit obligations, plan assets, funded status and
recorded values for these plans follows (in thousands):
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
1998 1998
-------- --------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at January 1, 1998....................... $ -- $ --
Service cost................................................ 98 636
Interest cost............................................... 76 983
Plan participants' contributions............................ -- 117
Actuarial loss.............................................. -- 529
Acquisitions................................................ 2,201 13,039
Curtailment (gain).......................................... (425) --
Benefits paid from plan assets.............................. (88) (570)
------ --------
Benefit obligation at December 31, 1998..................... $1,862 $ 14,734
====== ========
Change in Plan Assets
Fair value of plan assets at January 1, 1998................ $ -- $ --
Actual return on plan assets................................ 136 --
Acquisitions................................................ 1,628 --
Employer contributions...................................... 157 453
Plan participants' contributions............................ -- 117
Benefits paid from plan assets.............................. (88) (570)
------ --------
Fair value of plan assets at December 31, 1998.............. $1,833 $ --
====== ========
Funded status............................................... $ (29) $(14,734)
Unrecognized net transition obligation...................... 3 --
Unrecognized net actuarial (gain)........................... (187) (1,831)
Unrecognized prior service (benefit)........................ -- (2,270)
------ --------
(Accrued) benefit cost...................................... $ (213) $(18,835)
====== ========
Weighted-Average assumptions at December 31, 1998
Discount rate............................................... 7.0% 7.0%
Expected return on plan assets.............................. 8.5% --
Rate of compensation increase............................... 4.0% 4.0%
</TABLE>
The unrecognized prior service credit will be amortized straight-line over
the remaining expected service to retirement (5.6 years). For 1998, the assumed
health care cost trend rate for medical costs was 9% and is assumed to decrease
gradually to 5% by 2005 and remain constant thereafter.
A one-percentage change in assumed health care cost trend rates would have
the following effects (in thousands):
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
BENEFITS
1998
--------------
<S> <C>
Effect on total of service and interest cost components
1-Percentage point increase................................. $ 103
1-Percentage point decrease................................. $ (93)
Effect on postretirement benefit obligation
1-Percentage point increase................................. $ 1,655
1-Percentage point decrease................................. $(1,490)
</TABLE>
F-33
<PAGE> 121
MULTIEMPLOYER PLANS AND OTHER BENEFITS. With the acquisition of Hall-Buck,
the Partnership participates in multi-employer pension plans for the benefit of
its employees who are union members. Partnership contributions to these plans
were $0.6 million from the period of acquisition through December 31, 1998.
These plans are not administered by the Partnership and contributions are
determined in accordance with the provisions of negotiated labor contracts.
Other benefits include a self-insured health and welfare insurance plan and an
employee health plan where employees may contribute for their dependents' health
care costs. Amounts charged to expense for these plans were $0.5 million from
the period of acquisition through December 31, 1998.
The Partnership terminated the Employee Stock ownership Plan (the "ESOP")
held by Hall-Buck for the benefit of its employees on August 13, 1998. All
participants became fully vested retroactive to July 1, 1998, the effective date
of the acquisition. The assets remaining in the plan will be distributed during
1999.
The Partnership assumed River Consulting, Inc.'s (a consolidating affiliate
of Hall-Buck Marine, Inc.), savings plan under Section 401(k) of the Internal
Revenue Code. This savings plan allowed eligible employees to contribute up to
10 percent of their compensation on a pre-tax basis, with the Partnership
matching 2.5 percent of the first 5 percent of the employees' wage. Matching
contributions are vested at the time of eligibility, which is one year after
employment. Effective January 1, 1999, this savings plan was merged into the
retirement savings plan of the general partner.
10. PARTNERS' CAPITAL
At December 31, 1998, Partners' capital consisted of 47,959,690 units held
by third parties and 862,000 units held by the general partner. Together, these
48,821,690 units represent the limited partners' interest and an effective 98%
interest in the Partnership, excluding the general partner's incentive
distribution. At December 31, 1997 and 1996 there were 14,111,200 and 13,020,000
units outstanding, respectively. The general partner interest represents an
effective 2% interest in the Partnership, excluding the general partner's
incentive distribution. On February 14, 1997, the 1,720,000 deferred
participation units held by the general partner were converted to common units
and 858,000 of these units were sold to a third party. Since the deferred
participation units owned by the general partner are now common units, they are
no longer separately disclosed. In addition to the units issued for the
acquisition of SFPP and Hall-Buck (see Note 3), the Partnership issued 6,070,578
units in June 1998 related to a primary public offering.
For purposes of maintaining partner capital accounts, the partnership
agreement specifies that items of income and loss shall be allocated among the
partners in accordance with their respective percentage interests. Normal
allocations according to percentage interests are done only, however, after
giving effect to any priority income allocations in an amount equal to incentive
distributions allocated 100% to the general partner.
Incentive distributions allocated to the general partner are determined by
the amount quarterly distributions to unitholders exceed certain specified
target levels. For the years ended December 31, 1998 and 1997, the Partnership
distributed $2.4725 and $1.8775, respectively, per unit. The distributions for
1998 and 1997 required incentive distributions to the general partner in the
amount of $32,737,571 and $3,935,852, respectively. The increased incentive
distribution paid for 1998 over 1997 reflects the increase in amount distributed
per unit as well as the issuance of additional units in 1998.
On January 13, 1999, the Partnership declared a cash distribution for the
quarterly period ended December 31, 1998, of $0.65 per unit. The distribution
was paid on February 12, 1999, to unitholders of record as of January 29, 1999,
and required an incentive distribution to the general partner of $10,717,464.
Since this distribution was declared after the end of the quarter, no amount is
shown in the December 31, 1998 balance sheet as a Distribution Payable.
F-34
<PAGE> 122
11. CONCENTRATIONS OF CREDIT RISK
Four customers of the Partnership each accounted for over 10% of
consolidated revenues for 1998. In 1997, only one customer accounted for more
than 10% of consolidated revenues. See Note 14 for more information on major
customers. Additionally, a portion of the Partnership's revenues is derived from
transportation services to oil and gas refining and marketing companies in the
Midwest. Although this concentration could affect the Partnership's overall
exposure to credit risk inasmuch as these customers could be affected by similar
economic or other conditions, management believes that the Partnership is
exposed to minimal credit risk. The Partnership generally does not require
collateral for its receivables.
12. RELATED PARTY TRANSACTIONS
Revenues and Expenses
Revenues for the year ended December 31, 1996 include transportation
charges and product sales to an Enron subsidiary, Enron Gas Liquids, Inc., of
$7.7 million. Another Enron subsidiary, Enron Gas Processing Company ("EGP"),
provided services in connection with a gas processing agreement with Mobil as
well as storage and other services to the Partnership and charged $6.6 million
for the year ended December 31, 1996. Management believes that these charges
were reasonable. As a result of KMI's acquisition of all of the common stock of
the general partner, Enron and its affiliates are no longer affiliates of the
Partnership.
The Partnership leases approximately 17 MBbls/d of North System capacity to
Heartland Pipeline Company ("Heartland") under a lease agreement, which will
expire in 2010. Revenues earned from Heartland for the lease rights were
approximately $0.9 million for each of the years ended December 31, 1998, 1997
and 1996.
General and Administrative Expenses
Prior to the sale of the general partner, Enron and its affiliates were
reimbursed for certain corporate staff and support services rendered to the
general partner in managing and operating the Partnership. Such reimbursement
was made pursuant to the terms of the Omnibus Agreement executed among Enron,
the Partnership and the general partner at the time of formation of the
Partnership. For the year ended December 31, 1996, the amounts reimbursed to
Enron were $5.8 million.
After the sale of the general partner, the general partner provides the
Partnership with general and administrative services and is entitled to
reimbursement of all direct and indirect costs related to the business
activities of the Partnership. The general partner incurred $38.0 million in
general and administrative expenses in 1998 and $6.9 million in general and
administrative expenses in 1997.
Partnership Distributions
Kinder Morgan G.P., Inc. (the "general partner") serves as the sole general
partner of the four operating partnerships as well as the sole general partner
of the Partnership. Pursuant to the partnership agreements, the general partner
interests represent a 1% ownership interest in the Partnership, and a direct
1.0101% ownership interest in the operating partnerships. Together then, the
general partner owns an effective 2% interest in the operating partnerships,
excluding incentive distributions; the 1.0101% direct general partner ownership
interest (accounted for as minority interest in the consolidated financial
statements of the Partnership) and the 0.9899% ownership interest indirectly
owned via its 1% ownership interest in the Partnership.
At December 31, 1998, the general partner owned 862,000 units, representing
approximately 1.8% of the outstanding units. The partnership agreements
governing the operation of the Partnership and the operating partnerships
require the partnerships to distribute 100% of the "Available Cash" (as defined
in the partnership agreements) to the partners within 45 days
F-35
<PAGE> 123
following the end of each calendar quarter in accordance with their respective
percentage interests. Available Cash consists generally of all cash receipts of
the partnerships, less all of their cash disbursements, net additions to
reserves, and amounts payable to the former Santa Fe General Partner in respect
of its 0.5% interest in SFPP, L.P.
In general, Available Cash for each quarter is distributed, first, 98% to
the limited partners and 2% to the general partner until the limited partners
have received a total of $0.3025 per unit for such quarter, second, 85% to the
limited partners and 15% to the general partner until the limited partners have
received a total of $0.3575 per unit for such quarter, third, 75% to the limited
partners and 25% to the general partner until the limited partners have received
a total of $0.4675 per unit for such quarter, and fourth, thereafter 50% to the
limited partners and 50% to the general partner. Incentive distributions are
generally defined as all cash distributions paid or payable to the general
partner that are in excess of 2% of the aggregate amount of cash being
distributed. The general partner's declared incentive distributions for the
years ended December 31, 1998, 1997, and 1996 were $32,737,571, $3,935,852 and
$100,571, respectively.
13. LEASES AND COMMITMENTS
The Partnership has entered into certain operating leases. Including
probable elections to exercise renewal options, the leases have remaining terms
ranging from one to forty-five years. Future commitments related to these leases
at December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 4,886
2000........................................................ 3,951
2001........................................................ 3,781
2002........................................................ 4,209
2003........................................................ 4,052
Thereafter.................................................. 31,924
-------
Total minimum payments............................ $52,803
=======
</TABLE>
Total minimum payments have not been reduced for future minimum sublease
rentals aggregating approximately $3.2 million. Total lease expenses, including
related variable charges, incurred for the years ended December 31, 1998, 1997,
and 1996 were $3.7 million, $1.3 million and $1.5 million, respectively.
The primary shipper on the Cypress Pipeline has the right until 2011 to
purchase up to a 50% joint venture interest in the pipeline at a price based on,
among other things, the construction cost of the Cypress Pipeline, plus
adjustments for expansions. If the customer exercises its rights under the
option, management anticipates that no loss will accrue to the Partnership.
Under a joint tariff agreement, the Partnership's North System is obligated
to pay minimum tariff revenues of approximately $2.0 million per contract year
to an unaffiliated pipeline company subject to certain adjustments. This
agreement expires March 1, 2013, but provides for a five-year extension at the
option of the Partnership.
During 1998, the Partnership established a unit option plan, which provides
that key personnel are eligible to receive grants of options to acquire units.
The number of units available under the option plan is 250,000. The option plan
terminates in March 2008. As of December 31, 1998, 194,500 options were granted
to certain personnel with a term of seven years at exercise prices equal to the
market price of the units at the grant date ($34.56 weighted average price). In
addition, 10,000 options were granted to non-employee directors of the
Partnership. The options granted generally vest forty percent in the first year
and twenty percent each year thereafter.
The Partnership applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for unit options granted under the
F-36
<PAGE> 124
Partnership's option plan. Pro forma information regarding changes in net income
and per unit data if the accounting prescribed by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation," had been
applied is not material. No compensation expense has been recorded since the
options were granted at exercise prices equal to the market prices at the date
of grant.
During 1997, the Partnership established an Executive Compensation Plan for
certain executive officers of the general partner. The Partnership may, at its
option and with the approval of the unitholders, pay the participants in units
instead of cash. Eligible awards are equal to a formula based upon the cash
distributions paid to the general partner during the four calendar quarters
preceding the date of redemption multiplied by eight (the "Calculated Amount").
Calculated amounts are accrued as compensation expense and adjusted quarterly.
Under the plan, no eligible employee may receive a grant in excess of 2% and
total awards under the Plan may not exceed 10% of the Calculated Amount. The
plan terminates January 1, 2007, and any unredeemed awards will be automatically
redeemed.
At December 31, 1998, certain executive officers of the general partner had
outstanding awards totaling 2% of the Calculated Amount eligible to be granted
under the Plan. On January 4, 1999 (subsequent to year end) 50% of the awards
granted to these executive officers were vested and paid out. Each participant
continues to have a grant of 1% under the plan.
14. REPORTABLE SEGMENTS
The Partnership has adopted SFAS No. 131 -- "Disclosures About Segments of
an Enterprise and Related Information." The Partnership competes in three
reportable business segments: Pacific Operations, Mid-Continent Operations and
Bulk Terminals (see Note 1). The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (see
Note 2). The Partnership evaluates performance based on each segments' earnings,
which excludes general and administrative expenses, third-party debt costs,
unallocable non-affiliated interest income and expense, and minority interest.
The Partnership's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment involves different products and marketing strategies.
Financial information by segment follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues
Pacific Operations..................................... $ -- $ -- $ 221,430
Mid-Continent Operations............................... 63,191 55,777 38,271
Bulk Terminals......................................... 8,059 18,155 62,916
-------- -------- ----------
Total Segments......................................... $ 71,250 $ 73,932 $ 322,617
======== ======== ==========
Operating Income
Pacific Operations..................................... $ -- $ -- $ 145,685
Mid-Continent Operations............................... 21,804 22,389 13,632
Bulk Terminals......................................... 4,401 10,709 20,572
-------- -------- ----------
Total Segments......................................... $ 26,205 $ 33,098 $ 179,889
======== ======== ==========
Earnings from equity investments
Pacific Operations..................................... $ -- $ -- $ 803
Mid-Continent Operations............................... 5,675 5,724 24,892
Bulk Terminals......................................... -- -- 37
-------- -------- ----------
Total Segments......................................... $ 5,675 $ 5,724 $ 25,732
======== ======== ==========
</TABLE>
F-37
<PAGE> 125
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Other, net
Pacific Operations..................................... $ -- $ -- $ (6,418)
Mid-Continent Operations............................... 2,605 (707) (80)
Bulk Terminals......................................... 21 (1) (765)
-------- -------- ----------
Total Segments......................................... $ 2,626 $ (708) $ (7,263)
======== ======== ==========
Income tax benefit (expense)
Pacific Operations..................................... $ -- $ -- $ --
Mid-Continent Operations............................... (1,343) 740 (972)
Bulk Terminals......................................... -- -- (600)
-------- -------- ----------
Total Segments......................................... $ (1,343) $ 740 $ (1,572)
======== ======== ==========
Segment earnings
Pacific Operations..................................... $ -- $ -- $ 140,070
Mid-Continent Operations............................... 28,741 27,482 37,156
Bulk Terminals......................................... 4,422 10,708 19,244
-------- -------- ----------
Total Segments(1)...................................... $ 33,163 $ 38,190 $ 196,470
======== ======== ==========
Assets at December 31
Pacific Operations..................................... $ -- $ -- $1,549,523
Mid-Continent Operations............................... 255,679 254,084 381,881
Bulk Terminals......................................... 33,625 54,710 186,298
-------- -------- ----------
Total Segments(2)...................................... $289,304 $308,794 $2,117,702
======== ======== ==========
Depreciation and amortization
Pacific Operations..................................... $ -- $ -- $ 25,177
Mid-Continent Operations............................... 8,542 9,009 8,274
Bulk Terminals......................................... 1,366 1,058 3,870
-------- -------- ----------
Total Segments......................................... $ 9,908 $ 10,067 $ 37,321
======== ======== ==========
Capital expenditures
Pacific Operations..................................... $ -- $ -- $ 23,925
Mid-Continent Operations............................... 7,969 4,310 4,531
Bulk Terminals......................................... 606 2,574 9,951
-------- -------- ----------
Total Segments......................................... $ 8,575 $ 6,884 $ 38,407
======== ======== ==========
</TABLE>
(1) The following reconciles segment earnings to net income.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Segment earnings........................................ $ 33,163 $ 38,190 $196,470
Interest and corporate administrative expenses(a)....... (21,263) (20,453) (92,864)
-------- -------- --------
Net Income.............................................. $ 11,900 $ 17,737 $103,606
======== ======== ========
</TABLE>
- ------------
(a) Includes interest and debt expense, general and administrative expenses,
minority interest expense and other insignificant items.
F-38
<PAGE> 126
(2) The following reconciles segment assets to consolidated assets.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Segment assets........................................... $289,304 $308,794 $2,117,702
Corporate assets(a)...................................... 14,299 4,112 34,570
-------- -------- ----------
Total assets............................................. $303,603 $312,906 $2,152,272
======== ======== ==========
</TABLE>
- ------------
(a) Includes cash, cash equivalents and certain unallocable deferred charges.
Although the Partnership's 1998 revenues were derived from a wide customer
base, revenues from one customer of the Partnership's Pacific Operations and
Bulk Terminals segments represented approximately $42.5 million (13.2%) of the
Partnership's consolidated revenues. Three other customers of the Pacific
Operations accounted for more than 10% of total revenues. These customers had
revenues of approximately $39.7 million (12.3%), $35.29 million (11.0%) and
$35.28 million (10.9%), respectively, of total revenues. For the year ended
December 31, 1997, revenues from one customer of the Mid-Continent Operations
segment represented approximately $8.8 million (11.9%) of total revenues. For
the year ended December 31, 1996, revenues from two customers of the
Mid-Continent Operations segment represented approximately $8.9 million (12.4%)
and $7.4 million (10.4%), respectively, of total revenues.
15. LITIGATION AND OTHER CONTINGENCIES
The tariffs charged for interstate common carrier pipeline transportation
for the Partnership's pipelines are subject to rate regulation by the Federal
Energy Regulatory Commission ("FERC") under the Interstate Commerce Act ("ICA").
The ICA requires, among other things, that petroleum products (including NGLs)
pipeline rates be just and reasonable and non-discriminatory. Pursuant to FERC
Order No. 561, effective January 1, 1995, petroleum 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, expands the
circumstances under which petroleum 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, 1998, 1997, and 1996, the application of
the indexing methodology did not significantly affect the Partnership's rates.
Tariffs charged by SFPP are subject to certain proceedings involving shippers'
protests regarding the interstate rates, as well as practices and the
jurisdictional nature of certain facilities and services on the Pacific
Operations' pipeline systems.
FERC Proceedings
In September 1992, El Paso Refinery, L.P. ("El Paso") filed a
protest/complaint with the FERC challenging SFPP's East Line rates from El Paso,
Texas to Tucson and Phoenix, Arizona, challenging SFPP's proration policy and
seeking to block the reversal of the direction of flow of SFPP's six inch
pipeline between Phoenix and Tucson. At various dates following El Paso's
September 1992 filing, other shippers on SFPP's South System, including Chevron
U.S.A. Products Company ("Chevron"), Navajo, ARCO Products Company ("ARCO"),
Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a
partnership formed by El Paso's long-term secured creditors that purchased El
Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation, filed
separate complaints, and/or motions to intervene in the FERC proceeding,
challenging SFPP's rates on its East and West Lines. Certain of these parties
also claimed that a gathering enhancement charge at SFPP's Watson origin pump
station in Carson, California was charged in violation of the Interstate
Commerce Act. In subsequent procedural rulings, the FERC consolidated these
challenges (Docket Nos. OR92-8-000, et al.) and ruled that they must proceed as
a complaint proceeding, with the burden of proof being placed on the complaining
parties. Such parties must show that SFPP's rates and practices at issue violate
the requirements of the Interstate Commerce Act.
F-39
<PAGE> 127
Hearings in the FERC proceeding commenced on April 9, 1996 and concluded on
July 19, 1996. The parties completed the filing of their post-hearing briefs on
December 9, 1996. An initial decision by the FERC Administrative Law Judge was
issued on September 25, 1997 (the "Initial Decision").
The Initial Decision upheld SFPP's position that "changed circumstances"
were not shown to exist on the West Line, thereby retaining the just and
reasonable status of all West Line rates that were "grandfathered" under the
Energy Policy Act of 1992 ("EPACT"). Accordingly, such rates are not subject to
challenge, either for the past or prospectively, in that proceeding. The
Administrative Law Judge's decision specifically excepted from that ruling
SFPP's Tariff No. 18 for movement of jet fuel from Los Angeles to Tucson, which
was initiated subsequent to the enactment of EPACT.
The Initial Decision also included rulings that were generally adverse to
SFPP on such cost of service issues as the capital structure to be used in
computing SFPP's 1985 starting rate base under FERC Opinion 154-B, the level of
income tax allowance, and the recoverability of civil and regulatory litigation
expense and certain pipeline reconditioning costs. The Administrative Law Judge
also ruled that a gathering enhancement service at SFPP's Watson origin pump
station in Carson, California was subject to FERC jurisdiction and ordered that
a tariff for that service and supporting cost of service documentation be filed
no later than 60 days after a final FERC order on this matter.
As of December 31, 1998, the matters at issue were pending before the FERC
commissioners for a final decision. On January 13, 1999, the FERC issued its
Opinion No. 435, which affirmed in part and modified in part the Initial
Decision. In Opinion No. 435, the FERC ruled that all but one of the West Line
rates are "grandfathered" as just and reasonable and that "changed
circumstances" had not been shown to satisfy the complainants' threshold burden
necessary to challenge those rates. The FERC further held that the one
"non-grandfathered" West Line tariff did not require rate reduction.
Accordingly, all complaints against the West Line rates were dismissed without
any requirement that SFPP reduce, or pay any reparations for, any West Line
rate.
With respect to the East Line rates, Opinion No. 435 reversed in part and
affirmed in part the Initial Decision's ruling regarding the methodology of
calculating the rate base for the East Line. Among other things, Opinion No. 435
modified the Initial Decision concerning the date in reference to which the
starting rate base would be calculated and the income tax allowance and
allowable cost of equity used to calculate the rate base. In addition, Opinion
No. 435 ruled that no reparations would be owed to any complainant for any
period prior to the date on which that complainant's complaint was filed, thus
reducing the potential reparations period for most complainants by two years. On
January 19, 1999, ARCO Products Company filed a petition with the United States
Court of Appeals for the District of Columbia circuit for review of Opinion No.
435. SFPP has not yet determined if it will seek rehearing or appellate review
of Opinion No. 435. The Partnership believes Opinion No. 435 substantially
reduces the negative impact of the Initial Decision.
In December 1995, Texaco filed an additional FERC complaint, which involves
the question of whether a tariff filing was required for movements on certain of
SFPP's lines upstream of its Watson, California station origin point (the
"Sepulveda Lines") and, if so, whether those rates may be set in that proceeding
and what those rates should be. Texaco's initial complaint was followed by
several other West Line shippers filing similar complaints and/or motions to
intervene, all of which have been consolidated into Docket Nos. OR96-2-000 et
al. Hearings before an Administrative Law Judge were held in December 1996 and
the parties completed the filing of final post-hearing briefs on January 31,
1997.
On March 28, 1997, the Administrative Law Judge issued an initial decision
holding that the movements on SFPP's Sepulveda Lines are not subject to FERC
jurisdiction. On August 5, 1997, the FERC reversed that decision and found the
Sepulveda Lines to be subject to the jurisdiction of the FERC. SFPP was ordered
to make a tariff filing within 60 days to establish an initial rate for these
facilities. The FERC reserved decision on reparations until it ruled on the
newly-filed rates. On October 6, 1997, SFPP filed a tariff establishing the
initial interstate rate for movements on the Sepulveda Lines from Sepulveda
Junction to Watson Station at the preexisting rate of five cents per
F-40
<PAGE> 128
barrel, along with supporting cost of service documentation. Subsequently,
several shippers filed protests and motions to intervene at the FERC challenging
that rate. On October 27, 1997, SFPP made a responsive filing at the FERC,
requesting that these protests be held in abeyance until the FERC ruled on
SFPP's request for rehearing of the August 5, 1997 order, and also indicating
that SFPP intended to defend the new tariff both on the basis of its cost of
service and as a market-based rate. On November 5, 1997, the FERC issued an
order accepting the new rate effective November 6, 1997, subject to refund, and
referred the proceeding to a settlement judge. On December 10, 1997, following a
settlement conference held at the direction of the FERC, the settlement judge
recommended that the settlement procedures be terminated. On December 24, 1997,
FERC denied SFPP's request for rehearing of the August 5, 1997 decision. On
December 31, 1997, SFPP filed an application for market power determination,
which, if granted, will enable it to charge market-based rates for this service.
SFPP's application has been set for hearing before a FERC Administrative Law
Judge.
On October 22, 1997, ARCO Products Company, Mobil Oil Corporation and
Texaco Refining and Marketing, Inc. filed another complaint at the FERC (Docket
No. OR98-1-000) challenging the justness and reasonableness of all of SFPP's
interstate rates. The complaint again challenges SFPP's East and West Line rates
and raises many of the same issues, including a renewed challenge to the
grandfathered status of West Line rates, that have been at issue in Docket Nos.
OR92-8-000, et al. The complaint includes an assertion that the acquisition of
SFPP and the cost savings anticipated to result from the acquisition constitute
"changed circumstances" that provide a basis for terminating the "grandfathered"
status of SFPP's otherwise protected rates. The complaint also seeks to
establish that SFPP's grandfathered interstate rates from the San Francisco Bay
area to Reno, Nevada and from Portland to Eugene, Oregon are also subject to
"changed circumstances" and, therefore, can be challenged as unjust and
unreasonable. On November 26, 1997, Ultramar Diamond Shamrock Corporation filed
a similar complaint at the FERC (Docket No. OR98-2-000). Both reparations and
prospective rate deductions are sought for movements on all of the lines.
SFPP filed answers to both complaints with the FERC on November 21, 1997
and December 22, 1997, respectively, and intends to vigorously defend all of the
challenged rates. On January 20, 1998, the FERC issued an order accepting the
complaints and consolidating both complaints into one proceeding, but holding
them in abeyance pending a Commission decision on review of the Initial Decision
in Docket Nos. OR92-8-000 et al. In a companion order to Opinion No. 435, the
FERC directed the complainants to amend their complaints, as may be appropriate,
consistent with the terms and conditions of its orders, including Opinion No.
435.
Applicable rules and regulations in this field are vague, relevant factual
issues are complex and there is little precedent available regarding the factors
to be considered or the method of analysis to be employed in making a
determination of "changed circumstances", which is the showing necessary to make
"grandfathered" rates subject to challenge. The Partnership believes, after
consultation with FERC counsel, that the acquisition of SFPP, standing alone,
should not be found to constitute "changed circumstances", however, the
realization of the cost savings anticipated to arise from the acquisition may
increase the risk of a finding of "changed circumstances".
If "changed circumstances" are found, SFPP rates previously "grandfathered"
under EPACT may lose their "grandfathered" status and, if such rates are found
to be unjust and unreasonable, shippers may be entitled to a prospective rate
reduction together with reparations for periods from the date of the complaint
to the date of the implementation of the new rates.
The Partnership is not able to predict with certainty whether settlement
agreements will be completed with some or all of the complainants, the final
terms of any such settlement agreements that may be consummated, or the final
outcome of the FERC proceedings should they be carried through to their
conclusion, and it is possible that current or future proceedings could be
resolved in a manner adverse to the Partnership.
F-41
<PAGE> 129
California Public Utilities Commission Proceeding
A complaint was filed with the California Public Utilities Commission on
April 7, 1997 by ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. against SFPP, L.P. 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. On October 1, 1997, the complainants filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year. On
November 26, 1997, SFPP filed responsive testimony defending the justness and
reasonableness of its rates. The rebuttal testimony was filed on December 12,
1997 and hearings before the Administrative Law Judge were completed on January
15, 1998. Briefing and oral arguments were made in March 1998, and on June 18,
1998, a California Public Utilities Commission ("CPUC") Administrative Law Judge
issued a ruling in the Partnership's favor and dismissed the complaints. On
August 6, 1998, the CPUC affirmed the Judge's decision. The shippers have
appealed the CPUC's decision to the California Supreme Court. The Partnership
believes it has adequate reserves recorded for any adverse decision related to
this matter.
SPTC Easements
SFPP and Southern Pacific Transportation Company ("SPTC") are engaged in a
judicial reference 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 SPTC
should be adjusted pursuant to existing contractual arrangements (Southern
Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP Properties,
Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al., Superior Court of
the State of California for the County of San Francisco, filed August 31, 1994).
This matter was tried in the latter part of 1996 and the court issued its
Statement of Tentative Decision in January 1997. The Statement of Tentative
Decision indicated that the court intended to establish a new base annual rental
for the subject rights-of-way at a level, subject to inflation adjustments, that
is adequately provided for by the amounts accrued by SFPP through December 31,
1998.
On May 7, 1997, the judge issued a Statement of Decision and Judgment that
reaffirmed the conclusions set forth in his January 1997 Statement of Tentative
Decision. This Statement of Decision and Judgment was filed on June 30, 1997
with the Superior Court for the County of San Francisco, under which court's
jurisdiction it is subject to appeal by SPTC. On May 30, 1997, SPTC filed a
motion for a new trial and the motion was denied on June 26, 1997. SPTC and SFPP
filed motions of appeal in July and August 1997, respectively. The case is
currently pending before the Court of Appeals for the First Appellate District
of the State of California. The Partnership believes it has adequate reserves
recorded for any adverse decision related to this matter.
Environmental Matters
The Partnership is subject to environmental cleanup and enforcement actions
from time to time. In particular, the federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund" law) generally
imposes joint and several liability for cleanup and enforcement costs, without
regard to fault or the legality of the original conduct, on current or
predecessor owners and operators of a site. The operations of the Partnership
are also subject to Federal, state and local laws and regulations relating to
protection of the environment. Although the Partnership believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and liabilities will
not be incurred by the Partnership. 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 the operations of the Partnership, could result in substantial
costs and liabilities to the Partnership.
F-42
<PAGE> 130
Since August 1991, SFPP, along with several other respondents, has been
involved in one cleanup ordered by the United States Environmental Protection
Agency ("EPA") related to ground water contamination in the vicinity of SFPP's
storage facilities and truck loading terminal at Sparks, Nevada. The EPA
approved the respondents' remediation plan in September 1992 and the remediation
system began operation in 1995. In addition, SFPP is presently involved in 18
ground water hydrocarbon remediation efforts under administrative orders issued
by the California Regional Water Quality Control Board and two other state
agencies. The Partnership has recorded a reserve for environmental claims in the
amount of $26.1 million at December 31, 1998.
Morris Storage Facility
The general partner is a defendant in two proceedings (one by the State of
Illinois and one by the Department of Transportation) relating to alleged
environmental violations for events relating to a fire that occurred at the
Morris storage field in September, 1994. Although no assurance can be given, the
Partnership believes that the ultimate resolution of these matters will not have
a material adverse effect on its financial position or results of operations.
Other
The Partnership, in the ordinary course of business, is a defendant in
various lawsuits relating to the Partnership's assets. Although no assurance can
be given, the Partnership believes, based on its experience to date, that the
ultimate resolution of such items will not have a material adverse impact on the
Partnership's financial position or results of operations.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING OPERATING NET INCOME
REVENUES INCOME NET INCOME PER UNIT
--------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
1998
First Quarter(1)...................... $ 36,741 $15,091 $ 353 $(0.12)
Second Quarter........................ 82,044 39,371 30,313 0.50
Third Quarter......................... 101,900 41,623 35,116 0.52
Fourth Quarter........................ 101,932 43,820 37,824 0.55
1997
First Quarter......................... $ 19,132 $ 5,927 $ 3,428 $ 0.26
Second Quarter........................ 16,036 4,800 2,866 0.15
Third Quarter......................... 17,385 5,315 3,754 0.20
Fourth Quarter........................ 21,379 8,189 7,689 0.41
</TABLE>
- ------------
(1) Note: 1998 First Quarter includes an extraordinary charge of $13,611 due to
an early extinguishment of debt. Net Income before extraordinary charge was
$13,964 and Net Income per Unit before extraordinary charge was $0.52.
F-43
<PAGE> 131
UNDERWRITING
Kinder Morgan, Inc. and the underwriters named below have entered into an
underwriting agreement for the shares of common stock being offered. Subject to
various conditions, each underwriter has severally agreed to purchase the number
of shares of common stock indicated in the following table. Goldman, Sachs & Co.
and PaineWebber Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
PaineWebber Incorporated....................................
-------
Total.......................................................
=======
</TABLE>
If the underwriters sell more shares than the total number shown in the
table above, the underwriters have an option to buy up to an additional
1,087,500 shares of common stock from Kinder Morgan, Inc. to cover those sales.
They may exercise that option for 30 days. If any shares are purchased under
that option, the underwriters will severally purchase shares in approximately
the same proportion as shown in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by Kinder Morgan, Inc. Amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
Paid by Kinder Morgan, Inc.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Common stock sold by the underwriters to the public will initially be
offered at the initial public offering price shown on the cover of this
prospectus. Any common stock sold by the underwriter to securities dealers may
be sold at a discount of up to $ per share from the initial public offering
price. Any securities dealers may resell any common stock purchased from the
underwriters to other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
Kinder Morgan, Inc. has agreed with the underwriters not to dispose of or
hedge any common stock or securities convertible into or exchangeable for shares
of common stock for 180 days without the prior written consent of the
representatives. In addition, Richard D. Kinder, Director, Chairman and Chief
Executive Officer, and William V. Morgan, Director, Vice Chairman and President,
have agreed with the underwriters not to dispose of or hedge any common stock or
securities convertible into or exchangeable for shares of common stock for two
years without the prior written consent of the representatives. Kinder Morgan,
Inc.'s remaining executive officers have agreed with the underwriters not to
dispose of or hedge any common stock or securities convertible into or
exchangeable for shares of common stock for 180 days without the prior written
consent of the representatives. Finally, First Union, one of Kinder Morgan,
Inc.'s principal stockholders, has agreed with the underwriters not to dispose
of or hedge any common stock or securities convertible into or exchangeable for
shares of common stock for one year without the prior written consent of the
representatives. The restrictions that apply to Kinder Morgan, Inc. do not
affect issuances under any existing employee benefit plans. See "Shares
Available for Future Sale" for a discussion of transfer restrictions.
Prior to the offering, there has been no public market for the shares.
Kinder Morgan, Inc. will negotiate the initial public offering price with the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will
U-1
<PAGE> 132
be Kinder Morgan, Inc.'s historical performance, estimates of Kinder Morgan,
Inc.'s business potential and earnings prospects, an assessment of Kinder
Morgan, Inc.'s management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the New York
Stock Exchange in the over-the-counter market or otherwise.
Some of the underwriters and their affiliates have from time to time
performed various investment banking and financial advisory services for Kinder
Morgan, Inc. and its affiliates for which they have received customary fees and
reimbursement of their out-of-pocket expenses. Within the twelve months
preceding this offering, Goldman, Sachs & Co. and PaineWebber Incorporated acted
as underwriters of an equity offering by Kinder Morgan Energy Partners in June
of 1998 and Goldman, Sachs & Co. acted as an underwriter of a debt offering by
Kinder Morgan Energy Partners in January of 1999.
Goldman, Sachs Credit Partners L.P., an affiliate of Goldman, Sachs & Co.,
served as syndication agent and a lender under the Kinder Morgan Energy Partners
credit facility for which it received customary fees and out-of-pocket expense
reimbursement. A portion of the net proceeds of this offering to be received by
Kinder Morgan, Inc. will be used to repay lenders under this credit facility,
including Goldman, Sachs Credit Partners, L.P. [Since the amount to be repaid to
those lenders exceeds 10% of the net proceeds of this offering to be received by
Kinder Morgan, Inc., the offering is being made under the provisions of Rule
2710(c)(8) of the NASD's Conduct Rules.]
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Kinder Morgan, Inc. estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
Kinder Morgan, Inc. has agreed to indemnify the several underwriters
against various liabilities, including liabilities under the Securities Act of
1933, as amended.
U-2
<PAGE> 133
===============================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the common stock offered in this prospectus, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 10
Use of Proceeds................................. 19
Capitalization.................................. 20
Dilution........................................ 21
Dividend Policy................................. 22
Selected Historical Consolidated Financial of
Kinder Morgan, Inc............................ 23
Selected Historical Consolidated Financial and
Operating Data of Kinder Morgan Energy
Partners...................................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
Business of Kinder Morgan, Inc.................. 41
Business of Kinder Morgan Energy Partners....... 43
Management...................................... 55
Specific Relationships and Related
Transactions.................................. 63
Security Ownership of Principal Beneficial
Owners and Management......................... 64
Description of Our Capital Stock................ 65
Relevant Provisions of Kinder Morgan Energy
Partners' Partnership Agreement............... 70
Shares Eligible for Future Sale................. 80
Legal Matters................................... 81
Experts......................................... 81
Forward-Looking Statements...................... 82
Where You Can Find More Information............. 82
Index to Financial Statements................... F-1
Underwriting.................................... U-1
</TABLE>
---------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and for an unsold allotment or subscription.
===============================================================================
===============================================================================
7,250,000 Shares
KINDER MORGAN, INC.
Common Stock
---------------------------
[KINDER MORGAN, INC. LOGO]
---------------------------
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
Representatives of the Underwriters
===============================================================================
<PAGE> 134
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Shown below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered in this prospectus. With the exception
of the Securities and Exchange Commission registration fee, the NASD filing fee
and the New York Stock Exchange filing fee, the amounts shown below are
estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ *
NASD filing fee............................................. *
New York Stock Exchange listing fee......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
--------
TOTAL.............................................
========
</TABLE>
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under specific circumstances
and subject to specific limitations. Kinder Morgan, Inc.'s restated certificate
of incorporation and restated bylaws provide that Kinder Morgan, Inc. shall
indemnify its directors and officers to the full extent permitted by Delaware
General Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law.
In addition to the indemnification provided for in Kinder Morgan, Inc.'s
restated certificate of incorporation, Kinder Morgan, Inc. plans to enter into
agreements to indemnify its directors and executive officers. These agreements,
among other things, will provide for indemnification of Kinder Morgan, Inc.'s
directors and executive officers for specific expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any person in any
action or proceeding, including any action by or in the right of Kinder Morgan,
Inc., arising out of that person's services as a director or executive officer
of Kinder Morgan, Inc., any subsidiary of Kinder Morgan, Inc. or any other
company or enterprise to which the person provides services at Kinder Morgan,
Inc.'s request. Kinder Morgan, Inc. believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. Kinder Morgan, Inc.'s restated certificate of incorporation provides
for that limitation of liability.
II-1
<PAGE> 135
Policies of insurance are maintained by Kinder Morgan, Inc. under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against specific expenses in connection with the
defense of, and specific liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been directors or officers.
Reference is also made to the Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for information concerning the Underwriters'
obligation to indemnify Kinder Morgan, Inc. and its officers and directors in
various circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On , 1999, under an exchange agreement among Kinder Morgan,
Inc. and all of its stockholders, Kinder Morgan, Inc. issued 29,646,023 shares
of common stock and 3,103,977 shares of non-voting convertible common stock in
exchange for all of its shares of capital stock then outstanding consisting of
8,047 shares of Class A Common Stock and 2,541 shares of Class B Common Stock.
The offering and sale of the common stock and non-voting convertible common
stock under the exchange agreement were exempt from registration under Section
3(a)(9) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S>
**1.1 -- Underwriting Agreement by and among Kinder Morgan, Inc.,
Goldman, Sachs & Co. and PaineWebber Incorporated dated
as of , 1999.
*2.1 -- Purchase Agreement dated October 18, 1997, among Kinder
Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc.,
Santa Fe Pacific Pipeline Partners, L.P., Santa Fe
Pacific Pipelines, Inc. and SFP Pipeline Holdings, Inc.
(Exhibit 2.1 to Amendment No. 1 to Kinder Morgan Energy
Partners' Registration Statement on Form S-4 (File No.
333-44519) filed February 4, 1998).
*2.2 -- Master Agreement dated as of January 1, 1998, among Shell
Western E&P Inc., Shell Western Pipelines Inc., Shell
Cortez Pipeline Company, Shell CO(2) LLC, Shell CO(2)
General LLC, Shell Land & Energy Company, Kinder Morgan
Operating L.P. "A" and Kinder Morgan CO(2), LLC (Exhibit
2.2 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
*2.3 -- First Amended and Restated Agreement of Limited
Partnership dated as of March 5, 1998, by and between
Shell CO(2) General LLC, Kinder Morgan CO(2), LLC and
Shell CO(2) LLC (Exhibit 2.3 to Kinder Morgan Energy
Partners' Current Report on Form 8-K (File No. 001-11234)
filed March 18, 1998).
*2.4 -- Amendment to the Limited Partnership Agreement of Shell
CO(2) Company, Ltd. dated as of September 30, 1998
(Exhibit 2.4 to Kinder Morgan Energy Partners' Annual
Report on Form 10-K (File No. 001-11234) filed March 15,
1999).
</TABLE>
II-2
<PAGE> 136
<TABLE>
<C> <S>
*2.5 -- Assumption and Indemnification Agreement dated as of
January 1, 1998, among Shell CO(2) General LLC, Shell
CO(2) General LLC, Shell Western E&P Inc., Shell Western
Pipelines Inc., Shell Cortez Pipeline Company, Shell Land
& Energy Company, Kinder Morgan CO(2), LLC, Kinder Morgan
Operating L.P. "A" and Shell CO(2) Company, Ltd. (Exhibit
2.4 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
*2.6 -- Guaranty and Indemnification Agreement dated as of
January 1, 1998, between Shell Western E&P Inc. and
Kinder Morgan Energy Partners, L.P. (Exhibit 2.5 to
Kinder Morgan Energy Partners' Current Report on Form 8-K
(File No. 001-11234) filed March 18, 1998).
**2.7 -- Exchange Agreement dated , 1999, among Kinder
Morgan, Inc. and all of its stockholders.
3.1 -- Form of Restated Certificate of Incorporation of Kinder
Morgan, Inc.
3.2 -- Form of Restated Bylaws of Kinder Morgan, Inc.
**3.3 -- Certificate of Designation of Series A Junior
Participating Preferred Stock as filed with the Secretary
of State of Delaware on , 1999.
*3.4 -- Second Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P. dated
as of February 14, 1997 (Exhibit 3.1 to the Amendment No.
1 to Kinder Morgan Energy Partners' Registration
Statement on Form S-4 (File No. 333-44519) filed February
4, 1998).
**4.1 -- Specimen Certificate representing shares of common stock.
*4.2 -- Indenture dated as of January 29, 1999 among Kinder
Morgan Energy Partners, the guarantors listed on the
signature page thereto and U.S. Trust Company of Texas,
N.A., as trustee, relating to Senior Debt Securities
(Exhibit 4.1 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
*4.3 -- First Supplemental Indenture dated as of January 29, 1999
among Kinder Morgan Energy Partners, the subsidiary
guarantors listed on the signature page thereto and U.S.
Trust Company of Texas, N.A., as trustee, relating to
$250,000,000 of 6.30% Senior Notes due February 1, 2009
(Exhibit 4.2 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
*4.4 -- Amended and Restated Credit Agreement dated as of
December 1, 1998 among Kinder Morgan Energy Partners,
Kinder Morgan Operating L.P. "B," the subsidiary
guarantors listed on the signature page thereto, the
lenders party thereto and First Union National Bank, as
agent (Exhibit 4.4 to Kinder Morgan Energy Partners'
Annual Report on Form 10-K for 1998 (File No. 001-11234)
filed March 15, 1999).
*4.5 -- First Amendment, dated December 21, 1998, to Amended and
Restated Credit Agreement among Kinder Morgan Energy
Partners, Kinder Morgan Operating L.P. "B," the
subsidiary guarantors listed on the signature page
thereto, the lenders party thereto and First Union
National Bank, as agent (Exhibit 4.5 to Kinder Morgan
Energy Partners' Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*4.6 -- First Mortgage Note Agreement dated December 8, 1988,
among Southern Pacific Pipe Lines Partnership, L.P. now
known as SFPP, L.P.) and the Purchasers listed on
Schedule A (a conformed composite of 54 separate
agreements, identical except for signatures) (Exhibit 4.2
to Santa Fe Pacific Pipeline Partners, L.P.'s Annual
Report on Form 10-K for 1988 (File No. 1-110066)).
</TABLE>
II-3
<PAGE> 137
<TABLE>
<C> <S>
*4.7 -- Consent and Amendment dated as of December 19, 1997,
between the noteholders and SFPP, L.P. (a conformed
composite of the separate agreements with each
noteholder, identical except for signatures) (Exhibit
4.14.1 to Kinder Morgan Energy Partners' Annual Report on
Form 10-K for 1997 (File No. 001-11234) filed March 31,
1998).
*4.8 -- Deed of Trust, Security Agreement and Fixture Filing,
dated December 8, 1988, between SFPP, L.P., its general
partner, Chicago Title Insurance Company and Security
Pacific National Bank (Exhibit 4.3 to Santa Fe Pacific
Pipeline Partners, L.P.'s Annual Report on Form 10-K for
1988 (File No. 1-110066)).
*4.9 -- Trust Agreement dated December 19, 1988, between SFPP,
L.P., its general partner and Security Pacific National
Bank (Exhibit 4.4 to Santa Fe Pacific Pipeline Partners,
L.P.'s Annual Report on Form 10-K for 1988 (File No.
1-110066)).
*4.10 -- Amended and Restated Credit Agreement dated as of August
11, 1997, among SFPP, L.P., Bank of America National
Trust and Savings Association, as agent, Texas Commerce
Bank National Association, as syndication agent, Bank of
Montreal, as documentation agent, BancAmerica Securities,
Inc., as arranger, and the lenders that are signatories
thereto. As the maximum allowable borrowings under this
facility do not exceed 10% of the Registrant's total
assets, this instrument is not filed as an exhibit to
this Report, however, the Registrant agrees to furnish a
copy of that instrument to the Securities and Exchange
Commission upon request.
**4.11 -- Rights Agreement dated , 1999, between Kinder
Morgan, Inc. and , as rights agent.
**5 -- Opinion of Bracewell & Patterson, L.L.P. as to the
legality of the securities registered in this prospectus.
*10.1 -- Amended and Restated Credit Agreement dated as of June
18, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.2 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*10.2 -- First Amendment to Credit Agreement dated as of August
26, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.3 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*10.3 -- Second Amendment to Credit Agreement dated as of
September 8, 1998, among Kinder Morgan, Inc. and First
Union National Bank (Exhibit 10.4 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K (File No.
001-11234) filed March 15, 1999).
**10.4 -- Kinder Morgan, Inc. 1999 Stock Awards Plan
**10.5 -- Amended and Restated Registration Rights Agreement dated
as of February 14, 1997, among Kinder Morgan, Inc. and
some of its stockholders.
21 -- List of Subsidiaries
**23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in
Exhibit 5)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of PricewaterhouseCoopers LLP
27 -- Financial Data Schedule
</TABLE>
II-4
<PAGE> 138
- ------------
* Asterisk indicates exhibits incorporated by reference as indicated; all other
exhibits are filed herewith, except as noted.
** To be filed by amendment.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant under the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on May 10, 1999.
KINDER MORGAN, INC.
By: /s/ RICHARD D. KINDER
----------------------------------
Richard D. Kinder
Chairman and Chief Executive
Officer
---------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD D. KINDER Director, Chairman and Chief May 10, 1999
- ----------------------------------------------------- Executive Officer
Richard D. Kinder
/s/ WILLIAM V. MORGAN Director, Vice Chairman and May 10, 1999
- ----------------------------------------------------- President
William V. Morgan
/s/ DAVID G. DEHAEMERS, JR. Vice President and Treasurer May 10, 1999
- ----------------------------------------------------- (principal financial and
David G. Dehaemers, Jr. accounting officer)
</TABLE>
II-6
<PAGE> 140
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
**1.1 -- Underwriting Agreement by and among Kinder Morgan, Inc.,
Goldman, Sachs & Co. and PaineWebber Incorporated dated
as of , 1999.
*2.1 -- Purchase Agreement dated October 18, 1997, among Kinder
Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc.,
Santa Fe Pacific Pipeline Partners, L.P., Santa Fe
Pacific Pipelines, Inc. and SFP Pipeline Holdings, Inc.
(Exhibit 2.1 to Amendment No. 1 to Kinder Morgan Energy
Partners' Registration Statement on Form S-4 (File No.
333-44519) filed February 4, 1998).
*2.2 -- Master Agreement dated as of January 1, 1998, among Shell
Western E&P Inc., Shell Western Pipelines Inc., Shell
Cortez Pipeline Company, Shell CO(2) LLC, Shell CO(2)
General LLC, Shell Land & Energy Company, Kinder Morgan
Operating L.P. "A" and Kinder Morgan CO(2), LLC (Exhibit
2.2 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
*2.3 -- First Amended and Restated Agreement of Limited
Partnership dated as of March 5, 1998, by and between
Shell CO(2) General LLC, Kinder Morgan CO(2), LLC and
Shell CO(2) LLC (Exhibit 2.3 to Kinder Morgan Energy
Partners' Current Report on Form 8-K (File No. 001-11234)
filed March 18, 1998).
*2.4 -- Amendment to the Limited Partnership Agreement of Shell
CO(2) Company, Ltd. dated as of September 30, 1998
(Exhibit 2.4 to Kinder Morgan Energy Partners' Annual
Report on Form 10-K (File No. 001-11234) filed March 15,
1999).
*2.5 -- Assumption and Indemnification Agreement dated as of
January 1, 1998, among Shell CO(2) General LLC, Shell
CO(2) General LLC, Shell Western E&P Inc., Shell Western
Pipelines Inc., Shell Cortez Pipeline Company, Shell Land
& Energy Company, Kinder Morgan CO(2), LLC, Kinder Morgan
Operating L.P. "A" and Shell CO(2) Company, Ltd. (Exhibit
2.4 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
*2.6 -- Guaranty and Indemnification Agreement dated as of
January 1, 1998, between Shell Western E&P Inc. and
Kinder Morgan Energy Partners, L.P. (Exhibit 2.5 to
Kinder Morgan Energy Partners' Current Report on Form 8-K
(File No. 001-11234) filed March 18, 1998).
**2.7 -- Exchange Agreement dated , 1999, among Kinder
Morgan, Inc. and all of its stockholders.
3.1 -- Form of Restated Certificate of Incorporation of Kinder
Morgan, Inc.
3.2 -- Form of Restated Bylaws of Kinder Morgan, Inc.
**3.3 -- Certificate of Designation of Series A Junior
Participating Preferred Stock as filed with the Secretary
of State of Delaware on , 1999.
</TABLE>
II-7
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
*3.4 -- Second Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P. dated
as of February 14, 1997 (Exhibit 3.1 to the Amendment No.
1 to Kinder Morgan Energy Partners' Registration
Statement on Form S-4 (File No. 333-44519) filed February
4, 1998).
**4.1 -- Specimen Certificate representing shares of common stock.
*4.2 -- Indenture dated as of January 29, 1999 among Kinder
Morgan Energy Partners, the guarantors listed on the
signature page thereto and U.S. Trust Company of Texas,
N.A., as trustee, relating to Senior Debt Securities
(Exhibit 4.1 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
*4.3 -- First Supplemental Indenture dated as of January 29, 1999
among Kinder Morgan Energy Partners, the subsidiary
guarantors listed on the signature page thereto and U.S.
Trust Company of Texas, N.A., as trustee, relating to
$250,000,000 of 6.30% Senior Notes due February 1, 2009
(Exhibit 4.2 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
*4.4 -- Amended and Restated Credit Agreement dated as of
December 1, 1998 among Kinder Morgan Energy Partners,
Kinder Morgan Operating L.P. "B," the subsidiary
guarantors listed on the signature page thereto, the
lenders party thereto and First Union National Bank, as
agent (Exhibit 4.4 to Kinder Morgan Energy Partners'
Annual Report on Form 10-K for 1998 (File No. 001-11234)
filed March 15, 1999).
*4.5 -- First Amendment, dated December 21, 1998, to Amended and
Restated Credit Agreement among Kinder Morgan Energy
Partners, Kinder Morgan Operating L.P. "B," the
subsidiary guarantors listed on the signature page
thereto, the lenders party thereto and First Union
National Bank, as agent (Exhibit 4.5 to Kinder Morgan
Energy Partners' Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*4.6 -- First Mortgage Note Agreement dated December 8, 1988,
among Southern Pacific Pipe Lines Partnership, L.P. now
known as SFPP, L.P.) and the Purchasers listed on
Schedule A (a conformed composite of 54 separate
agreements, identical except for signatures) (Exhibit 4.2
to Santa Fe Pacific Pipeline Partners, L.P.'s Annual
Report on Form 10-K for 1988 (File No. 1-110066)).
*4.7 -- Consent and Amendment dated as of December 19, 1997,
between the noteholders and SFPP, L.P. (a conformed
composite of the separate agreements with each
noteholder, identical except for signatures) (Exhibit
4.14.1 to Kinder Morgan Energy Partners' Annual Report on
Form 10-K for 1997 (File No. 001-11234) filed March 31,
1998).
*4.8 -- Deed of Trust, Security Agreement and Fixture Filing,
dated December 8, 1988, between SFPP, L.P., its general
partner, Chicago Title Insurance Company and Security
Pacific National Bank (Exhibit 4.3 to Santa Fe Pacific
Pipeline Partners, L.P.'s Annual Report on Form 10-K for
1988 (File No. 1-110066)).
*4.9 -- Trust Agreement dated December 19, 1988, between SFPP,
L.P., its general partner and Security Pacific National
Bank (Exhibit 4.4 to Santa Fe Pacific Pipeline Partners,
L.P.'s Annual Report on Form 10-K for 1988 (File No.
1-110066)).
</TABLE>
II-8
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
*4.10 -- Amended and Restated Credit Agreement dated as of August
11, 1997, among SFPP, L.P., Bank of America National
Trust and Savings Association, as agent, Texas Commerce
Bank National Association, as syndication agent, Bank of
Montreal, as documentation agent, BancAmerica Securities,
Inc., as arranger, and the lenders that are signatories
thereto. As the maximum allowable borrowings under this
facility do not exceed 10% of the Registrant's total
assets, this instrument is not filed as an exhibit to
this Report, however, the Registrant agrees to furnish a
copy of that instrument to the Securities and Exchange
Commission upon request.
**4.11 -- Rights Agreement dated , 1999, between Kinder
Morgan, Inc. and , as rights agent.
**5 -- Opinion of Bracewell & Patterson, L.L.P. as to the
legality of the securities registered hereby.
*10.1 -- Amended and Restated Credit Agreement dated as of June
18, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.2 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*10.2 -- First Amendment to Credit Agreement dated as of August
26, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.3 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
*10.3 -- Second Amendment to Credit Agreement dated as of
September 8, 1998, among Kinder Morgan, Inc. and First
Union National Bank (Exhibit 10.4 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K (001-11234)
filed March 15, 1999).
**10.4 -- Kinder Morgan, Inc. 1999 Stock Awards Plan
**10.5 -- Amended and Restated Registration Rights Agreement dated
as of February 14, 1997, among Kinder Morgan, Inc. and
some of its stockholders.
21 -- List of Subsidiaries
**23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in
Exhibit 5)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of PriceWaterhouseCoopers LLP
27 -- Financial Data Schedule
</TABLE>
- ------------
* Asterisk indicates exhibits incorporated by reference as indicated; all other
exhibits are filed herewith, except as noted.
** To be filed by amendment.
II-9
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
KINDER MORGAN, INC.
The name of the corporation is Kinder Morgan, Inc. (the
"Corporation"). The name of the Corporation as originally incorporated was KC
Liquids Holding Corporation and its original Certificate of Incorporation was
filed with the Delaware Secretary of State on October 31, 1996. On February 13,
1997, the Corporation filed with the Delaware Secretary of State a Restated
Certificate of Incorporation that, in part, changed the Corporation's name to
Kinder Morgan, Inc. This Restated Certificate of Incorporation, which restates,
integrates and further amends the Company's Restated Certificate of
Incorporation, was duly adopted in accordance with ss. 242 and ss. 245 of the
General Corporation Law of the State of Delaware ("DGCL").
ARTICLE I
The name of the Corporation is Kinder Morgan, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, County of New Castle,
Wilmington, Delaware 19801. The name of the Corporation's registered agent at
such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
DGCL; provided, however, that if the consummation by Kinder Morgan G.P., Inc.,
a Delaware corporation (the "General Partner"), Kinder Morgan Energy Partners,
L.P., a Delaware limited partnership ("KMEP"), or any of KMEP's operating
limited partnership or subsidiaries of any purchase, sale, investment,
divestment or any other transaction is determined by the board of directors of
the General Partner to be fair and reasonable to such entities, as applicable,
such transaction shall not be within the power of the Corporation, including,
but not limited to, any such action that was originally offered to the
Corporation and was disclosed to the board of directors of General Partner by
any director or officer of both General Partner and the Corporation; provided,
however, that if the board of directors of the General Partner later determines
to abandon such transaction, such transaction shall again be within the
corporate power of the Corporation.
ARTICLE IV
Section 1. Authorized Capital. The Corporation shall be authorized to
issue two hundred and fifteen million (215,000,000) shares of capital stock,
of which (i) two hundred million (200,000,000) shares shall be shares of
common stock, $.01 par value per share ("Common Stock"), (ii) ten million
(10,000,000)
<PAGE> 2
shares shall be shares of Non-Voting Convertible Common Stock, par value $0.01
per share ("Non-Voting Common Stock"), and (iii) five million (5,000,000) shares
shall be shares of preferred stock, $.01 par value per share ("Preferred
Stock").
Section 2. Preferred Stock. The Board of Directors is hereby expressly
authorized, subject to any limitations prescribed by applicable law, to provide
from time to time for the issuance of shares of Preferred Stock in one or more
series, and to determine the number of shares of each series and to fix for
each series of Preferred Stock such voting powers, full or limited or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors or a duly authorized committee
thereof providing for the issue of such series.
Section 3. Common Stock.
(a) Exclusive Rights. Subject to the rights of the holders of
any series of Preferred Stock and except as otherwise provided by law,
the Common Stock shall have the exclusive right to vote for the
election of directors of the Corporation (each a "Director") and for
all other purposes. The number of authorized shares of Common Stock,
Non-Voting Common Stock and Preferred Stock may be increased or
decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in
voting power of the stock of the Corporation entitled to vote thereon
irrespective of the provisions of Section 242(b)(2) of the DGCL (or
any successor provision thereto), and no vote of the holders of either
the Common Stock, Non-Voting Common Stock or the Preferred Stock
voting separately as a class shall be required therefor.
(b) Voting Rights. Each outstanding share of Common Stock
shall entitle the holder thereof to one vote on each matter properly
submitted to the stockholders of the Corporation for their vote,
consent, waiver, release or other action; provided, however, that,
except as otherwise required by law, holders of Common Stock shall not
be entitled to vote on any amendment to this Restated Certificate of
Incorporation (including any Certificate of Designations relating to
any series of Preferred Stock) that relates solely to the terms of one
or more outstanding series of Preferred Stock if the holders of such
affected series are entitled, either separately or together with the
holders of one or more other such series, to vote thereon pursuant to
this Restated Certificate of Incorporation (including any Certificate
of Designations relating to any series of Preferred Stock) or pursuant
to the DGCL. Except as required by law, the holders of the Non-Voting
Common Stock shall have no right to vote on any matters for which a
vote of the stockholders of the Corporation is taken.
(c) Ranking. Except with respect to voting and conversion
rights, the Common Stock and the Non-Voting Common Stock shall be in
all respects have the same powers, preferences, rights and
qualifications (including dividend rights and rights on liquidation,
dissolution and winding up) and shall rank pari passu with each other.
(d) Dividends. Subject to all of the rights of any class of
stock ranking senior to the Common Stock and Non-Voting Common Stock as
to dividends, dividends may be paid upon the Common Stock as and when
declared by the Board of Directors out of funds and other assets
legally available for the payment of dividends. The Board of Directors
may declare a dividend or distribution upon both the Common Stock and
the Non-Voting Common Stock in shares of any authorized class or series
of capital stock of the Corporation only if such dividend is declared
and paid proportionately to all holders of Common Stock and Non-Voting
Common Stock as follows: (i) in Common Stock to the holders of Common
Stock and in Non-Voting Common Stock to the holders of Non-Voting
Common Stock, or (ii) in any authorized class or series of capital
stock to the holders of both Common Stock and Non-Voting Common Stock.
-2-
<PAGE> 3
(e) Conversion.
(i) Any holder of Non-Voting Common Stock shall have the
right, at its option, at any time and from time to time, to
convert, subject to the terms and provisions of this Section
3(d) of Article IV, any or all of such holder's shares of
Non-Voting Common Stock into fully paid and non-assessable
shares of Common Stock at the rate (subject to adjustment as
provided below) of one share of Common Stock for each share
of Non-Voting Common Stock surrendered for conversion;
provided, however, if the holder in any such conversion is
subject to the Bank Holding Company Act of 1956, as amended
(12 U.S.C. ss.1841, et. seq.) and the regulations promulgated
thereunder (collectively and including any successor
provisions, the "BHCA Act"), such conversion may be made only
if:
(A) the BHCA Act would not prohibit such holder from
holding such shares of Common Stock; and
(B) such shares of Common Stock to be received upon
such conversion will be distributed or sold (1) in
connection with any public equity offering registered
under the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder (the
"Securities Act"), (2) in a "broker's transaction" (as
defined in Rule 144(g) under the Securities Act) pursuant
to Rule 144 under the Securities Act or any similar rule
then in force, (3) to a person or group (within the
meaning of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of persons if, after such
distribution or sale, such person or group of persons
would not, in the aggregate, own, control or have the
right to acquire more than 2% of the outstanding
securities of the Corporation entitled to vote on the
election of directors of the Corporation, (4) to a person
or group (within the meaning of the Exchange Act) of
persons if, prior to such sale, such persons or group of
persons had control of the Corporation, or (5) in any
other manner permitted under the BHCA;
provided, further, that if the holder converts any shares of
the Non-Voting Common Stock as provided in clauses (A) and
(B) above and any distribution or sale of the Common Stock
fails to occur for any reason, such holder may convert the
Common Stock into the Non-Voting Common Stock converted in
anticipation of such distribution or sale.
(ii) Such conversion right shall be exercised by the
surrender to the Corporation of the shares of the applicable
Non-Voting Common Stock to be converted in the manner
provided above at any time during usual business hours at its
principal place of business, accompanied by (A) written
notice that the holder elects to convert such shares of
Non-Voting Common Stock and specifying the name or names
(with address) in which a certificate or certificates for
shares of the Common Stock are to be issued; (B) if so
required by the Corporation, a written instrument or
instruments of transfer in form reasonably satisfactory to
the
-3-
<PAGE> 4
Corporation duly executed by the holder or its duly
authorized legal representative; (C) transfer tax stamps or
funds therefor, if required pursuant to Section 3(d)(iv) of
this Article IV, and (D) a certificate in form satisfactory
to the Corporation stating that the holder has satisfied all
applicable conditions to conversion, including without
limitation the restrictions described in Section 3(d)(i) of
this Article IV, and the Corporation may rely upon such
Certificate as to the holder's compliance with any such
conditions or restrictions without any investigation by the
Corporation as to such matters. As promptly as practicable
after the surrender, as herein provided, of any shares of
Non-Voting Common Stock for conversion pursuant to Section
3(d)(i) of this Article IV, the Corporation shall deliver to
or upon the written order of the holder of such shares of
Non-Voting Common Stock so surrendered a certificate or
certificates representing the number of fully paid and
non-assessable shares of the Common Stock into which such
shares of Common Stock may be or have been converted in
accordance with the provisions of this Section 3(d) of
Article IV. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date that
such shares of Non-Voting Common Stock shall have been
surrendered in satisfactory form for conversion, and the
person or persons entitled to receive the shares of Common
Stock deliverable upon conversion of such shares of
Non-Voting Common Stock shall be treated for all purposes as
having become the record holder or holders of such shares of
Common Stock at such appropriate time. Notwithstanding the
foregoing, a holder's identification of the person or persons
entitled to receive any shares of Common Stock deliverable
upon conversion shall not be deemed an approval by the
Corporation of a transfer or conversion that would result in
a violation of any applicable law or restriction on transfer
or conversion and shall not be deemed a waiver by the
Corporation or any other person of any right or restriction
regarding any such transfer or conversion.
(iii) So long as shares of each of the Common Stock and
Non-Voting Common Stock are outstanding or authorized or
reserved for issuance, the Corporation shall not, without the
affirmative vote of the holders of a majority of the Common
Stock and the Non-Voting Common Stock, each voting separately
as a class, effect any stock split, reclassification,
reorganization, recapitalization, combination or subdivision
of Common Stock or Non-Voting Common Stock, unless the
Corporation shall also contemporaneously effect a stock split,
stock dividend, reclassification, reorganization combination
on subdivision on the same terms with respect to the other
class. The Corporation will not, by amendment of its Restated
Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, share exchange,
dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed
hereunder by the Corporation, including without limitation the
adjustments required under this Section 3(d)(iii) of Article
IV, and will at all times in good faith assist in the carrying
out of all the provisions of this Section 3(d)(iii) of Article
IV, and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights of
the holders of Non-Voting Common Stock against dilution or
other impairment.
(iv) The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on
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conversion of shares of Non-Voting Common Stock pursuant
hereto; provided, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer
requested by any holder in connection with any such
conversion.
(v) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock, free of preemptive rights, solely for the purpose of
effecting the conversion of the shares of Non-Voting Common
Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of
all outstanding shares of Non-Voting Common Stock into Common
Stock; and if at any time the number of authorized but
unissued shares of each class shall not be sufficient to
effect the conversion of all then outstanding shares of the
other class, the Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in
reasonable best efforts to obtain the requisite stockholder
approval of any necessary amendment to this Restated
Certificate of Incorporation.
(vi) In the event of a merger or consolidation of the
Corporation with or into another entity (whether or not the
Corporation is the survey entity), the holders of the
Non-Voting Common Stock shall be entitled to receive the same
per share consideration as the per share consideration, if
any, received by any holder of the Common Stock in such merger
on consolidation; provided, however, that if the per share
consideration consists of voting capital stock, proper
provision shall be made so that the holders of the Non-Voting
Common Stock shall receive non-voting capital stock
convertible into that voting capital stock in the same manner
and with the stock provisions as set forth in this Section 3
of Article IV.
Section 4. Record Holders. The Corporation shall be entitled to treat
the person in whose name any share of its stock is registered in the records of
the Corporation, or with any agent of the Corporation employed as the stock
transfer agent of the Corporation, as the owner thereof for all purposes, and
the Corporation shall not be bound to recognize any equitable or other claim
to, or interest in, such share on the part of any other person or entity,
whether or not the Corporation shall have notice of such claim, except as
expressly provided by applicable law.
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ARTICLE V
Section 1. Annual Meetings of Stockholders. The annual meetings of
stockholders of the Corporation (each a "Stockholder" and collectively,
"Stockholders") shall be held on such date and at such place and time as may be
fixed by resolution of the Board of Directors.
Section 2. Calling of Special Meetings of Stockholders. Subject to the
rights of the holders of any series of Preferred Stock and to the requirements
of applicable law, special meetings of Stockholders may be called only by
either (a) the Chairman of the Board of Directors, or (b) by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
Directors which the Corporation would have if there were no vacancies (the
"Whole Board").
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 2 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the then outstanding shares of the
Corporation's stock entitled to vote generally in the election of Directors
("Voting Stock"), voting together as a single class.
Section 3. Chairman of Stockholder Meetings. Each annual and special
meeting of Stockholders shall be presided over by a Chairman, who shall have
the exclusive authority to, among other things, determine (a) whether business
and nominations have been properly brought before such meetings, (b) the order
in which business and nominations properly brought before such meeting shall be
considered, and (c) whether or not a quorum is present, shall have the power to
adjourn such meeting from time to time, without any notice other than
announcement at the meeting of the time and place of the holding of the
adjourned meeting. The Chairman of each annual and special meeting shall be the
Chairman of the Board of Directors, or such person as shall be appointed by the
resolution approved by the majority of the Whole Board. If a meeting is
adjourned for more than thirty (30) days, or if after an adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at such
meeting. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally called.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 3 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the outstanding shares of Voting
Stock, voting together as a single class.
Section 4. Election of Directors.
(a) Method of Election. Election of Directors at all meetings
of the Stockholders at which Directors are to be elected need not be
by written ballot and instead may be made by voice vote.
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<PAGE> 7
(b) Required Vote. At all meetings of Stockholders at which
Directors are to be elected, a plurality of the combined voting power
of the then outstanding shares of Voting Stock cast thereat shall
elect Directors. Each share of Common Stock shall be entitled to one
vote, in person or by proxy. Each share of any series of Preferred
Stock shall be entitled to that number of votes as designated by the
Board of Directors (or a committee thereof) in the resolution
establishing such issuance or series. Cumulative voting for the
election of Directors is expressly not permitted.
Section 5. Matters Other Than the Election of Directors.
(a) Method of Voting. Unless and except to the extent that
the By-Laws of the Corporation shall so require, all voting by
Stockholders, except the election of Directors of the Corporation,
need not be by written ballot and instead may be made by voice vote.
(b) Required Vote. Subject to the rights of holders of any
series of Preferred Stock, and except as otherwise provided by law,
applicable stock exchange rules or this Restated Certificate of
Incorporation, in all matters other than the election of Directors,
the affirmative vote of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote on the matter
shall be the act of the Stockholders.
Section 6. Inspectors of Elections; Opening and Closing the Polls. To
the extent required by applicable law, the Board of Directors by resolution
shall appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives, to act at the
meetings of Stockholders and make a written report thereof. One or more persons
may be designated as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate has been appointed to act or is able to act
at a meeting of Stockholders, the Chairman of the meeting shall appoint one or
more inspectors to act at the meeting. Each inspector, before discharging his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the Stockholders will vote at a meeting.
Section 7. Stockholder Inspection of Corporate Records. Except as
otherwise provided by applicable law, the Board of Directors shall have the
power to determine from time to time whether and, if allowed, under what
conditions, circumstances and regulations the books and records of the
Corporation shall be open to inspection by the Stockholders, and the
Stockholders' ability to inspect any of the books and records or any other
document of the Corporation are and shall be restricted or limited according to
the determination of the Board of Directors.
Section 8. Written Consent. Subject to the rules and regulations of
the New York Stock Exchange, or any other exchange on which the Corporation's
securities are listed, and until the date on which Richard D. Kinder, William
V. Morgan and their affiliates no longer own a majority of the combined voting
power of the then outstanding shares of Voting Stock, any action permitted or
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<PAGE> 8
required by law, this Restated Certificate of Incorporation or the Bylaws of
the Corporation to be taken at a special meeting of stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding Voting Stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the state
of incorporation, its principal place of business, or an officer or agent of
the Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Subject to the above provisions of this Section 8 of Article V and the
rights of the holders of any series of Preferred Stock, any action otherwise
required or permitted to be taken by the Stockholders must be effected at a
duly called annual or special meeting of Stockholders and may not be effected
without such a meeting by any consent in writing by such holders.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 8 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the then outstanding shares of
Voting Stock, voting together as a single class.
ARTICLE VI
Section 1. Corporate Governance. Subject to Article IX hereof, the
business and affairs of the Corporation shall be managed by or under the
direction of its Board of Directors. Only the directors shall have the power to
elect or appoint the officers of the Corporation; no officer may be elected or
appointed by the stockholders of the Corporation.
Section 2. Number. Subject to the rights of the holders of any series
of Preferred Stock, the number of Directors constituting the Whole Board shall
not be less than one. Subject to the rights of the holders of any series of
Preferred Stock, the number of Directors shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Whole Board.
Section 3. Qualifications.
(a) Age. No person shall be nominated for election, nor
elected, as a Director of the Corporation if such person (i) has
attained the age of 80 as of such nomination or election, or (ii) will
attain the age of 80 prior to the expiration of the term of office
such person is being nominated or elected for.
(b) Convictions. No person may be a Director of the
Corporation after conviction of any offense under applicable law
punishable by a term of imprisonment exceeding one year or by death
during the period after such conviction that such person in connection
with
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such conviction is incarcerated, on parole, subject to court order or
supervision, or subject to supervision of any agency of a state or the
federal government.
Section 4. Tenure. The Directors, other than those who may be elected
by the holders of any series of Preferred Stock pursuant to the applicable
Certificate of Designations, shall be divided, with respect to the time for
which they severally hold office, into three classes. The initial Class I
Directors shall serve for a term expiring at the first annual meeting of
Stockholders following the filing of this Restated Certificate of
Incorporation; the initial Class II Directors shall serve for a term expiring
at the second annual meeting of Stockholders following the filing of this
Restated Certificate of Incorporation; and the initial Class III Directors
shall serve for a term expiring at the third annual meeting of Stockholders
following the filing of this Restated Certificate of Incorporation. Each
Director shall hold office until his or her successor shall have been duly
elected and qualified. At each annual meeting of Stockholders, commencing with
the first annual meeting after the filing of this Restated Certificate of
Incorporation (i) Directors elected to succeed those Directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of Stockholders after their election, with each Director to hold
office until his or her successor shall have been duly elected and qualified,
and (ii) if authorized by a resolution of the Board of Directors, Directors may
be elected to fill any vacancy on the Board of Directors, regardless of how
such vacancy shall have been created.
Section 5. Vacancies. Subject to applicable law and the rights of the
holders of any series of Preferred Stock, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
and newly created directorships resulting from any increase in the authorized
number of Directors, shall be filled only by the affirmative vote of a majority
of the remaining Directors, even if less than a quorum of the Board of
Directors and not, unless so provided by a majority of the Whole Board, by
Stockholders, and Directors so chosen shall hold office for a term expiring at
the annual meeting of Stockholders at which the term of office of the class to
which they have been elected expires and until such Director's successor shall
have been duly elected and qualified. No decrease in the number of authorized
Directors constituting the Whole Board shall shorten the term of any incumbent
Director.
Section 6. Removal. Subject to the rights of the holders of any series
of Preferred Stock, any Director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least eighty (80) percent of the combined voting
power of the then outstanding shares of Voting Stock, voting together as a
single class.
Section 7. Rights of Classes Separately to Elect Directors.
Notwithstanding anything else contained in this Restated Certificate of
Incorporation, whenever holders of any one or more series of Preferred Stock
shall have the right, voting separately by class, classes or series, to elect
Directors at any annual or special meeting of Stockholders, the election, term
of office, filling of vacancies and other features of such directorships shall
be governed by the provisions of this Restated Certificate of Incorporation,
including any applicable resolutions of the Board of Directors adopted pursuant
to Article IV hereof. Directors so elected shall not be divided into classes
and shall be elected by such holders annually unless expressly provided
otherwise by those provisions or resolutions, and, during the prescribed terms
of office of those Directors, the Board of Directors shall
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consist of a number of Directors equal to the number of those Directors plus
the number of Directors determined as provided in Section 2 of Article VI.
Section 8. Amendment. Notwithstanding any other provisions of this
Restated Certificate of Incorporation, and notwithstanding that a lesser
percentage may be permitted from time to time by applicable law, no provision
of this Article VI may be altered, amended or repealed in any respect, nor may
any provision inconsistent therewith be adopted, unless such alteration,
amendment, repeal or adoption is approved by the affirmative vote of the
holders of at least eighty (80) percent of the combined voting power of the
then outstanding shares of Voting Stock, voting together as a single class.
ARTICLE VII
Section 1. Director Amendment of By-Laws. In furtherance and not in
limitation of the powers conferred by applicable law, the Board of Directors is
expressly authorized and empowered to make, alter, amend and repeal any or all
of the provisions of the By-Laws of the Corporation by a majority vote at any
regular or special meeting of the Board of Directors or by written consent.
Section 2. Stockholder Amendment of By-Laws. Stockholders may make,
alter, amend and repeal the By-Laws of the Corporation only by the affirmative
vote of the holders of at least eighty (80) percent of the combined voting
power of the then outstanding shares of Voting Stock, voting together as a
single class.
ARTICLE VIII
Section 1. Elimination of Certain Liability of Directors. A Director
of the Corporation shall not be personally liable to the Corporation or its
Stockholders for monetary damages for breach of fiduciary duty as a Director to
the fullest extent authorized by the DGCL, as the same exists or as may
hereafter be amended, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its Stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the DGCL is amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the DGCL, as so amended. No amendment, alteration or repeal
of, nor the adoption of any provision inconsistent with, any provision of this
Section 1 of Article VIII, which shall in any manner increase the actual or
potential liability of any Director of the Corporation, shall apply to or have
any effect on the liability or alleged liability of any such Director for or
with respect to actions or omissions of such Director occurring prior to such
amendment, alteration, repeal or adoption.
Section 2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the
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fact that he or she, or a person of whom he or she is the legal
representative, is or was a Director or officer of the Corporation or,
while a Director or officer of the Corporation, is or was serving at
the request of the Corporation as a Director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a Director, officer, employee or agent or
in any other capacity while serving as a Director, officer, employee
or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the DGCL, as the same exists or may
hereafter be amended, against all expense, liability and loss
(including attorneys' fees, judgments, fines, amounts paid or to be
paid in settlement, and excise taxes or penalties arising under the
Employee Retirement Income Security Act of 1974) reasonably incurred
or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a
Director or officer and shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify
any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the DGCL
requires, the payment of such expenses incurred by a Director or
officer in his or her capacity as a Director or officer (and not in
any other capacity in which service was or is rendered by such person
while a Director or officer, including, without limitation, service to
an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such Director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such
Director or officer is not entitled to be indemnified under this
Section or otherwise. The Corporation may, by action of the Board of
Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing
indemnification of Directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Corporation
within 30 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and,
if successful in whole or in part, the claimant shall be entitled to
be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the
DGCL for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its
directors, independent legal counsel, or its Stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Corporation (including its
directors, independent
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legal counsel, or its Stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable
standard of conduct. In addition, the claimant shall be presumed to
have met the applicable standard of conduct unless adjudicated
otherwise.
(c) Non-Exclusivity of Rights. The right to indemnification
and the payment of expenses incurred in defending a proceeding in
advance of its final disposition conferred in this Section shall not
be exclusive of any other right which any person may have or hereafter
acquire under any statute, provision of this Restated Certificate of
Incorporation, By-Laws, agreement, vote of Stockholders or
disinterested Directors of the Corporation or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability
or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under
the DGCL.
(e) Continuing Directors. All references in this Article VIII
to a Director shall also be deemed to refer to any such Director
acting in his or her capacity as Continuing Director, as defined in
Article IX.
Section 3. Amendment. No amendment, alteration or repeal of, nor the
adoption of any provision inconsistent with, any provisions of this Article
VIII, which shall in any manner increase the actual or potential liability of
any Corporate Affiliate or shall apply to or have any effect on the liability
or alleged liability of any such Corporate Affiliate for or with respect to
actions or omissions of such Corporate Affiliate occurring prior to such
amendment, alteration, repeal or adoption.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Article VIII may be
altered, amended or repealed in any respect, nor may any provision inconsistent
therewith be adopted, unless such alteration, amendment, repeal or adoption is
approved by the affirmative vote of the holders of at least eighty (80) percent
of the combined voting power of the then outstanding shares of Voting Stock,
voting together as a single class.
ARTICLE IX
The Board of Directors is expressly authorized to cause the
Corporation to issue rights pursuant to Section 157 of the DGCL and, in that
connection, to enter into any agreements necessary or convenient for such
issuance and to enter into other agreements necessary and convenient to the
conduct of the business of the Corporation. Any such agreement may include
provisions limiting, in certain circumstances, the ability of the Board of
Directors of the Corporation to redeem the securities issued pursuant thereto
or to take other action thereunder or in connection therewith unless there is a
specified number or percentage of Continuing Directors, as defined below, then
in office. Pursuant to Section 141(a) of the DGCL, the Continuing Directors
shall have the power and authority to make all decisions and determinations,
and to exercise or perform such other acts, that any such agreement provides
that such Continuing Directors shall make, exercise or perform. For
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purposes of this Article IX and any such agreement, the term "Continuing
Directors" shall mean (a) those Directors who were members of the Board of
Directors of the Corporation at the time the Corporation entered into such
agreement and any Director who subsequently becomes a member of the Board of
Directors, if such Director's nomination for election to the Board of Directors
is recommended or approved by the majority vote of the Continuing Directors
then in office, or (2) such members of the Board of Directors designated in, or
in the manner provided in, such agreement as Continuing Directors.
ARTICLE X
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Restated
Certificate of Incorporation, and any other provisions authorized by the laws
of the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by applicable law; and all rights,
preferences and privileges of whatsoever nature conferred upon Stockholders,
Directors or any other persons whomsoever by and pursuant to this Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article X.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by Richard D. Kinder, its Chairman
and Chief Executive Officer, on this ___ day of ____________, 1999.
By:
--------------------------------------
Richard D. Kinder
Chairman and Chief Executive Officer
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EXHIBIT 3.2
RESTATED BYLAWS
OF
KINDER MORGAN, INC.
_________, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
Offices
Section 1.1. Registered Office......................................................................1
Section 1.2. Other Offices..........................................................................1
ARTICLE 2
Stockholders
Section 2.1. Reference to Charter...................................................................1
Section 2.2. Place of Meetings......................................................................1
Section 2.3. Quorum; Adjournment of Meetings.......................................................1
Section 2.4. Record Date............................................................................2
Section 2.5. Notice of Stockholder Business and Nominations.........................................2
Section 2.6. Stockholder List.......................................................................5
Section 2.7. Proxies................................................................................6
ARTICLE 3
Board of Directors
Section 3.1. Reference to Charter...................................................................6
Section 3.2. Quorum; Voting; Other..................................................................6
Section 3.3. Place of Meetings; Order of Business...................................................6
Section 3.4. First Meeting..........................................................................7
Section 3.5. Regular Meetings.......................................................................7
Section 3.6. Special Meetings.......................................................................7
Section 3.7. Compensation...........................................................................7
Section 3.8. Action Without a Meeting; Telephone Conference Meeting.................................7
ARTICLE 4
Committees
Section 4.1. Designation; Powers....................................................................8
Section 4.2. Procedure; Meetings; Quorum............................................................8
Section 4.3. Removal of Members; Vacancies..........................................................8
ARTICLE 5
Officers
Section 5.1. Number, Titles and Term of Office......................................................8
Section 5.2. Powers and Duties of the Chairman of the Board.........................................9
Section 5.3. Powers and Duties of the President.....................................................9
Section 5.4. Vice Presidents........................................................................9
Section 5.5. Secretary..............................................................................9
Section 5.6. Assistant Secretaries..................................................................9
Section 5.7. Treasurer.............................................................................10
Section 5.8. Assistant Treasurers..................................................................10
Section 5.9. Action with Respect to Securities of Other Corporations...............................10
Section 5.10. Delegation............................................................................10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 6
Capital Stock
Section 6.1. Certificates of Stock.................................................................10
Section 6.2. Transfer of Shares....................................................................11
Section 6.3. Ownership of Shares...................................................................11
Section 6.4. Regulations Regarding Certificates....................................................11
Section 6.5. Lost or Destroyed Certificates........................................................11
ARTICLE 7
Miscellaneous Provisions
Section 7.1. Fiscal Year...........................................................................11
Section 7.2. Corporate Seal........................................................................11
Section 7.3. Notice and Waiver of Notice...........................................................12
Section 7.4. Facsimile Signatures..................................................................12
Section 7.5. Reliance upon Books, Reports and Records..............................................12
Section 7.6. Application of Bylaws.................................................................12
ARTICLE 8
Indemnification of Officers and Directors...................................12
ARTICLE 9
Amendments...................................................13
</TABLE>
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<PAGE> 4
RESTATED BYLAWS
OF
KINDER MORGAN, INC.
ARTICLE 1
OFFICES
Section 1.1. Registered Office. The registered office of the
Corporation required by the State of Delaware to be maintained in the State of
Delaware shall be the registered office named in the Corporation's Restated
Certificate of Incorporation as filed with the Delaware Secretary of State on
_______________, 1999, as amended if amended (the "Charter"), or such other
office as may be designated from time to time by the Board of Directors in the
manner provided by law.
Section 1.2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE 2
STOCKHOLDERS
Section 2.1. Reference to Charter. Article V of the Charter sets forth
certain provisions relating to the calling and holding of annual and special
meetings of stockholders, the presiding officer at meetings of stockholders,
the votes required for the election of directors and the taking of other action
at meetings of stockholders, procedures for stockholder initiatives,
stockholder rights to inspect corporate records, the prohibition on the use of
stockholder consents following the consummation of the Corporation's initial
underwritten public offering and certain other matters.
Section 2.2. Place of Meetings. All meetings of the stockholders shall
be held at the principal office of the Corporation, or at such other place
within or without the state of incorporation of the Corporation as shall be
specified or fixed in the notices or waivers of notice thereof.
Section 2.3. Quorum; Adjournment of Meetings. Unless otherwise
required by law or provided in the Charter or these Bylaws, (i) the holders of
a majority of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at any
meeting of stockholders for the transaction of business, (ii) in all matters
other than election of directors, the affirmative vote of the holders of a
majority of such stock so present or represented by proxy and entitled to vote
on such matter at any meeting of stockholders at which a quorum is present
shall constitute the act of the stockholders, and (iii) where a separate vote
by a class, classes or series is required, a majority of the outstanding shares
of such class, classes or series, present in person or represented by proxy and
entitled to vote on such matter shall constitute a quorum entitled to take
action with respect to that vote on that matter and the affirmative vote of the
majority of the shares of such class, classes or series present in person or
represented by proxy
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and entitled to vote on such matter at the meeting shall be the act of such
class, classes or series. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, subject to the
provisions of clauses (ii) and (iii) above.
Section 2.4. Record Date. For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors of the Corporation may fix a
date as the record date for any such determination of stockholders, which
record date shall not precede the date on which the resolutions fixing the
record date are adopted and which record date shall not be more than 60 days
nor less than ten days before the date of such meeting of stockholders, nor
more than 60 days prior to any other action to which such record date relates.
If the Board of Directors does not fix a record date for any meeting
of the stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on the
day next preceding the day on which notice is given, or, if in accordance with
Article 7, Section 7.3 of these Bylaws notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
If allowed pursuant to the Charter, for the purpose of determining the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. If the Board of Directors does not fix the
record date, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation at its registered office in the state of
incorporation of the Corporation or at its principal place of business. If the
Board of Directors does not fix the record date, and prior action by the Board
of Directors is necessary, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
Section 2.5. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by
the Stockholders may be made at an annual
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meeting of Stockholders (A) pursuant to the Corporation's
notice of meeting, (B) by or at the direction of the Board
of Directors or (C) by any Stockholder who was a Stockholder
of record at the time of giving of notice provided for in
this Section, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this
Section .
(ii) For nominations or other business to be properly
brought before an annual meeting by a Stockholder pursuant
to Section 2.5(a)(i)(C) of these Bylaws, the Stockholder
must have given timely notice thereof in writing to the
Secretary of the Corporation, (B) such other business must
otherwise be a proper matter for Stockholder action under
the General Corporation Law of the State of Delaware, and
(C) if the stockholder, or the beneficial owner on whose
behalf any such proposal or nomination is made, has provided
the Company with a Solicitation Notice, as that term is
defined in Section 2.5(a)(iii)(C) below, such stockholder or
beneficial owner must either (y) in the case of a proposal,
have delivered a proxy statement and form of proxy to
holders of at least the percentage of the Voting Stock
required under applicable law to carry any such proposal or,
in the case of a nomination or nominations, have delivered a
proxy statement and form of proxy to holders of a percentage
of the Voting Stock reasonably believed by such stockholder
or beneficial holder to be sufficient to elect such nominee
or nominees proposed to nominated by such stockholder or
beneficial owner, and must, in either case, have included in
such materials the Solicitation Notice, or (z) if no
Solicitation Notice relating thereto has been timely
provided pursuant to this Section, the stockholder or
beneficial owner proposing such business or nomination must
not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under
this Section.
(iii) To be timely, a Stockholder's notice shall be
delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of
business on the 45th day nor earlier than the close of
business on the 75th day prior to the first anniversary (the
"Anniversary") of the date on which the Corporation first
mailed its proxy materials for the preceding year's annual
meeting of stockholders; provided, however, that in the
event that the date of the annual meeting is more than 30
days before or more than 60 days after the anniversary of
the preceding year's annual meeting, notice by the
Stockholder to be timely must be so delivered not later than
the close of business on the later of (A) the 90th day prior
to such annual meeting, or (B) the close of business on the
tenth day following the day on which public announcement of
the date of such meeting is first made by the Corporation.
In no event shall the public announcement of an adjournment
of an annual meeting commence a new time period for the
giving of a Stockholder's notice as described above. Such
Stockholder's notice shall set forth:
(A) as to each person whom the Stockholder
proposes to nominate for election or reelection as a
Director all information relating to such person that is
required to be disclosed in solicitations of proxies for
election of Directors in an election contest, or is
otherwise required, in each case
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pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and Rule
14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a
nominee and to serving as a Director if elected);
(B) as to any other business that the Stockholder
proposes to bring before the meeting, a brief
description of the business desired to be brought before
the meeting, the reasons for conducting such business at
the meeting and any material interest in such business
of such Stockholder and the beneficial owner, if any, on
whose behalf the proposal is made; and
(C) as to the Stockholder giving the notice and
the beneficial owner, if any, on whose behalf the
nomination or proposal is made (1) the name and address
of such Stockholder, as they appear on the Corporation's
books, and of such beneficial owner, (2) the class and
number of shares of the Corporation which are owned
beneficially and of record by such Shareholder and such
beneficial owner,(3) whether the proponent intends (or
is part of a group which intends) to solicit proxies
from other stockholders in support of such nomination or
proposal, and (4) whether the proponent intends (or is
part of a group which intends) to deliver a proxy
statement and form of proxy to holders of, in the case
of a proposal, at least the percentage of the Voting
Stock required under applicable law to carry the
proposal or, in the case of a nomination or nominations,
a sufficient number of holders of the Voting Stock to
elect such nominee or nominees (an affirmative statement
of such intent, a "Solicitation Notice").
(iv) Notwithstanding anything in the Section 2.5(a)(iii)
of these Bylaws to the contrary, in the event that the number of
Directors to be elected to the Board of Directors is increased
and there is no public announcement by the Corporation naming all
of the nominees for Director or specifying the size of the
increased Board of Directors at least 55 days prior to the
Anniversary, a Stockholder's notice required by this Section
shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it
shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business
on the tenth day following the day on which such public
announcement is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of Stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of
meeting. Nominations of persons for election to the Board of Directors
may be made at a special meeting of Stockholders at which Directors are
to be elected pursuant to the Corporation's notice of meeting (a) by or
at the direction of the Board of Directors or (b) provided that the
Board of Directors has determined that Directors shall be elected at
such meeting, by any Stockholder who is a Stockholder of record at the
time of giving of notice provided for in this Section 2.5, who shall be
entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 2.5. In the
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event the Corporation calls a special meeting of Stockholders for the
purpose of electing one or more Directors to the Board of Directors,
any such Stockholder may nominate a person or persons (as the case may
be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the Stockholder's notice required by Section
2.5(a)(ii) of this Article V shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the
close of business on the later of the 90th day prior to such special
meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees
proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special
meeting commence a new time period for the giving of a Stockholder's
notice as described above.
(c) General.
(i) Only such persons who are nominated in accordance
with the procedures set forth in this Section 2.5 shall be
eligible to serve as Directors and only such business shall
be conducted at a meeting of Stockholders as shall have been
brought before the meeting in accordance with the procedures
set forth in this Section 2.5. Except as otherwise provided
by applicable law, the Chairman of the meeting shall have the
power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made
or proposed, as the case may be, in accordance with the
procedures set forth in this Section 2.5 and, if any proposed
nomination or business is not in compliance with this Section
2.5, to declare that such defective proposal or nomination
shall be disregarded.
(ii) For purposes of this Section 2.5, "public
announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
(iii) Notwithstanding the foregoing provisions of this
Section 2.5, a Stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth
in this Section 2.5. Nothing in this Section 2.5 shall be
deemed to affect any rights:
(A) of Stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant
to Rule 14a-8 under the Exchange Act; or
(B) of the holders of any series of Preferred Stock
to elect Directors under circumstances specified in a
Certificate of Designations relating to any series of
Preferred Stock.
Section 2.6. Stockholder List. A complete list of stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical order
for each class of stock and showing the
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address of each such stockholder and the number of shares registered in the
name of such stockholder, shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The stockholder list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by
any stockholder who is present.
Section 2.7. Proxies. Each stockholder entitled to vote at a meeting
of stockholders may authorize another person or persons to act for him, her or
it by proxy. All proxies shall be received and taken charge of and all ballots
shall be received and canvassed by the secretary of the meeting, who shall
decide all questions touching upon the qualification of voters, the validity of
the proxies, and the acceptance or rejection of votes, unless an inspector or
inspectors shall have been appointed, in which event such inspector or
inspectors shall decide all such questions.
No proxy shall be valid after three years from its date, unless the
proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or,
if an even number attend and a majority do not agree on any particular issue,
each proxy so attending shall be entitled to exercise such powers in respect of
such portion of the shares as is equal to the reciprocal of the fraction equal
to the number of proxies representing such shares divided by the total number
of shares represented by such proxies.
ARTICLE 3
BOARD OF DIRECTORS
Section 3.1. Reference to Charter. Article VI of the Charter sets
forth certain provisions relating to the Board of Directors of the Corporation,
including the power, number, qualifications, tenure and removal of directors,
the filling of vacancies on the Board of Directors, the creation of committees
of directors and certain other matters.
Section 3.2. Quorum; Voting; Other. A majority of the number of
directors fixed in accordance with the Charter shall constitute a quorum for
the transaction of business of the Board of Directors, and the vote of a
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors. Directors need not be stockholders
nor residents of the State of Delaware.
Section 3.3. Place of Meetings; Order of Business. The directors may
hold their meetings and may have an office and keep the books of the
Corporation, except as otherwise provided by law, in such place or places,
within or without the State of Delaware, as the Board of Directors may from
time to time determine. At all meetings of the Board of Directors business
shall be transacted in
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such order as shall from time to time be determined by the Chairman of the
Board, or in the Chairman of the Board's absence by the President or by the
Board of Directors.
Section 3.4. First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
the annual meeting of the stockholders. Notice of such meeting shall not be
required. At the first meeting of the Board of Directors in each year at which
a quorum shall be present, held after the annual meeting of stockholders, the
Board of Directors shall elect the officers of the Corporation.
Section 3.5. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as shall be designated from
time to time by the Chairman of the Board, or in the Chairman of the Board's
absence, by the President, or in the President's absence, by another officer of
the Corporation. Notice of such regular meetings shall not be required.
Section 3.6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, or in the Chairman of the
Board's absence by the President, or, on the written request of a majority of
the Whole Board, by the Secretary, in each case on at least twenty-four (24)
hours personal, written, telegraphic, cable or wireless notice to each
director. Such notice, or any waiver thereof pursuant to Article 7, Section 7.3
hereof, need not state the purpose or purposes of such meeting, except as may
otherwise be required by law or provided for in the Charter or these Bylaws.
Meetings may be held at any time without notice if all the directors are
present (except where a director is present for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because such meeting is not lawfully called or convened) or if those not
present waive notice of the meeting in writing.
Section 3.7. Compensation. Directors and members of standing
committees may receive such compensation as the Board of Directors from time to
time shall determine to be appropriate, and shall be reimbursed for all
reasonable expenses incurred in attending and returning from meetings of the
Board of Directors.
Section 3.8. Action Without a Meeting; Telephone Conference Meeting.
Any action required or permitted to be taken at any meeting of the Board of
Directors or any committee designated by the Board of Directors may be taken
without a meeting if all members of the Board of Directors or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or committee. Such
consent shall have the same force and effect as a unanimous vote at a meeting,
and may be stated as such in any document or instrument filed with the
Secretary of State of the State of Delaware.
Subject to the requirement for notice of meetings, members of the
Board of Directors, or members of any committee designated by the Board of
Directors, may participate in a meeting of such Board of Directors or
committee, as the case may be, by means of a conference telephone connection or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of
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objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
ARTICLE 4
COMMITTEES
Section 4.1. Designation; Powers. The Board of Directors may designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members present at
any meeting and not disqualified from voting, whether or not such member or
members constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the General Corporation Law of the State
of Delaware to be submitted to stockholders for approval or (ii) adopting,
amending or repealing any provision of these Bylaws.
Section 4.2. Procedure; Meetings; Quorum. Any committee designated
pursuant to this Article 4 shall keep regular minutes of its actions and
proceedings in a book provided for that purpose and report the same to the
Board of Directors at its meeting next succeeding such action, shall fix its
own rules or procedures, and shall meet at such times and at such place or
places as may be provided by such rules, or by such committee or the Board of
Directors. Should a committee fail to fix its own rules, the provisions of
these Bylaws, pertaining to the calling of meetings and conduct of business by
the Board of Directors, shall apply as nearly as may be practicable. At every
meeting of any such committee, the presence of a majority of all the members
thereof shall constitute a quorum, and the affirmative vote of a majority of
the members present shall be necessary for the adoption by it of any
resolution.
Section 4.3. Removal of Members; Vacancies. The Board of Directors
shall have the power at any time to remove any member(s) of a committee and to
appoint other directors in lieu of the person(s) so removed and shall also have
the power to fill vacancies in a committee.
ARTICLE 5
OFFICERS
Section 5.1. Number, Titles and Term of Office. The officers of the
Corporation shall be a Chairman of the Board, President, one or more Vice
Presidents (any one or more of whom may be designated Executive Vice President
or Senior Vice President), a Treasurer, a Secretary, and such other officers as
the Board of Directors, as allowed by the Charter, may from time to time elect
or appoint (including, but not limited to, a Vice-Chairman of the Board, one or
more Assistant Secretaries and one or more Assistant Treasurers). Each officer
shall hold office until such officer's
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successor shall be duly elected and shall qualify or until such officer's death
or until such officer shall resign or shall have been removed. Any number of
offices may be held by the same person, unless the Charter provides otherwise.
Except for the Chairman of the Board and the Vice Chairman of the Board, if
any, no officer need be a director.
Section 5.2. Powers and Duties of the Chairman of the Board. The
Chairman of the Board shall be the chief executive officer of the Corporation.
Subject to the control of the Board of Directors and the Executive Committee of
the Board of Directors (if any), the Chairman of the Board shall have general
executive charge, management and control of the properties, business and
operations of the Corporation with all such powers as may be reasonably
incident to such responsibilities; may agree upon and execute all leases,
contracts, evidences of indebtedness and other obligations in the name of the
Corporation and may sign all certificates for shares of capital stock of the
Corporation; and shall have such other powers and duties as designated in
accordance with these Bylaws and as from time to time may be assigned to the
Chairman of the Board by the Board of Directors. The Chairman of the Board
shall preside at all meetings of the stockholders and of the Board of
Directors.
Section 5.3. Powers and Duties of the President. Unless the Board of
Directors otherwise determines, the President shall have the authority to agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation; and the President shall have such
other powers and duties as designated in accordance with these Bylaws and as
from time to time may be assigned to the President by the Board of Directors or
the Chairman of the Board.
Section 5.4. Vice Presidents. Each Vice President shall at all times
possess power to sign all certificates, contracts and other instruments of the
Corporation, except as otherwise limited in writing by the Chairman of the
Board or the President of the Corporation. Each Vice President shall have such
other powers and duties as from time to time may be assigned to such Vice
President by the Board of Directors, the Chairman of the Board or the
President.
Section 5.5. Secretary. The Secretary shall keep the minutes of all
meetings of the Board of Directors, committees of the Board of Directors and
the stockholders, in books provided for that purpose; shall attend to the
giving and serving of all notices; may in the name of the Corporation affix the
seal of the Corporation to all contracts and attest the affixation of the seal
of the Corporation thereto; may sign with the other appointed officers all
certificates for shares of capital stock of the Corporation; shall have charge
of the certificate books, transfer books and stock ledgers, and such other
books and papers as the Board of Directors may direct, all of which shall at
all reasonable times be open to inspection of any director upon application at
the office of the Corporation during business hours; shall have such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to the Secretary by the Board of Directors, the Chairman of the Board
or the President; and shall in general perform all acts incident to the office
of Secretary, subject to the control of the Board of Directors, the Chairman of
the Board or the President.
Section 5.6. Assistant Secretaries. Each Assistant Secretary shall
have the usual powers and duties pertaining to such office, together with such
other powers and duties as designated in
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these Bylaws and as from time to time may be assigned to an Assistant Secretary
by the Board of Directors, the Chairman of the Board, the President or the
Secretary. The Assistant Secretaries shall exercise the powers of the Secretary
during that officer's absence or inability or refusal to act.
Section 5.7. Treasurer. The Treasurer shall have responsibility for
the custody and control of all the funds and securities of the Corporation, and
shall have such other powers and duties as designated in these Bylaws and as
from time to time may be assigned to the Treasurer by the Board of Directors,
the Chairman of the Board or the President. The Treasurer shall perform all
acts incident to the position of Treasurer, subject to the control of the Board
of Directors, the Chairman of the Board or the President; and the Treasurer
shall, if required by the Board of Directors, give such bond for the faithful
discharge of the Treasurer's duties in such form as the Board of Directors may
require.
Section 5.8. Assistant Treasurers. Each Assistant Treasurer shall have
the usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, or the Treasurer. The Assistant Treasurers shall
exercise the powers of the Treasurer during that officer's absence or inability
or refusal to act.
Section 5.9. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the Chairman of the Board
or the President, together with the Secretary or any Assistant Secretary shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of security holders of or with respect to any action
of security holders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
Section 5.10. Delegation. For any reason that the Board of Directors
may deem sufficient, the Board of Directors may, except where otherwise
provided by statute, delegate the powers or duties of any officer to any other
person, and may authorize any officer to delegate specified duties of such
office to any other person. Any such delegation or authorization by the Board
of Directors shall be effected from time to time by resolution of the Board of
Directors.
ARTICLE 6
CAPITAL STOCK
Section 6.1. Certificates of Stock. The certificates for shares of
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the Charter, as shall be approved by the Board of
Directors. Every holder of stock represented by certificates shall be entitled
to have a certificate signed by or in the name of the Corporation by the
Chairman of the Board, President or a Vice President and the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation representing the number of shares (and, if the stock of the
Corporation shall be divided into classes or series, certifying the class and
series of such shares) owned by such stockholder which are registered in
certified form; provided, however, that any of or all the signatures on the
certificate may be facsimile. The stock record books and the blank stock
certificate books shall be kept by the Secretary or at the office of such
transfer agent or transfer
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agents as the Board of Directors may from time to time determine. In case any
officer, transfer agent or registrar who shall have signed or whose facsimile
signature or signatures shall have been placed upon any such certificate or
certificates shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued by the Corporation, such certificate may
nevertheless be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue. The
stock certificates shall be consecutively numbered and shall be entered in the
books of the Corporation as they are issued and shall exhibit the holder's name
and number of shares.
Section 6.2. Transfer of Shares. The shares of stock of the
Corporation shall be transferable only on the books of the Corporation by the
holders thereof in person or by their duly authorized attorneys or legal
representatives upon surrender and cancellation of certificates for a like
number of shares. Upon surrender to the Corporation or a transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 6.3. Ownership of Shares. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Delaware.
Section 6.4. Regulations Regarding Certificates. The Board of
Directors shall have the power and authority to make all such rules and
regulations as they may deem expedient concerning the issue, transfer and
registration or the replacement of certificates for shares of capital stock of
the Corporation.
Section 6.5. Lost or Destroyed Certificates. The Board of Directors
may determine the conditions upon which the Corporation may issue a new
certificate of stock in place of a certificate theretofore issued by it which
is alleged to have been lost, stolen or destroyed and may require the owner of
such certificate or such owner's legal representative to give bond, with surety
sufficient to indemnify the Corporation and each transfer agent and registrar
against any and all losses or claims which may arise by reason of the alleged
loss, theft or destruction of any such certificate or the issuance of such new
certificate in the place of the one so lost, stolen or destroyed.
ARTICLE 7
MISCELLANEOUS PROVISIONS
Section 7.1. Fiscal Year. The fiscal year of the Corporation shall
begin on the first day of January of each year.
Section 7.2. Corporate Seal. The corporate seal shall be circular in
form and shall have inscribed thereon the name of the Corporation and the state
of its incorporation, which seal shall be in the charge of the Secretary and
shall be affixed to certificates of stock, debentures, bonds, and other
documents, in accordance with the direction of the Board of Directors or a
committee thereof,
-11-
<PAGE> 15
and as may be required by law; however, the Secretary may, if the Secretary
deems it expedient, have a facsimile of the corporate seal inscribed on any
such certificates of stock, debentures, bonds, contract or other documents.
Duplicates of the seal may be kept for use by any Assistant Secretary.
Section 7.3. Notice and Waiver of Notice. Whenever any notice is
required to be given by law, the Charter or under the provisions of these
Bylaws, said notice shall be deemed to be sufficient if given (i) by
telegraphic, cable or wireless transmission (including by telecopy or facsimile
transmission) or (ii) by mail, by deposit in the United States mail at a post
office box, or by overnight courier service, by delivery thereto, in either
case in a sealed prepaid wrapper addressed to the person entitled thereto at
such person's post office address, as it appears on the records of the
Corporation, and such notice shall be deemed to have been given on the day of
such transmission or mailing or delivery to courier, as the case may be.
Whenever notice is required to be given by law, the Charter or under
any of the provisions of these Bylaws, a written waiver thereof, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person, including without
limitation a director, at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the Charter or
these Bylaws.
Section 7.4. Facsimile Signatures. In addition to the provisions for
the use of facsimile signatures elsewhere specifically authorized in these
Bylaws, facsimile signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors.
Section 7.5. Reliance upon Books, Reports and Records. A member of the
Board of Directors, or a member of any committee designated by the Board of
Directors, shall, in the performance of such person's duties, be protected to
the fullest extent permitted by law in relying upon the records of the
Corporation and upon information, opinion, reports or statements presented to
the Corporation.
Section 7.6. Application of Bylaws. In the event that any provisions
of these Bylaws is or may be in conflict with any law of the United States, of
the State of Delaware or of any other governmental body or power having
jurisdiction over this Corporation, or over the subject matter to which such
provision of these Bylaws applies, or may apply, such provision of these Bylaws
shall be inoperative to the extent only that the operation thereof unavoidably
conflicts with such law, and shall in all other respects be in full force and
effect.
ARTICLE 8
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall provide indemnification and the advancement of
expenses to its officers and directors to the extent and upon the terms set
forth in Section 2 of Article VIII of the Charter.
-12-
<PAGE> 16
ARTICLE 9
AMENDMENTS
The Board of Directors and the stockholders of the Corporation shall
have the power to make, alter, amend and repeal any or all of the provisions of
these Bylaws to the extent and upon the terms set forth in Article VII of the
Charter.
-13-
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Subsidiary:
Kinder Morgan, G.P., Inc. a Delaware corporation.
Kinder Morgan G.P., Inc. is the general partner of the following entities:
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership;
Kinder Morgan Operating L.P. "A", a Delaware limited partnership;
Kinder Morgan Operating L.P. "B", a Delaware limited partnership;
Kinder Morgan Operating L.P. "C", a Delaware limited partnership; and
Kinder Morgan Operating L.P. "D", a Delaware limited partnership.
Subsidiaries of Kinder Morgan Energy Partners, L.P.:
Kinder Morgan Natural Gas Liquids Corporation, a Delaware corporation;
Kinder Morgan CO2, LLC, a Delaware limited liability company;
Mont Belvieu Associates, a Texas general partnership;
Heartland Partnership, a Texas general partnership;
SFPP L.P., a Delaware limited partnership;
Kinder Morgan Bulk Terminals Inc., a Louisiana corporation;
River Consulting, Inc., a Louisiana corporation; and
Western Plant Services, Inc., a California corporation.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated February 21,
1997 included in Kinder Morgan Energy Partners, L.P.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, and to all
references to our Firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
May 10, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated March 10, 1999, March 31, 1999 and May 10, 1999, relating to the
financial statements of Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc.
and Enron Liquids Pipeline Company, respectively, which appear in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Houston, Texas
May 10, 1999
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