UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File Number 1-11234
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0380342
----------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
1301 McKinney Street
Suite 3450
Houston, Texas 77010
- ----------------------------------- -------------------------------
(Address of principal (Zip Code)
executive offices)
(713) 844-9500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
The Registrant had 14,111,200 Common Units outstanding at November 14, 1997.
Page 1 of 21
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements (Unaudited)
Consolidated Statement of Income - Three Months
and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheet - September 30, 1997 and
December 31, 1996 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 1. - Legal Proceedings 20
ITEM 5. - Other Information 20
ITEM 6. - Exhibits and Reports on Form 8-K 20
Page 2 of 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
---------------------- -----------------------
Revenues
Trade $17,385 $14,422 $52,553 $47,521
---------- --------- ---------- ----------
17,385 14,422 52,553 47,521
---------- --------- ---------- ----------
Costs and Expenses
Cost of products sold 1,589 915 5,307 4,181
Operations and 3,726 4,822 10,803 13,678
maintenance
Fuel and power 1,030 938 3,756 3,134
Depreciation and 2,657 2,490 7,797 7,344
amortization
General and 2,310 2,432 6,564 6,803
administrative
Taxes other than income 758 877 2,284 2,449
taxes
---------- --------- ---------- ----------
12,070 12,474 36,511 37,589
---------- --------- ---------- ----------
Operating Income 5,315 1,948 16,042 9,932
Other Income (Expense)
Equity in earnings of 1,729 1,358 4,184 3,784
partnerships
Interest expense (3,052) (3,076) (9,566) (9,404)
Interest income and 142 2,496 398 3,110
other, net
Minority Interest (37) (24) (101) (66)
---------- --------- ---------- ----------
Income Before Income Taxes 4,097 2,702 10,957 7,356
Income Tax (Expense) (343) (356) (909) (847)
---------- --------- ---------- ----------
Net Income $3,754 $2,346 $10,048 $6,509
========== ========= ========== ==========
General Partner's interest
in Net Income 1,072 48 2,115 139
Limited Partners' interest
in Net Income 2,682 2,298 7,933 6,370
---------- --------- ---------- ----------
Net Income $3,754 $2,346 $10,048 $6,509
========== ========= ========== ==========
Allocation of Net Income
per Limited Partner Unit $0.20 $0.18 $0.60 $0.49
========== ========= ========== ==========
Number of Units used in 13,482 13,020 13,176 13,020
Computation
========== ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
(Unaudited)
September December
30, 31,
1997 1996
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $3,453 $14,299
Restricted cash 5,167 -
Accounts receivable
Trade 10,193 7,970
Related parties - 4,390
Inventories
Products 1,663 882
Materials and supplies 1,660 1,827
------------- -------------
22,136 29,368
------------- -------------
Property, Plant and Equipment, 298,664 272,178
at cost
Less accumulated depreciation 43,605 36,184
------------- -------------
255,059 235,994
------------- -------------
Investments in Partnerships 31,702 32,043
------------- -------------
Deferred Charges and Other 6,359 6,198
Assets
------------- -------------
TOTAL ASSETS $315,256 $303,603
============= =============
LIABILITIES AND PARTNERS'
CAPITAL
Current Liabilities
Accounts payable
Trade $3,109 $5,512
Related parties 243 4,520
Current portion of long-term 11,110 1,709
debt
Accrued liabilities 5,114 811
Accrued taxes 7,192 2,304
Distribution payable - 4,210
------------- -------------
26,768 19,066
------------- -------------
Long-term Liabilities and
Deferred Credits
Long-term debt 130,896 160,211
Other 5,178 3,492
------------- -------------
136,074 163,703
------------- -------------
Minority Interest 1,466 2,490
------------- -------------
Partners' Capital
Common units 148,404 117,165
General Partner 2,544 1,179
------------- -------------
150,948 118,344
------------- -------------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $315,256 $303,603
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
----------- ------------
Cash Flows From Operating
Activities
Reconciliation of net income to
net cash provided by operating
activities
Net Income $10,048 $6,509
Depreciation and amortization 7,797 7,344
Equity in earnings of (4,184) (3,784)
partnerships
Distributions from investments 6,425 5,206
in partnerships
Changes in components of working
capital
Accounts receivable 2,167 2,629
Inventories (614) 566
Accounts payable (6,680) 1,613
Accrued liabilities 4,303 53
Accrued taxes 4,888 (83)
Other, net 1,293 1,024
----------- -----------
Net Cash Provided by Operating 25,443 21,077
Activities
----------- -----------
Cash Flows From Investing
Activities
Acquisitions of assets (22,184) -
Additions to property, plant and (4,378) (8,022)
equipment
Sale of property, plant and 33 -
equipment
Contributions to partnership (1,900) (484)
investments
----------- -----------
Net Cash Used in Investing (28,429) (8,506)
Activities
----------- -----------
Cash Flows From Financing
Activities
Payment of debt (58,014) (1,296)
Issuance of debt 38,100 -
Increase in restricted cash (5,167) -
Net proceeds from issuance of 33,919 -
common units
Distributions to partners
Common units (14,712) (12,303)
General Partner (1,163) (201)
Minority interest (162) (126)
Other, net (661) -
----------- -----------
Net Cash Used in Financing (7,860) (13,926)
Activities
----------- -----------
(Decrease) in Cash and Cash (10,846) (1,355)
Equivalents
Cash and Cash Equivalents, 14,299 14,202
Beginning of Period
----------- -----------
Cash and Cash Equivalents, End of $3,453 $12,847
Period
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The unaudited consolidated financial statements included herein have been
prepared by Kinder Morgan Energy Partners, L.P. (the "Partnership") without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial results for
the interim periods. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Partnership believes, however, that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1996 ("Form 10-K").
Allocation of Net Income per Limited Partner Unit was computed by dividing
Limited Partners' interest in Net Income by the weighted average number of
Common Units outstanding during the period.
Certain reclassifications have been made to the consolidated financial
statements for the prior year to conform with the current presentation.
2. Litigation
On September 12, 1995, the State of Illinois filed suit against the General
Partner for events related to a fire that occurred in September, 1994 at the
North System's above-ground natural gasoline storage sphere at Morris, Illinois.
The suit seeks civil penalties in the stated amount of $50,000 each for three
counts of air and water pollution, plus $10,000 per day for any continuing
violation. The State also seeks an injunction against future similar events. On
August 29, 1996, the Illinois Attorney General's office proposed a settlement in
the form of a consent decree that would require the Partnership to implement
several fire protection recommendations, pay a $100,000 civil penalty, and pay a
$500 per day penalty if established deadlines for implementing the
recommendations are not met. The Partnership has made a settlement offer to the
State and settlement negotiations are ongoing. If attempts at settlement are
unsuccessful, the General Partner will vigorously defend itself and the
Partnership against the charges. Although no assurance can be given, the
Partnership believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position or results of operations.
On December 10, 1996, the U.S. Department of Transportation ("D.O.T.")
issued to the General Partner a notice of eight probable violations of federal
safety regulations in connection with the fire at the Morris storage field. The
D.O.T. proposed a civil penalty of $90,000. The General Partner has responded to
the notice, and believes that the alleged violations and proposed fine will not
have a material impact on the Partnership. It is expected that the Partnership
will reimburse the General Partner for any liability or expenses incurred by the
General Partner in connection with these legal proceedings.
Four purported class actions have been filed arising out of the proposed
acquisition (the "Transaction") by the Partnership of substantially all of the
assets of Santa Fe Pacific Pipelines, L.P. ("Santa Fe") See note 11). On October
23, 1997, shortly after the announcementof the Transaction, a purported Santa Fe
Common Unit holder class action was filed in the Court of Chancery of the State
of Delaware (Ruderman v. Santa Fe Pacific Pipeline Partners, L.P., C.A. No.
16002NC). Later on the same day another purported Santa Fe Common Unit holder
class action was filed in the Superior Court of the State of California, County
of Orange (Vogel v. Santa Fe Pacific Pipeline Partners, L.P., Case No. 785816).
On October 24, 1997, a second purported Santa Fe Common Unit holder class action
was filed in the Court of Chancery of the State of Delaware (Beck v. Santa Fe
Pacific Pipeline Partners, L.P., C.A. No. 16005). On November 6, 1997, a third
purported Santa Fe Common Unit holder class action was filed in the Court of
Chancery of the State of Delaware (Hocheiser v. Santa Fe Pacific Pipeline
Partners, L.P., C.A. No. 16023NC).
Page 6 of 21
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The actions name as defendants Santa Fe, Santa Fe Pacific Pipelines, Inc.,
the general partner of Santa Fe (the "SF General Partner"), and the individual
members of the SF General Partner Board of Directors. In addition, Vogel and
Ruderman name the Partnership as a defendant and Beck names the parent company
of the SF General Partner as a defendant. In general, the actions variously
allege that the individual defendants suffered from a conflict of interest in
the negotiation of the Transaction, that despite this conflict they did not
appoint or retain independent representation for the Santa Fe Common Unit
holders, and that this conflict resulted in an excessive payment to the SF
General Partner. The actions further allege that the defendants breached their
duties of loyalty and due care to the Santa Fe Common Unit holders and that the
defendants failed to fully inform themselves about the value of the Santa Fe
Common Units (including allegedly failing to obtain valid appraisals of the
value of the SF General Partner's interests in Santa Fe, failing to conduct an
auction process or active market check, and failing to examine the fairness of
the Transaction). Beck and Vogel allege that the terms of the Transaction are
intrinsically unfair and inadequate from the Santa Fe Common Unit holders'
perspective. Ruderman alleges that the payment to the SF General Partner
"constitutes an unlawful payoff, kickback, or conversion of Partnership assets."
Vogel alleges that the defendants allowed the price of the Santa Fe Common Units
to be capped, depriving plaintiffs of the opportunity to realize an increase in
the value of the Santa Fe Common Units. Beck alleges that the defendants
intended to take advantage of the disparity between the knowledge and
information possessed by the defendants compared to the class by inducing the
Santa Fe Common Unit holders to approve the Transaction based on incomplete or
inadequate information.
The actions seek certification of a class action on behalf of the Santa Fe
Common Unit holders. The actions seek preliminary and permanent injunctions of
the Transaction, rescission of the transaction if it is consummated, an award of
rescissory damages and other damages including attorneys' fees, an accounting by
defendants of any special benefits obtained from the Transaction, imposition of
a constructive trust for any consideration received by the defendants, and any
other relief the court finds appropriate.
The Partnership believes that all of these lawsuits are without merit and
intend to oppose them vigorously.
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3. Cash and Cash Equivalents - Restricted
A financing agreement requires the Partnership to continuously maintain in
cash and cash equivalents an amount equal to a stated percentage of principal
due, if any, within the succeeding nine months and a stated percentage of
interest due, if any, within the succeeding three months. This amount is shown
on the September 30, 1997 balance sheet as Cash and cash equivalents -
restricted. No such amount existed at December 31, 1996.
4. 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 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 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.
5. Distributions
On August 15, 1997, the Partnership paid a cash distribution for the
quarterly period ended June 30, 1997, of $0.50 per Unit. The distribution was
declared on July 16, 1997, payable to unitholders of record as of July 31, 1997.
On October 15, 1997, the Partnership declared a cash distribution for the
quarterly period ended September 30, 1997, of $0.50 per Unit. The distribution
will be paid on November 14, 1997, to unitholders of record as of October 31,
1997.
6. Investment in Mont Belvieu Associates
Summarized income statement information for the Partnership's investment in
Mont Belvieu Associates, of which it holds a 50% interest, is presented below
(in thousands):
Three Months Nine Months
Ended September Ended
30, September 30,
1997 1996 1997 1996
---------------------- ------------------
Income Statement
Revenues $8,530 $7,291 $25,824 $19,667
Expenses $5,343 $4,385 $17,357 $12,034
Net Income $3,187 $2,906 $8,467 $7,633
Page 8 of 21
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7. Partners' Capital
At December 31, 1996, Partners' capital consisted of 11,300,000 Common
Units held by third parties and 1,720,000 units held by the General Partner.
Together, these 13,020,000 units represented the limited partners' interest and
a 98% economic interest in the Partnership. The general partner interest
represents a 2% economic interest in the Partnership, as defined in the
Partnership Agreement. On February 14, 1997, the limited partner interests held
by the General Partner were converted to Common Units. Also, on February 14,
1997, 858,000 of these Units were sold by the General Partner to a third party.
The General Partner retained the remaining 862,000 Units. Since the Units owned
by the General Partner are now Common Units, they are no longer separately
disclosed.
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 each of the first three quarters of 1996 and the first
quarter of 1997, the Partnership's cash distribution of $0.315 per Unit required
an incentive distribution of $25,143 to the General Partner. The Partnership's
cash distribution of $0.50 per Unit for the second quarter of 1997 required an
incentive distribution of $964,600 to the General Partner. The Partnership's
declaration of a $0.50 per Unit cash distribution for the third quarter of 1997
will result in an incentive distribution of $1,045,442 to the General Partner.
The increased incentive distribution for the third quarter of 1997 reflects the
issuance of additional Common Units. In the third quarter, the Partnership
issued 1,091,200 Common Units and received net proceeds of $33.9 million.
8. Related Party Transactions
The General Partner employs all employees of the Partnership and provides
the Partnership with general and administrative services. The General Partner is
entitled to reimbursement of all direct and indirect costs related to the
business activities of the Partnership. The General Partner has no related
commercial transactions with the Partnership; therefore, the Partnership's
reimbursements to the General Partner are not considered related party
transactions.
9. Significant Events - Coal Transfer, Storage, and
Services
In April, 1997, the Partnership formed a new business unit under the
operation of Kinder Morgan Operating L.P. "B" ("OLP-B"). The business unit, Red
Lightning Energy Services, markets coal and provides coal blending and storage
services.
Page 9 of 21
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10. Acquisitions
In September, 1997, the Partnership formed a third operating partnership,
Kinder Morgan Operating L.P. "C" ("OLP-C"). OLP-C received capital contributions
in the amount of $17.05 million and $.17 million from the Partnership and the
General Partner, respectively. In exchange for their individual contributions,
the Partnership received a 98.9899% limited partner ownership interest in OLP-C,
and the General Partner received a 1.0101% general partner ownership interest.
On September 4, 1997, OLP-C announced the completion of its purchase, for
approximately $17 million, of all of the outstanding capital stock of BRT
Transfer Terminal, Inc. ("BRT") from Vulcan Materials Company. BRT operated a
coal loading and storage terminal in southwest Kentucky, on the Tennessee River
near the Kentucky Lake Dam. Following the acquisition, the acquired corporate
entity was liquidated and the assets were distributed to OLP-C. The terminal
conducts business as Grand Rivers Terminal ("GRT"). The Partnership has
accounted for the acquisition under the purchase method of accounting and the
allocation of the purchase price resulted in the establishment of $22 million of
depreciable property, plant, and equipment with a $5 million estimated tax
liability resulting from the liquidation of BRT.
11. Subsequent Events
On October 18, 1997, the Partnership signed a Definitive Agreement to
purchase substantially all of the assets of Santa Fe Pacific Pipeline Partners,
L.P. ("Santa Fe") for approximately 26.6 million Common Units and approximately
$85 million in cash. Santa Fe is one of the largest independent refined
petroleum products pipelines in the United States. It serves six Western states
with approximately 3,300 miles of common carrier pipeline and thirteen truck
loading terminals. The transaction is subject to the approval of the California
Public Utilities Commission, the receipt of certain lender consents, the
approval of the unitholders of both the Partnership and Santa Fe, and certain
other conditions. Closing of the transaction is anticipated to occur in the
first quarter of 1998. Following the purchase, the Partnership intends to
conduct the acquired operations under a fourth operating partnership, Kinder
Morgan Operating L.P.
"D" ("OLP-D").
On October 27, 1997, the Partnership announced its intention to form a new
partnership with Shell Western E&P Inc. The new partnership, which will conduct
business as Shell CO2 Company, Ltd., will explore, produce, market, and
transport carbon dioxide (CO2) for enhanced oil recovery throughout the
continental United States. The Partnership will receive a 20 percent interest in
the new partnership by contributing its CO2-dedicated Central Basin Pipeline and
approximately $25 million in cash. The transaction is subject to certain
conditions, including the execution of a definitive partnership agreement,
certain lender consents, and regulatory approvals. Closing of the transaction is
anticipated to occur before year-end.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarter 1997 Compared With Third Quarter 1996
Net income of the Partnership increased by 60% to $3.8 million in 1997. The
increase primarily relates to higher earnings from the coal businesses, the
North System, and the Central Basin Pipeline. Higher overall quarterly earnings
were partially offset by lower earnings from the gas processing and
fractionation segment.
Revenues grew in all business units except gas processing and
fractionation. Total revenues of the Partnership increased $3.0 million (21%) in
the third quarter of 1997 compared to the third quarter of 1996. The increase
was primarily due to increased coal activity. The coal transfer, storage, and
services segment reported revenues of $5.0 million and $2.2 million for the
three months ended September 30, 1997 and 1996, respectively. The increase in
coal revenues was mainly due to a 36% increase in coal transport volumes and
inclusion of the Red Lightning coal services unit in 1997. The Central Basin
Pipeline reported a 17% increase in revenues in the third quarter of 1997
compared to the comparable quarter of last year. This was due to a 4% increase
in average daily delivery volumes and slightly higher average tariffs. Both the
North System and the Cypress Pipeline reported 8% increases in revenues and
throughput volumes for the third quarter compared to the same prior year period.
The North System also realized a 9% increase in average tariff per barrel
transported.
Revenues decreased at the Partnership's Painter Plant due to the
termination of the gas processing agreement by Chevron, USA ("Chevron")
effective as of August 1, 1996. Loss of processing revenues at Painter was
partially offset by lease revenue earned from the Painter Fractionator pursuant
to the operating lease agreement with Amoco Oil Company ("Amoco"), executed
February 14, 1997.
Page 11 of 21
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Operating statistics for the third quarter are as follows:
Third Quarter
1997 1996
-------------------
Liquids Pipelines
North System
Delivery Volumes (MMBbls) 7.2 6.7
Average Tariff ($/Bbl) $0.81 $0.74
Cypress Pipeline
Delivery Volumes (MMBbls) 3.3 3.0
Average Tariff ($/Bbl) $0.46 $0.47
Central Basin Pipeline
Delivery Volumes (MMcf/d) 199 191
Average Tariff ($/Mcf) $0.17 $0.16
Coal Transfer, Storage, and
Services
Coal Terminals
Transport Volumes(MM Tons) 2.3 1.6
Average Revenues ($/Ton) $1.32 $1.29
Gas Processing and
Fractionation
Painter Gas Processing Plant
Processing Volumes (MMcf/d) - -
Average Revenues ($/Mcf) $0.00 $0.00
Fractionator Volumes - 4.0
(MBbls/d)
Average Revenues ($/Bbl) $0.00 $0.98
Earnings contribution by business segment for
the third quarter is as follows:
Earnings Contribution by Business Segment*
(Unaudited)
(In Thousands)
Third Quarter
1997 1996
Liquids pipelines 5,273 3,770
Coal transfer, storage,
and services 2,826 1,187
Gas processing and fractionation 768 2,803
----------------------
* Excludes general and administrative
expenses, debt costs and minority interest.
Page 12 of 21
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Cost of products sold increased 74% to $1.6 million in the third quarter of
1997 compared to the third quarter of 1996. This increase was primarily due to
costs attributable to the Red Lightning coal services unit, partially offset by
lower cost of sales reported by the North System.
Operations and maintenance expense, combined with general and
administration expense, declined 17% to $6.0 million in the third quarter of
1997 compared to the third quarter of 1996. This decrease was chiefly related to
the change in management resulting from the purchase of the General Partner from
Enron Liquids Holding Corp., the assignment of the Mobil Agreement to KN, and
the lease of the Painter Facility to Amoco Oil Company.
Fuel and power expense for the three months ended September 30, 1997
totaled $1.0 million, compared with $0.9 million for the corresponding period in
1996. This 10% increase resulted primarily from higher expense at the coal
terminals due to increased coal operations. The liquids pipelines segment
reported a slight increase (4%) in fuel and power expense due to higher
throughput.
Earnings from investments in partnerships increased 27% to $1.7 million in
the third quarter of 1997 as compared to the third quarter of 1996. This was
mainly due to an 18% increase in equity earnings from the Partnership's
investment in Mont Belvieu Associates.
Interest and other income decreased $2.4 million in the third quarter of
1997 when compared to the same period last year. The third quarter 1996 amount
includes a non-recurring gain of $2.5 million, attributable to the cash buyout
received from Chevron for early termination of a gas processing contract at the
Painter Plant.
Nine Months Ended September 30, 1997 Compared With
Nine Months Ended September 30, 1996
Net income of the Partnership increased 54% to $10.0 million in 1997 from
$6.5 million in 1996. A significant earnings increase was attributable to the
coal transfer, storage, and services segment. This segment reported net income
of $8.1 million in the first nine months of 1997 compared to $3.5 million in the
first nine months of 1996. The 1997 earnings include the results of Grand Rivers
Terminal, which was acquired by the Partnership in September, and the Red
Lightning coal services unit. The Partnership also realized higher earnings from
all three pipelines included in the liquids pipelines segment: the North System,
the Central Basin Pipeline, and the Cypress Pipeline. Together, the liquids
pipelines reported a 20% earnings increase in the first nine months of 1997 when
compared to the same year-ago-period. Higher overall earnings were offset by
lower earnings in the gas processing and fractionation business units.
Revenues of the Partnership increased $5.0 million (11%) in the first nine
months of 1997 compared to the same period in 1996. Significant revenue growth
was reported by the North System and all units in the coal transfer, storage,
and services segment. The North System reported an 18% increase in revenues that
resulted from a 13% increase in average tariff rates. The coal terminals
reported a 54% increase in revenues in the first nine months of 1997 when
compared to the same period last year. This resulted from a 39% increase in tons
transported. The Red Lightning coal services unit began operations in the second
quarter of 1997 and generated $3.5 million of revenue through September.
Revenues from the Cypress Pipeline increased 10% due to an 11% increase in
delivery volumes.
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The overall increase in Partnership revenue was offset by slightly lower
revenues (5%) from the Central Basin Pipeline. Although average daily delivery
volumes increased 20%, Central Basin's revenues were negatively affected by
slightly lower average tariffs for the first six months of 1997 and reduced
deficiency credit payments. Also, lower revenues were reported by the gas
processing and fractionation units due to the leasing of the Painter Facility
and the assignment of the Mobil Agreement at Bushton.
Operating statistics for the first nine months of 1997 and 1996 are as
follows:
Nine Months Ended September 30,
1997 1996
--------------------
Liquids Pipelines
North System
Delivery Volumes (MMBbls) 22.5 22.5
Average Tariff ($/Bbl) $0.88 $0.78
Cypress Pipeline
Delivery Volumes (MMBbls) 9.6 8.6
Average Tariff ($/Bbl) $0.46 $0.47
Central Basin Pipeline
Delivery Volumes (MMcf/d) 196 163
Average Tariff ($/Mcf) $0.15 $0.16
Coal Transfer, Storage, and
Services
Coal Terminals
Transport Volumes (MM Tons) 6.2 4.4
Average Revenues ($/Ton) $1.35 $1.31
Gas Processing and
Fractionation
Painter Gas Processing Plant
Processing Volumes (MMcf/d) - 18.3
Average Revenues ($/Mcf) $0.00 $0.34
Fractionator 0.9 4.6
Volumes(MBbls/d)
Average Revenues ($/Bbl) $0.98 $0.97
Earnings contribution by business segment for the first nine months of 1997
and 1996 is as follows:
Earnings Contribution by Business Segment*
(Unaudited)
(In Thousands)
Nine Months Ended September 30,
1997 1996
Liquids pipelines 15,735 13,070
Coal transfer, storage,
and services 8,063 3,540
Gas processing and fractionation 1,580 5,682
----------------------
* Excludes general and administrative expenses,
debt costs and minority interest.
Page 14 of 21
<PAGE>
Cost of products sold increased 27% to $5.3 million in the first nine
months of 1997 compared to the first nine months of 1996. This was primarily due
to costs incurred by the Red Lightning coal services unit and a purchase/sale
contract recorded by the North System in the first half of 1997. Higher overall
cost of products sold was partially offset by lower purchase/sale contracts
reported by the Central Basin Pipeline.
Fuel and power expense increased to $3.8 million (23%) in the first nine
months of 1997 compared to $3.1 million in the same period of last year. This
was mainly the result of higher fuel costs incurred by the North System, the
Cypress Pipeline, and the coal terminals. Increased volumes accounted for the
higher costs reported by the Cypress Pipeline and the coal terminals.
Operations and maintenance expense, combined with general and
administration expense, decreased 15% to $17.4 million in the first nine months
of 1997 as compared to the first nine months of 1996. This decrease was
primarily due to cost savings realized by new management, lower expenses
associated with the assignment of the Mobil Agreement to KN, and the lease of
the Painter Facility to Amoco Oil Company. The overall favorable change was
partially offset by higher expenses at the coal terminals due to increased
business activity.
Financial Condition
General
The Partnership's 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 utilizing cash generated from operations, the Partnership could meet
its cash requirements through the utilization of credit facilities or by issuing
additional limited partner interests in the Partnership.
The current portion of long term debt as reflected on the September 30,
1997 balance sheet is a combination of maturing long term debt instruments and
installment payments due within the next twelve months. The Partnership intends
to refinance these payments in due course. However, the Partnership has not
entered into any noncancelable agreements. This financing will be done by either
the incurrence of additional debt, the extension of existing debt, the issuance
of additional Common Units, or a combination of the foregoing. In November, the
Partnership extended a maturing revolving credit facility to mature in May,
1999.
Cash Provided by Operating Activities
Net cash provided by operating activities was $25.4 million for the nine
months ended September 30, 1997, versus $21.1 million for the comparable period
of 1996. This $4.3 million period-to-period increase in cash flow from
operations was primarily the result of a $3.5 million improvement in net
earnings and a $1.2 million increase in distributions received from the
Partnership's investment in Mont Belvieu Associates. The completion of an
expansion project at the Mont Belvieu Fractionator in 1997 enabled Mont Belvieu
Associates to realize an 11% increase in earnings for the first nine months of
1997 as compared to the same period last year.
Page 15 of 21
<PAGE>
Cash Used in Investing Activities
Cash used in investing activities totaled $28.4 million during the first
nine months of 1997 compared to $8.5 million during the first nine months of
1996. Additions to property, plant and equipment totaled $26.6 million in the
September, 1997 year-to-date period compared to $8.0 million for the same period
in 1996. This large increase reflects the Partnership's purchase of $22.2
million of property, plant and equipment relating to the September, 1997
acquisition of BRT. For more information, see Note 10. to the consolidated
financial statements. Excluding the effect of assets purchased in the BRT
acquisition, capital additions in the first nine months of 1997 were $3.6
million lower than capital additions in the comparable 1996 period. The higher
additions to property, plant and equipment in 1996 primarily reflect
construction costs of a propane terminal on the North System located in Tampico,
Illinois.
Contributions to partnership investments increased to $1.9 million for the
first nine months of 1997 as compared to $0.5 million for the first nine months
of 1996. The 1997 contributions reflect the Partnership's funding of its share
of loan repayments associated with the completion, in 1996, of an expansion
project at the Mont Belvieu Fractionator.
Cash Used in Financing Activities
Net cash used in financing activities was $7.9 million and $13.9 million
for the nine months ended September 30, 1997 and 1996, respectively. This
decrease of $6.0 million from the comparable 1996 period was the result of $33.9
million in net proceeds received from the issuance of Common Units, partially
offset by debt payments, distributions to partners, and an increase in
restricted cash. Distributions to partners increased to $16.0 million for the
first nine months of 1997 compared to $12.6 million for the same period last
year. This increase reflects a cash distribution of $0.50 per Unit for the
second quarter of 1997 as compared to a distribution of $0.315 for the same
quarter of 1996.
Kinder Morgan Energy Partners, L.P. (the "Partnership") conducts business
by serving as the sole limited partner of three operating partnerships: Kinder
Morgan Operating L.P. "A" ("OLP-A"), Kinder Morgan Operating L.P. "B" ("OLP-B"),
and Kinder Morgan Operating L.P. "C" ("OLP-C"). The ownership percentage in the
operating partnerships relating to the limited partner interest is 98.9899%. The
14,111,200 outstanding Common Units at September 30, 1997 represent a 99%
limited partner ownership interest in the Partnership.
Kinder Morgan G.P., Inc. (the "General Partner") serves as the sole general
partner of the three 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; 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.
Page 16 of 21
<PAGE>
The partnership agreements governing the operation of the Partnership and
the operating partnerships require the partnerships to distribute 100% of
"Available Cash" (as defined in the partnership agreements) to the 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 the partnerships less all of their cash disbursements and net
additions to reserves.
The partnership agreement governing the Partnership generally prescribes
that the Available Cash of the Partnership be distributed 98% to the Limited
Partners and 2% to the General Partner. This general requirement is modified to
provide for incentive distributions to be paid to the General Partner in the
event that quarterly distributions to unitholders exceed certain specified
targets. Incentive distributions are generally defined as all cash distributions
paid to the General Partner that are in excess of 2% of the aggregate amount of
cash being distributed. The General Partner's incentive distribution for the
quarter ended September 30, 1997 is $1,045,442 compared to $25,143 for the
quarter ended September 30, 1996.
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.
The Partnership believes that the increase in quarterly cash distributions
from $0.315 for each of the four quarters of 1996 and the first quarter of 1997
to $0.50 for each of the second and third quarters of 1997 is the result of
favorable operating results during the first nine months of 1997. Operating
results for the nine months ended September 30, 1997 benefited from significant
revenue increases due to positive volume and price changes along with reductions
in combined operating, maintenance, and administrative expenses resulting from
the change in control of the Partnership. The Partnership believes that future
operating results will continue to support similar levels of quarterly cash
distributions, however, no assurance can be given that future distributions will
continue at such levels. Subject to the closing of the Santa Fe purchase, the
Partnership anticipates a minimum quarterly distribution of $0.5625 per Common
Unit beginning in the first post-closing quarter.
Page 17 of 21
<PAGE>
Capital Requirements for Pending Transactions
Shell CO2 Company. On October 24, 1997, the Partnership entered into a
letter of intent to transfer the Central Basin Pipeline and $25 million in cash
to Shell CO2 Company, Ltd. ("Shell CO2 Company"), a limited partnership to be
formed with Shell Western E&P, Inc. ("Shell"). Shell CO2 Company will explore,
produce, market, and transport CO2 for enhanced oil recovery throughout the
continental United States. The closing of the transaction is anticipated to
occur before year-end. The Partnership intends to finance its cash investment in
Shell CO2 Company through a bridge loan facility to be arranged by its financial
advisor (the "Bridge Loan Facility"). In the event that the Partnership is
unable to obtain the requisite consent of the holders of the First Mortgage
Notes to the substitution of the Partnership's interest in Shell CO2 Company for
the Central Basin Pipeline as collateral for the Partnership's First Mortgage
Notes, the Partnership intends to refinance the First Mortgage Notes through the
Bridge Loan Facility or make other acceptable financial arrangements.
Santa Fe Pacific Pipeline Partners, L.P. On October 17, 1997, the
Partnership and the General Partner entered into a purchase agreement (the
"Purchase Agreement") with Santa Fe Pacific Pipeline Partners, L.P. ("Santa
Fe"), Santa Fe Pacific Pipelines, Inc., the general partner of Santa Fe (the "SF
General Partner"), and SFP Pipeline Holdings, Inc., the parent company of the SF
General Partner ("SF Holdings"). Pursuant to the terms of the Purchase
Agreement, the Partnership has agreed to acquire substantially all of the assets
of Santa Fe in exchange for the issuance of 1.39 Common Units for each common
unit of Santa Fe (an aggregate of approximately 26.6 million Common Units) and
approximately $85 million in cash (the "Santa Fe Acquisition"). The Santa Fe
Acquisition is anticipated to close in the first quarter of 1998.
The Partnership intends to finance the $85 million cash portion of the
purchase price through the Bridge Loan Facility.
The number of Common Units ultimately to be issued may be reduced by up to
approximately 11.3 million Common Units depending upon the actions taken by the
Partnership with respect to SF Holdings' $218,981,000 Variable Rate Exchangeable
Debentures Due 2010 (the "VREDs"). The closing of the Santa Fe Acquisition will
constitute an Exchange Event (as defined in the Indenture governing the VREDs)
and, as a result, each $1,000 principal amount of VREDs will become exchangeable
for approximately 51.7 Common Units (which is equal to approximately $2,017
based on the closing price of the Common Units ($39.00) on October 17, 1997, the
last full trading day before the announcement of the Santa Fe Acquisition). The
Partnership may seek to acquire for cash some or all of the VREDs at a price
that would be less than the fair market value of the Common Units into which the
VREDs will be exchangeable. The Partnership intends to finance the purchase
price for any VREDs so acquired with the Bridge Loan Facility.
Bridge Loan Facility. Although the Partnership's financial advisor with
respect to the Santa Fe Acquisition has agreed to attempt to arrange the Bridge
Loan Facility, the Partnership does not currently have a commitment for any such
facility. The Partnership intends to repay the Bridge Loan Facility following
the closing of the Santa Fe Acquisition with the proceeds from the sale of
Common Units, the issuance of long term debt or a combination thereof. There can
be no assurance that the Partnership will be able to obtain the Bridge Loan
Facility (or issue Common Units or long term debt to repay the Bridge Loan
Facility) upon terms acceptable to the Partnership.
Information Regarding Forward Looking Statements
This filing includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the Partnership believes that its expectations
are based on reasonable assumptions, it can give no assurance that its goals
will be achieved. Price trends and overall demand for NGLs, CO2 and coal in the
United States and the condition of the capital markets and equity markets could
cause actual results to differ from those in the forward looking statements
herein.
Page 18 of 21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Part I., Item 1., Note 2. to
Consolidated Financial Statements (Unaudited)
entitled "Litigation".
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Agreement to Purchase Units dated August 7, 1997 between
Kinder Morgan Energy Partners, L.P. and the Purchasers listed on Schedule A
thereto (filed as Exhibit 10.1 to the Partnership's Current Report on Form 8-K
dated August 7, 1997 and incorporated herein by reference).
Exhibit 10.2 - Amended and Restated Agreement to Purchase Units dated
as of August 13, 1997 between Kinder Morgan Energy Partners, L.P. and First
Union Investors, Inc. (filed as Exhibit 10.2 to the Partnership's Current Report
on Form 8-K dated August 7, 1997 and incorporated herein by reference).
Exhibit 27 - Financial Data Schedule as of and for the nine months
ended September 30, 1997
(b) Reports on Form 8-K
Report dated August 7, 1997, on Form 8-K was filed on August 29, 1997.
Agreements between the Partnership and certain investors relating to the
purchase of Common Units from the Partnership were filed as exhibits pursuant to
Item 7. of that form.
Report dated September 2, 1997, on Form 8-K was filed on September 3,
1997. The Partnership's two-for-one Common Unit split was reported pursuant to
Item 5. of that form.
Report dated October 18, 1997, on Form 8-K was filed on October 21,
1997, pursuant to Items 5. and 7. of that form. An agreement to purchase the
assets of Santa Fe Pacific Pipeline Partners, L.P. was disclosed according to
Item 5., and exhibits of the purchase agreement and associated press release
were filed pursuant to Item 7.
Page 19 of 21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kinder Morgan Energy Partners, L.P.
(A Delaware Limited Partnership)
BY: Kinder Morgan G.P., Inc.
as General Partner
BY: /s/David G. Dehaemers, Jr. Dated:
November 14, 1997
David G. Dehaemers, Jr.
Vice President and
Chief Financial Officer
Page 20 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the Consolidated
Statements of Income for the nine months ended
September 30, 1997 and the Consolidated Balance
is qualified in its entirety by reference to such
financial statements.
Page 21 of 21
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,620
<SECURITIES> 0
<RECEIVABLES> 10,193
<ALLOWANCES> 0
<INVENTORY> 3,323
<CURRENT-ASSETS> 22,136
<PP&E> 298,664
<DEPRECIATION> 43,605
<TOTAL-ASSETS> 315,256
<CURRENT-LIABILITIES> 26,768
<BONDS> 130,896
0
0
<COMMON> 0
<OTHER-SE> 150,948
<TOTAL-LIABILITY-AND-EQUITY> 315,256
<SALES> 52,553
<TOTAL-REVENUES> 52,553
<CGS> 5,307
<TOTAL-COSTS> 36,511
<OTHER-EXPENSES> (4,481)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,566
<INCOME-PRETAX> 10,957
<INCOME-TAX> 909
<INCOME-CONTINUING> 10,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,048
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
