As filed with the Securities Exchange Commission on April 17, 1998
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
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 organization) Identification Number)
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
(713) 844-9500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Clare H. Doyle
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
(713) 844-9500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------------------
Copy to:
George E. Rider Michael Rosenwasser
Patrick J. Respeliers William N. Finnegan, IV
Morrison & Hecker L.L.P. Andrews & Kurth L.L.P.
2600 Grand Avenue 425 Lexington Avenue
Kansas City, Missouri 64108 New York, NY 10017
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Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effective date of this Registration Statement.
--------------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, please 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 of 1933, 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 of 1933, please 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
under the Securities Act of 1933, please check the following box. [_]
<PAGE>
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
- ------------------- -------------------- ------------------ ---------------------- =================
Title of Amount to be Proposed maximum Proposed maximum Amount of
securities registered Offering price Aggregate offering registration fee
to be registered per price (1)
Unit <F1>
- ------------------- -------------------- ------------------ ---------------------- =================
- ------------------- -------------------- ------------------ ---------------------- =================
<S> <C> <C> <C> <C>
Common Units 100,000 Common $36.97 $3,697,000 $1,090.58
Units
- ------------------- -------------------- ------------------ ---------------------- =================
<FN>
<F1> Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and Rule
457(c) thereunder, based on the average of the high and low prices of the Units
reported in the consolidated reporting system of the New York Stock Exchange on
April 14, 1998.
</FN>
</TABLE>
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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>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
________________________ COMMON UNITS
Representing Limited Partner Interests
KINDER MORGAN ENERGY PARTNERS, L.P.
-------------
Of the _________common units ("Units") representing limited partner
interests in Kinder Morgan Energy Partners, L.P. (the "Partnership") offered
hereby, ________________ Units are being sold by the Partnership and _______
Units are being sold by the Selling Unitholders (as defined herein), each of
whom acquired such Units pursuant to the VRED Exchange (as defined herein). See
"Selling Unitholders." The Partnership will not receive any of the proceeds from
the sale of the Units being sold by the Selling Unitholders.
The last reported sales price of the Units on ______________, 1998, as
reported on the New York Stock Exchange ("NYSE") Composite Transactions tape,
was $_____ per Unit. See "Price Range of Units and Distribution Policy."
For a discussion of the material risks regarding an
investment in the Units and the business and operations
of the Partnership that should be evaluated before
investing in the Units, see "Risk Factors" commencing on
page 6.
--------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Initial Underwriting Proceeds to Proceeds to
Public Discount(1) Partnership(2) Selling
Offering Unitholders(2)
Price
Per
Unit......
Total
(3)......
- --------------
(1) The Partnership and the Selling Unitholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $___________ payable by the
Partnership and $___________ payable by the Selling Unitholders.
(3) The Partnership has granted to the Underwriters an option for 30 days
to purchase up to an additional __________ Units at the initial
offering price per Unit, less the underwriting discounts, solely to
cover over-allotments, if any. If such option is exercised in full,
the total initial public offering price, underwriting discounts
and proceeds to the Partnership will be $____________, $____________
and $____________, respectively. See "Underwriting."
The Units offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the Units will be ready for delivery in New York, New York on or about
___________, 1998, against payment therefor in immediately available funds.
Goldman, Sachs & Co.
--------------------------------------
The date of this Prospectus , 1998
<PAGE>
[Map of Partnership Properties]
<PAGE>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Units, including
over-allotment, stabilizing and short-covering transactions in such securities,
and the imposition of a penalty bid in connection with the offering. For a
description of these activities, see "Underwriting."
AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"SEC") in Washington, D.C., a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration Statement
and exhibits and schedules relating thereto for further information with respect
to the Partnership and the securities offered by this Prospectus. The
Partnership is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the SEC. Such reports, statements and other information are available for
inspection at, and copies of such materials may be obtained upon payment of the
fees prescribed therefor by the rules and regulations of the SEC from, the
Public Reference Section of the SEC at its principal offices located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the SEC located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and at Seven World Trade Center, 13th
Floor, New York, New York 10048. In addition, the Units are traded on the NYSE,
and such reports, statements and other information may be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10002. The SEC
maintains an Internet Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of such Internet Web Site is http://www.sec.gov.
The Partnership will furnish to record holders of Units within 120 days
after the close of each calendar year, an annual report containing audited
financial statements and a report thereon by its independent public accountants.
The Partnership will also furnish each Unit holder with tax information within
90 days after the close of each taxable year of the Partnership.
INCORPORATION OF CERTAIN DOCUMENTS
The following documents filed with the Commission by the Partnership (File
No. 1-11234) pursuant to the Exchange Act are hereby incorporated herein by
reference:
1. The Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "Form 10-K"); and
2. The Partnership's Current Report on Form 8-K dated March 5, 1998, as
amended.
The description of the Units which is contained in the Partnership's
registration statement on Form S-1 (File No. 33-48142) under the Securities Act
filed on June 1, 1992, including any amendment or reports filed for the purpose
of updating such description, is incorporated herein by reference.
All documents filed by the Partnership pursuant to Section 13(e), 13(c), 14
or 15(d) of the Exchange Act, after the date of this Prospectus shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus, or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference, modifies or replaces such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Partnership undertakes to provide without charge to each person to whom
a copy of this Prospectus has been delivered, upon written or oral request of
any such person, a copy of any or all of the documents incorporated by reference
herein, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to:
Kinder Morgan Energy Partners, L.P., 1301 McKinney Street, Suite 3450, Houston,
Texas 77010, Attention: Carol Haskins, telephone (713) 844-9500.
<PAGE>
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference include
forward looking statements. These forward looking statements are identified as
any statement that does not relate strictly to historical or current facts. They
use words such as plans, expects, anticipates, estimates, will and other words
and phrases of similar meaning. Although the Partnership believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Such forward looking statements involve known and
unknown risks and uncertainties. Given these uncertainties, prospective
investors are cautioned not to rely on such forward looking statements. The
Partnership's actual actions or results may differ materially from those
discussed in the forward looking statements. Specific factors which could cause
actual results to differ from those in the forward looking statements, include,
among others:
price trends and overall demand for natural gas liquids ("NGLs"), refined
petroleum products, carbon dioxide ("CO2"), and coal in the United States
(which may be affected by general levels of economic activity, weather,
alternative energy sources, conservation and technological advances);
changes in the Partnership's tariff rates set by the Federal Energy
Regulatory Commission ("FERC") and the California Public Utilities
Commission ("CPUC");
the Partnership's ability to integrate the acquired operations of Santa Fe
Pacific Pipeline Partners, L.P. ("Santa Fe") (and other future
acquisitions) into its existing operations;
with respect to the Partnership's coal terminals, the ability of railroads
to deliver coal to the terminals on a timely basis;
the Partnership's ability to successfully identify and close strategic
acquisitions and realize cost savings;
the discontinuation of operations at major end-users of the products
transported by the Partnership's liquids pipelines (such as refineries,
petrochemical plants, or military bases);
the condition of the capital markets and equity markets in the United
States; and
the availability to a Unitholder of the federal income tax benefits of an
investment in the Partnership largely depends on the classification of the
Partnership as a partnership for that purpose. The Partnership will rely
on an opinion of counsel, and not a ruling from the Internal Revenue
Service, on that issue and others relevant to a Unitholder.
For additional information which could affect the forward looking
statements, see "Risk Factors" listed on page 6 of this Prospectus and "Risk
Factors" included in the Form 10-K, which is incorporated herein by reference.
The Partnership disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the forward looking
statements included or incorporated by reference herein to reflect future events
or developments.
The information referred to above should be considered by potential
investors when reviewing any forward looking statements contained in this
Prospectus, in any documents incorporated herein by reference, in any of the
Partnership's public filings or press releases or in any oral statements made by
the Partnership or any of its officers or other persons acting on its behalf.
ii
<PAGE>
SUMMARY
The following is only a summary of certain information contained elsewhere
in this Prospectus and does not purport to be complete. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
contained elsewhere in this Prospectus or incorporated herein by reference. As
used in this Prospectus, the "Partnership" refers to Kinder Morgan Energy
Partners, L.P., and, except where the context otherwise requires, its subsidiary
operating partnerships. Unless specifically stated otherwise, all information
provided on a per Unit basis has been restated to give effect to the
Partnership's 2 for 1 Unit split, which was effective October 1, 1997. Unless
otherwise defined herein, capitalized terms used in this Summary have the
meanings described elsewhere in this Prospectus. Prospective investors are urged
to read this Prospectus in its entirety.
The Partnership
Kinder Morgan Energy Partners, L.P. ("the Partnership"), a Delaware limited
partnership, is a publicly traded master limited partnership ("MLP") formed in
August 1992. The Partnership manages a diversified portfolio of midstream energy
assets, including six refined products/liquids pipeline systems containing over
5,000 miles of trunk pipeline (the "Liquids Pipelines") and 21 truck loading
terminals. The Partnership also owns two coal terminals, a 20% interest in a
joint venture with affiliates of Shell Oil Company ("Shell")which produces,
markets and delivers CO2 for enhanced oil recovery ("Shell CO2 Company") and a
25% interest in a Y-grade fractionation facility. The Partnership is the largest
pipeline MLP and has the second largest products pipeline system in the United
States in terms of volumes delivered.
The Partnership's objective is to operate as a growth-oriented MLP by
reducing operating costs, better utilizing and expanding its asset base and
making selective, strategic acquisitions that are accretive to Unitholder
distributions. The Partnership regularly evaluates potential acquisitions of
complementary assets and businesses, although there are currently no agreements
or commitments with respect to any material acquisition. The General Partner's
incentive distributions provide it with a strong incentive to increase
Unitholder distributions through successful management and growth of the
Partnership's business. The success of this strategy was demonstrated in 1997 as
net income grew by 49% over 1996, including a 15% reduction in operating,
maintenance, general and administrative expenses. As a result of this strong
financial performance, the Partnership was able to increase its distribution to
Uithholders by 79% from an annualized rate of $1.26 per Unit at year-end 1996 to
$2.25 per Unit at year-end 1997.
On March 6, 1998, the Partnership acquired substantially all of the assets
of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"), which assets currently
comprise the Partnership's Pacific Operations, for an aggregate consideration of
approximately $1.4 billion consisting of approximately 26.6 million Units, $84.4
million in cash and the assumption of certain liabilities. On March 5, 1998, the
Partnership contributed its 157 mile Central Basin CO2 Pipeline and
approximately $25.0 million in cash for a 20% limited partner interest in Shell
CO2 Company.
The Partnership's operations are grouped into three reportable business
segments: Liquids Pipelines; Coal Transfer, Storage and Services; and Gas
Processing and Fractionation.
Liquids Pipelines
The Liquids Pipelines segment includes both interstate common carrier
pipelines regulated by FERC and intrastate pipeline systems, which are regulated
by the CPUC in California. Products transported on the Liquids Pipelines segment
include refined petroleum products, NGLs and CO2. The Liquids Pipelines segment
conducts operations through two geographic divisions: Kinder Morgan Pacific
Operations and Kinder Morgan Mid-Continent Operations.
Pacific Operations. The Pacific Operations include four pipeline systems
which transport approximately one million barrels per day of refined petroleum
products such as gasoline, diesel and jet fuel, and 13 truck loading terminals.
These operations serve approximately 44 customer-owned terminals, three
commercial airports and 12 military bases in six western states. Pipeline
transportation of gasoline and jet fuel has a direct correlation with changing
demographics, and the Partnership serves, directly or indirectly, some of the
fastest growing populations in the United States, such as the Los Angeles and
Orange, California, the Las Vegas, Nevada and the Tucson and Phoenix Arizona
areas. The Pacific Operations transport, directly or indirectly, virtually all
of the refined products utilized in Arizona and Nevada, together with the
majority of refined products utilized in California. The Partnership plans to
extend its presence in these rapidly growing markets in the western United
States through accretive acquisitions and incremental expansions of the Pacific
Operations. In the near term, the Partnership expects to
<PAGE>
realize $15-20 million per year in cost savings through elimination of redundant
general and administrative and other expenses following the acquisition of Santa
Fe.
Mid-Continent Operations. The Mid-Continent Operations consist of two
pipeline systems (the North System and the Cypress Pipeline), the Partnership's
indirect interest in Shell CO2 Company and a 50% interest in Heartland Pipeline
Company.
The North System includes a 1,600 mile NGL and refined products pipeline
which is a major transporter of products between the NGL hub in Bushton, Kansas
and Chicago, Illinois industrial area consumers, such as refineries and
petrochemical plants. In addition, the North System has eight truck loading
terminals, which primarily deliver propane throughout the upper midwest, and
approximately 3 million barrels of storage capacity. Since the North System
serves a relatively mature market, the Partnership intends to focus on
increasing 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 Cypress Pipeline is a 100 mile NGL pipeline originating in the NGL hub
in Mont Belvieu, Texas which serves a major petrochemical producer in Lake
Charles, Louisiana. The bulk of the capacity of this pipeline is under a long
term ship or pay contract with this producer.
Shell CO2 Company is a leader in the production, transportation and
marketing of CO2 and serves oil producers, primarily in the Permian Basin of
Texas and the Oklahoma panhandle, utilizing enhanced oil recovery programs. With
ownership interests in two CO2 domes, two CO2 trunklines, and a distribution
pipeline running throughout the Permian basin, Shell CO2 Company can deliver
over 1 billion cubic feet of CO2 per day. Within the Permian Basin, Shell CO2
Company offers its customers "one-stop shopping" for CO2 supply, transportation
and technical service. Outside the Permian Basin, Shell CO2 Company intends to
compete aggressively for new supply and transportation projects which the
Partnership believes will arise as other United States oil producing basins
mature and make the transition from primary production to enhanced recovery
methods.
The Heartland Pipeline Company transports refined petroleum products over
the North System from refineries in Kansas and Oklahoma to a Conoco terminal in
Lincoln, Nebraska and Heartland's terminal in Des Moines, Iowa. Demand for, and
supply of, refined petroleum products in the geographic regions served by
Heartland directly affect the volume of refined petroleum products it
transports.
Coal Transfer, Storage and Services
The Coal Transfer, Storage and Services segment consists of two coal
terminals with capacity to transload approximately 40 million tons of coal
annually. The Cora Terminal is a high-speed, rail-to-barge coal transfer and
storage facility located on the upper Mississippi River near Cora, Illinois. The
Grand Rivers Terminal, located on the Tennessee River near Paducah, Kentucky, is
a modern, high-speed coal handling terminal featuring a direct dump
train-to-barge facility, a bottom dump train-to-storage facility, a barge
unloading facility and a coal blending facility. A majority of the coal loaded
through these terminals is low sulfur western coal. The Partnership believes
demand for this coal should increase due to the provisions of the Clean Air Act
Amendments of 1990 mandating decreased sulfur emissions from power plants. This
low sulfur coal is often blended at the terminals with higher sulfur/higher Btu
Illinois Basin Coal. The Partnership's modern blending facilities and rail
access to low sulfur western coal enable it to offer higher margin services to
its customers. Through the Partnership's Red Lightning Energy Services unit, the
Partnership markets specialized coal services for both the Cora Terminal and the
Grand Rivers Terminal.
Gas Processing and Fractionation
The Gas Processing and Fractionation segment consists of (i) the
Partnership's 25% indirect interest in the Mont Belvieu Fractionator and (ii)
the Painter Gas Processing Plant. The Mount Belvieu Fractionator is a full
service fractionating facility with capacity of approximately 200,000 barrels
per day. Located in proximity to major end-users of its products, the Mount
Belvieu Fractionator has consistent access to the largest domestic market for
NGL products, as well as to deepwater port loading facilities via the Port of
Houston, allowing access to import and export markets. The Painter Gas
Processing Plant includes a natural gas processing plant, a nitrogen rejection
fractionation facility, an NGL terminal and interconnecting pipelines with truck
and rail loading facilities. Most of the Painter facilities are leased to Amoco
under a long term arrangement.
2
<PAGE>
The Offering
Units offered by the Partnership..................... ____ Units (1)
Units offered by the Selling Unitholders............. ____ Units
Units to be outstanding after the offering........... ____ Units (1)(2)
Use of proceeds...................................... Repayment of outstanding
indebtedness under the
Partnership's credit
facility. Amounts repaid
under the credit facility
may be reborrowed for any
proper partnership
purpose, including the
financing of future
acquisitions. See "Use of
Proceeds."
NYSE symbol.......................................... ENP
- -----------------
(1) Assumes the Underwriters' overallotment option is not exercised. See
"Underwriters."
(2) Excludes _______ Units issuable, subject to vesting, upon the exercise of
options outstanding granted by the Partnership.
3
<PAGE>
Summary Historical and Pro Forma Financial and Historical Operating Data
The following tables set forth, for the periods and at the dates indicated,
summary historical financial and operating data for the Partnership and Santa Fe
and pro forma financial data for the Partnership after giving effect to the
acquisition of Santa Fe, the formation of Shell CO2 Company and the refinancing
of certain indebtedness. The data in the tables is derived from and should be
read in conjunction with the historical financial statements, including the
notes thereto, of the Partnership and Santa Fe incorporated by reference, and
the selected historical financial and operating information included elsewhere
in this Prospectus. The pro forma financial data give effect to the acquisition
of the assets of Santa Fe and the formation of Shell CO2 Company as if they had
taken place at December 31, 1997 for balance sheet purposes and as of January 1,
1997 for the twelve month income statement period ended December 31, 1997, and
should be read in conjunction with the unaudited pro forma financial statements
of the Partnership set forth in and incorporated by reference in this
Prospectus.
The Partnership
<TABLE>
<CAPTION>
Historical Proforma
---------------
------------------------------------------
Year Ended Year Ended
December 31, December 31,
1997
------------------------------------------ ---------------
1995 1996 1997
---- ---- ----
(in thousands, except per Unit and operating data)
<S> <C> <C> <C> <C>
Income and Cash Flow Data:
Revenues................. $64,304 $ 71,250 $ 73,932 $318,347
Cost of product sold..... 8,020 7,874 7,154 7,154
Operating expense........ 15,928 22,347 17,982 76,942
Environmental and litigation - - - 8,000
Costs....................
Fuel and Power............ 3,934 4,916 5,636 26,310
Depreciation.............. 9,548 9,908 10,067 41,379
General and administrative 8,739 9,132 8,862 27,482
--------- ----- ------- -------
Operating income......... 18,135 17,073 24,231 131,080
Equity in earnings of 5,755 5,675 5,724 5,724
Partnerships.............
Interest
(expense)............... (12,455) (12,634) (12,605) (53,074)
Other income (expense)... 1,311 3,129 (353) (21)
Income tax (provision) (1,432) (1,343) 740 740
benefit.................. --------- ------ ------ --------
Net income............... $ 11,314 $ 11,900 $ 17,737 $ 84,449
======== ======== ======== ========
Net income per $ .85 $ .90 $ 1.02 $ 1.80
Unit<F1>................. ======== ======== ======= =======
Cash distributions paid per $ 1.26 $ 1.26 $ 1.63
Unit................... ======== ======== =======
Additions to property, plant
And Equipment<F2>........ $ 7,826 $ 8,575 $ 6,884
Balance Sheet Data (at period
end):
Net property, plant and $236,854 $235,994 $244,967 $1,597,559
Equipment................
Total assets............. 303,664 303,603 312,906 1,821,000
Long-term debt........... 156,938 160,211 146,824 610,747
Partners' capital........ 123,116 118,344 150,224 1,074,856
Operating Data:
Liquids pipelines transportation
Volumes-Thousand Barrels
("MBbls")................. 41,613 46,601 46,309
NGL fractionation volumes
(MBbls)<F3>............. 59,546 59,912 71,686
Gas processing volumes-
Million Cubic Feet Per
Day ("MMcf/d")<F4>........ 34 14 -
NGL revenue volumes
(MBbls)<F5>............. 477 1,638 395
CO2 transportation
Volumes-Billion Cubic
Feet ("Bcf")............ 44 63 76
Coal transport volumes-Thousand
Tons ("Mtons")<F6>........ 6,486 6,090 9,087
<FN>
<F1> Represents net income per Unit adjusted for the 2-for-1 split of Units
effective on October 1, 1997. Allocation of net income per Unit was
computed by dividing the interest of the holders of Units in net income by
the weighted average number of Units outstanding during the period.
<F2> Additions to property, plant and equipment for 1993, 1994 and 1997 exclude
the $25,291, $12,825 and $11,688 of assets acquired in the September 1993
Cora Terminal, the June 1994 Painter Gas Processing Plant ("Painter Plant")
and the September 1997 Grand Rivers Terminal acquisitions, respectively.
<F3> Represents total volumes for the Mont Belvieu Fractionator and the Painter
Plant.
<F4> Represents the volumes of the gas processing portion of the Painter Plant,
which has been operationally idle since June 1996.
<F5> Represents the volumes of the Bushton facility (beginning in October, 1995).
<F6> Represents the volumes of the Cora Terminal, excluding ship or pay volumes
of 252 Mtons for 1996 and the Grand Rivers Terminal from September 1997.
</FN>
</TABLE>
4
<PAGE>
Santa Fe
Year Ended December 31,
--------------------------------------------------
1995 1996 1997
(in thousands, except per Unit and operating data)
Income and Cash Flow Data:
Total revenues....... $233,677 $240,142 $244,415
Operating expenses... 54,019 56,619 61,585
Provisions for 34,000 23,000 8,000
environmental
And litigation costs
Fuel and Power....... 21,715 21,062 20,674
General and administrative 27,462 30,260 26,495
Depreciation &
Amortization........ 20,500 21,080 21,351
Operating income..... 75,981 88,121 106,310
Interest expense..... 37,247 36,518 35,922
Other income (expense),
Net................. 1,633 672 (941)
Net income........... $ 40,367 $ 52,275 $ 69,447
Per Unit Data:
Net income........... $ 2.04 $ 2.64 $3.51
Cash distributions paid 2.95 3.00 3.00
$ 31,431 $ 27,686 $ 24,934
Capital Expenditures:
Balance Sheet Data $628,694 $629,365
(at period end):
Properties, plant and
equipment, $623,318
Net................
Total assets......... 720,854 725,818 726,722
Long-term debt....... 355,000 355,000 355,000
Total partners' capital 270,065 262,915 272,937
Operating Data:
Delivered (MBbls)....
354,324 365,377
Barrel miles (millions) 50,010 51,827
Total revenue per barrel $ 0.66 $ 0.66
5
<PAGE>
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider each of the following risk factors, together with other
information set forth elsewhere in the Prospectus or incorporated herein by
reference. A more detailed description of each of these risk factors, as well as
other risk factors, is included in the Form 10-K, which is incorporated herein
by reference.
Pending FERC and CPUC Proceedings Seek Substantial Refunds and Reductions in
Tariff Rates
Various shippers have filed complaints before the FERC and the CPUC
challenging certain pipeline tariff rates of the Partnership's Pacific
Operations alleging such rates are not entitled to "grandfathered" status under
the Energy Policy Act of 1992. Although the Partnership believes such rates are
entitled to "grandfathered" status, if such challenges are upheld they could
result in substantial rate refunds and prospective rate reductions, which could
result in a material adverse effect on the Partnership's results of operations,
financial condition, liquidity and funds available for distributions.
The Partnership May Experience Difficulties Integrating Santa Fe's Operations
and Realizing Synergies
The Partnership may incur costs or encounter other challenges not currently
anticipated in integrating the acquired operations of Santa Fe into the
Partnership, which may negatively affect its prospects. The integration of
operations following the acquisition will require the dedication of management
and other personnel which may temporarily distract their attention from the
day-to-day business of the Partnership, the development or acquisition of new
properties and the pursuit of other business acquisition opportunities.
Possible Insufficient Cash to Pay Current Level of Distributions
The pro forma historical combined cash flow of the Partnership and Santa Fe
for 1997 would not be sufficient to pay the Partnership's current annual
distribution on all of its outstanding Units. The Partnership must realize
anticipated cost savings resulting from the acquisition of Santa Fe and increase
revenues in certain sectors in accordance with the Partnership's 1998 business
plan, if it is to continue its current level of distributions. In addition,
adverse changes in the Partnership's business, including the disruption of
operations at major suppliers or end-users, may adversely affect distributions
to Unitholders.
Issuance of Units to Holders of VREDs Might Adversely Affect Market Price
As of _________, 1998, the approximately _____ million Units to be
delivered in the VRED Exchange (as defined) represent approximately ____% of the
total outstanding Units. Selling Unitholders who have exchanged VREDs (as
defined) pursuant to the VRED Exchange may determine, for tax and other reasons,
not to hold the Units on a long-term basis. The Partnership can make no
predictions as to the effect, if any, that sales of such Units or the
availability of such Units for sale might have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Units
received in exchange for the VREDs could adversely affect prevailing market
prices of the Units. This offering is being made, in part, to attempt to provide
for an orderly distribution of such Units. However, there can be no assurance
that this offering will achieve its objective of providing for an orderly
distribution of the Units to be received in the VRED Exchange. See "Selling
Unitholders."
Risks Associated With Leverage
Substantially all of the Partnership's assets are pledged to secure its
indebtedness. If the Partnership defaults in the payment of its indebtedness,
the Partnership's lenders will be able to sell the Partnership's assets to pay
the debt. In addition, the agreements relating to the Partnership's debt contain
restrictive covenants which may in the future prevent the General Partner from
taking actions that it believes are in the best interest of the Partnership. The
agreements governing the Partnership's indebtedness generally prohibit the
Partnership from making cash distributions to holders of Units more frequently
than quarterly, from distributing amounts in excess of 100% of Available Cash
(as defined in the Partnership Agreement) for the immediately preceding calendar
quarter and from making any distribution to holders of Units if an event of
default exists or would exist upon making such distribution.
6
<PAGE>
Possible Change of Control if KMI Defaults on its Debt
Kinder Morgan, Inc. ("KMI") has pledged all of the stock of the General
Partner to secure KMI's indebtedness. If KMI were to default in the payment of
such debt, the lenders could acquire control of the General Partner.
The Partnership Could Have Significant Environmental Costs in the Future
The Partnership could incur significant costs and liabilities in the event
of an accidental leak or spill in connection with liquids petroleum products
transportation and storage. In addition, it is possible that other developments,
such as increasingly strict environmental laws and regulations, could result in
significant increased costs and liabilities to the Partnership.
Loss of Easements for Liquids Pipelines
A significant portion of the Liquids Pipelines are located on properties
for which the Partnership has been granted an easement for the construction and
operation of such pipelines. If any such easements were successfully challenged
(or if any non-perpetual easement were to expire), the Partnership should be
able to exercise the power of eminent domain to obtain a new easement at a cost
that would not have a material adverse effect on the Partnership, although no
assurance in this regard can be given. The Partnership does not believe that
Shell CO2 Company has the power of eminent domain with respect to its CO2
pipelines. The inability of the Partnership to exercise the power of eminent
domain could disrupt the Liquids Pipelines' operations in those instances where
the Partnership will not have the right through leases, easements,
rights-of-way, permits or licenses to use or occupy the property used for the
operation of the Liquids Pipelines and where the Partnership is unable to obtain
such rights.
Change in Management of Santa Fe Assets
As a result of the Partnership's acquisition of Santa Fe, the assets of
Santa Fe are under the ultimate control and management of different persons.
Risks Associated with Shell CO2 Company
The Partnership is entitled during the four year period ended December 31,
2002 to a fixed, quarterly distribution from Shell CO2 Company, to the extent
funds are available. If such amount exceeds the Partnership's proportionate
share of distributions during such period, the Partnership would receive less
than its proportionate share of distributions during the next two years (and
could be required to return a portion of the distributions received during the
first four years).
Competition
The Partnership is subject to competition from a variety of sources,
including competition from alternative energy sources (which affect the demand
for the Partnership's services) and other sources of transportation.
Risks Associated with the Partnership Agreement and State
Law
There are various risks associated with the Partnership's Second Amended
and Restated Agreement of Limited Partnership (the "Partnership Agreement"),
including, among others:
Unitholders have limited voting rights. Unitholders do not have the ability
to elect the management of the Partnership.
The vote of 66 2/3% of the Units is required to remove the General Partner,
which means that it will be difficult to remove the General Partner if one
or more Unitholders disagree with the General Partner.
The General Partner has the right to purchase all of the Units if at any
time the General Partner and its affiliates own 80% or more of the
outstanding limited partners interests. In addition, any Units held by a
person (other than the General Partner and its affiliates) that owns 20% or
more of the Units cannot be voted. The General Partner also has preemptive
rights with respect to new issuances of Units. These provisions may make it
more difficult for another entity to acquire control of the Partnership.
7
<PAGE>
No limit exists on the number or type of additional limited partner
interests that the Partnership may sell. A Unitholders' percentage interest
in the Partnership is therefore potentially subject to significant
dilution.
The Partnership Agreement purports to limit the General Partner's liability
and fiduciary duties to the holders of Units.
Unitholders may be required to return funds that they knew were wrongfully
distributed to them.
Conflicts of Interest
The General Partner may experience conflicts of interest with the
Partnership, which could result in the General Partner taking actions that are
not in the best interests of the Unit holders.
USE OF PROCEEDS
The Partnership will receive no portion of the proceeds of the sale of the
Units sold pursuant to the Selling Unitholder Offering. The Partnership will use
the proceeds received pursuant to the Partnership Offering hereunder in part to
repay borrowings under its $325 million revolving credit facility with Goldman
Sachs Credit Partners L.P., as Syndication Agent, First Union National Bank, as
Administrative Agent, and the other lenders that are a party to the facility
(the "Credit Facility").
Interest on loans under the Loan Facility accrues at the Partnership's option
at a floating rate equal to either First Union National Bank's base rate (but
not less than the Federal Funds Rate plus .5% per annum) or LIBOR plus a margin
that will vary from .75% to 1.5% per annum depending upon the ratio of the
Partnership's Funded Indebtedness to Cash Flow. Interest on advances is
generally payable quarterly. Commencing in May 2000, the amount available under
the Loan Facility reduces on a quarterly basis, with the final installment due
in February 2005. Any borrowings under the Credit Facility repaid with the net
proceeds from the Partnership Offering may be reborrowed by the Partnership for
any proper partnership purpose, including the financing of future acquisitions.
On February 18, 1998, the Partnership borrowed approximately $142 million to
refinance the First Mortgage Notes, including a make whole prepayment premium
thereunder, and the bank credit facilities of OLP-A and OLP-B (the "Refinanced
Indebtedness"). On March 5, 1998, the Partnership borrowed approximately $25
million to fund its cash investment in Shell CO2 Company. On March 6, 1998, the
Partnership borrowed approximately $90 million to fund its acquisition of the
general partner interest in Santa Fe and a portion of the transaction costs
associated with the acquisition of Santa Fe. The Partnership will borrow $_____
million to retire the VREDs that were not tendered in the VRED Exchange.
The Partnership's First Mortgage Notes were incurred in connection with the
original formation of the Partnership. The remainder of the Refinanced
Indebtedness was incurred for working capital and general partnership purposes.
The Partnership's First Mortgage Notes bore interest at a fixed rate of 8.79%
per annum. The remaining Refinanced Indebtedness bore interest at varying rates
(a weighted average rate of approximately 7.65% per annum as of December 31,
1997. The Partnership's First Mortgage Notes were payable in 10 equal annual
installments of $11 million commencing in June 1998. The remaining Refinanced
Indebtedness was scheduled to mature in 1999.
8
<PAGE>
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY
Price Range of Units
The following table sets forth certain information as to the sale prices
per Unit as quoted on the NYSE, and distributions declared with respect to each
calendar quarter, for each calendar year since the end of 1995, adjusted to give
effect to the 2 for 1 split of Units effective October 1, 1997.
<TABLE>
<CAPTION>
Sales Prices
-------------------------------
Calendar Year High Low Distributions
---- --- -------------
<S> <C> <C> <C>
1996
First Quarter........... $13.1875 $12.1875 $.3150
Second Quarter.......... 13.0000 12.4375 .3150
Third Quarter........... 14.0625 12.6875 .3150
Fourth Quarter.......... 14.5625 12.8125 .3150
1997
First Quarter........... $21.3750 $13.6875 $.3150
Second Quarter.......... 24.0625 19.2500 .5000
Third Quarter........... 36.8750 23.9375 .5000
Fourth Quarter.......... 41.2500 32.0000 .5625
1998
First Quarter........... $37.8750 $30.1250 $.5625
Second Quarter (through
_________, 1998).........
</TABLE>
On _____________, 1998, the last full trading day for which quotations were
available prior to the date of this Prospectus, the closing price for a Unit as
reported on the NYSE Composite Transaction Tape was $_________.
Distribution Policy
The Partnership Agreement requires the Partnership to distribute 100% of
"Available Cash" (as defined in the Partnership Agreement) to the Partners
within 45 days following the end of each calendar quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Partnership Distributions." The
Partnership currently pays quarterly distributions at the rate of $.5625 per
Unit. The Partnership currently expects that it will continue to pay comparable
cash distributions in the future assuming no adverse change in the Partnership's
operations, economic conditions and other factors. See "Risk Factors--Possible
Insufficient Cash to Pay Current Level of Distributions."
As of _______ ___, 1998, there were approximately ___ record holders of the
Partnership's Units and there were an estimated ____ beneficial owners of Units,
including Units held in street name.
9
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements of the Partnership
have been derived from the historical balance sheets and income statements of
the Partnership and Santa Fe as of December 31, 1997 and for the year then
ended. The unaudited pro forma combined financial statements have been prepared
to give effect to the acquisition of Santa Fe through the issuance of 1.39 Units
of the Partnership for each outstanding Santa Fe common unit and the purchase of
the general partner interest of Santa Fe for $84.4 million in cash using the
purchase method of accounting. The unaudited pro forma combined balance sheet
has been prepared assuming the acquisition of Santa Fe, the formation of Shell
CO2 Company and the refinancing of existing indebtedness had been consummated on
December 31, 1997. The unaudited pro forma combined statement of income for the
year ended December 31, 1997 has been prepared assuming the acquisition of Santa
Fe had been consummated on January 1, 1997.
The purchase price for Santa Fe allocated in the unaudited pro forma
combined financial statements is based on management's preliminary estimate of
the fair market values of assets acquired and liabilities assumed and are
subject to adjustment. The final allocation of the purchase price will be based
on the fair market values determined by valuations and other studies which are
not yet completed.
The unaudited pro forma combined financial statements assume all of the
VREDs are exchanged in the VRED Exchange, and accordingly, the VRED Exchange
will have no effect on the unaudited pro forma combined financial statements as
the Units to be exchanged are currently outstanding and held in escrow.
The unaudited pro forma combined financial statements include assumptions
and adjustments as described in the accompanying notes and should be read in
conjunction with the historical financial statements and related notes of the
Partnership and Santa Fe, incorporated by reference herein.
The unaudited pro forma combined financial statements may not be indicative
of the results that would have occurred if the acquisition of Santa Fe had been
consummated on the date indicated or which will be obtained in the future.
10
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED BALANCE SHEET
Partnership Santa Fe Pro Forma Pro Forma
Historical Historical Adjustments Combined
As of December 31, 1997
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $9,612 $40,872 $(19,200)(d) $25,484
(5,800)(e)
Accounts receivable.............................. 8,569 34,307 42,876
Inventories......................................
Products....................................... 1,901 1,901
Materials and supplies......................... 1,710 1,710
Other current assets............................. 2,875 2,875
-------- --------- ----------- ----------
21,792 78,054 (25,000) 74,846
Property, plant and equipment at cost............... 290,620 744,925 664,107 (a) 1,643,212
(56,440)(b)
Less accumulated depreciation.................... (45,653) (115,560) 115,560 (a) (45,653)
-------- --------- ------------ ----------
244,967 629,365 723,227 1,597,559
Investments in partnerships 31,711 81,440(b) 113,151
Deferred charges and other assets................... 14,436 19,303 1,705(d) 35,444
-------- --------- ------------ ----------
Total assets........................................ $312,906 $726,722 $781,372 $1,821,000
-------- -------- ------------ ----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities.................................
Accounts payable - Trade......................... 4,930 5,755 10,685
Accrued liabilities.............................. 3,585 32,920 12,000 (c) 48,505
Accrued taxes.................................... 2,861 2,861
-------- --------- ------------ ----------
11,376 38,675 12,000 62,051
Long-term debt...................................... 146,824 355,000 108,923 (d) 610,747
Deferred credits and other liabilities.............. 2,997 58,767 61,764
Minority interest................................... 1,485 1,342 9,623 (g) 11,582
(138)(d)
(730)(k)
Partners' capital...................................
Common Units..................................... 146,840 271,596 671,609 (a) 1,071,657
(13,368)(d)
(5,020)(k)
General partner.................................. 3,384 1,342 (1,342)(f) 3,199
(135)(d)
(50)(k)
150,224 272,938 651,694 1,074,856
-------- --------- ------------ ----------
Total liabilities and partners' capital............. $312,906 $726,722 $781,372 $1,821,000
-------- --------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED STATEMENT OF INCOME
Partnership Santa Fe Pro Forma Pro Forma
Historical Historical Adjustments Combined
Year Ended December 31, 1997
(in thousands, except per Unit amounts)
<S> <C> <C> <C> <C>
Revenues............................................. $73,932 $244,415 $318,347
Costs and expenses
Cost of products sold............................. 7,154 7,154
Operations and maintenance........................ 17,982 61,585 (2,625)(h) 76,942
Fuel and power.................................... 5,636 20,674 26,310
Depreciation and amortization..................... 10,067 21,351 9,961 (i) 41,379
General and administrative........................ 8,862 26,495 (7,875)(h) 27,482
Provision for litigation costs.................... 8,000 8,000
--------- --------- ---------- --------
49,701 138,105 (539) 187,267
-------- -------- ---------- --------
Operating income..................................... 24,231 106,310 539 131,080
Other income (expense)
Equity in earnings of partnerships................ 5,724 5,724
Interest expense.................................. (12,605) (35,922) (4,547)(j) (53,074)
Interest income and other, net.................... (174) 1,374 1,200
Minority interest.................................... (179) (2,315) 1,273 (l) (1,221)
------ -------- ---------- -------
Income before income taxes and extraordinary item.... 16,997 69,447 (2,735) 83,709
Income tax (expense)................................. 740 740
------- --------- ----------- -------
Net income before extraordinary item................. $17,737 $ 69,447 $(2,735) $ 84,449
------ ------- ---------- -------
General partner's interest in net income before
extraordinary item................................ $4,074 $2,315 $5,841 (l) $ 12,230
Limited partners' interest in net income before
extraordinary item................................ 13,663 67,132 (8,576)(l) 72,219
------- ------- ---------- -------
Net income before extraordinary item................. $17,737 $ 69,447 $(2,735) $ 84,449
------ ------- ---------- -------
Allocation of net income before extraordinary item per
limited partner unit.............................. $1.02 $1.80
---- ----
Number of units used in computation.................. 13,411 26,616 (a) 40,027
------- ---------- -------
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
12
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
(In thousands, except percentage and per Unit amounts)
Basis of Presentation
The following described pro forma adjustments give recognition to the
acquisition of Santa Fe through the issuance of 1.39 Units at a unit price, as
of the close of business on March 6, 1998, of $35.4375 to the public holders of
Santa Fe common units for each outstanding Santa Fe common unit, the redemption
of the general partner interest in Santa Fe for $84,400 in cash, a General
Partner cash contribution of $9,623, the refinancing of indebtedness and the
purchase of a 20% interest in Shell CO2 Company.
(a) Reflects the preliminary allocation of the total purchase price in excess
of the net assets acquired to estimated fair value of property, plant and
equipment utilizing the purchase method of accounting for the acquisition
of Santa Fe as of December 31, 1997. The purchase price allocation is
subject to revision based on a preliminary appraisal. The valuation of the
assets and liabilities is not complete as of the date of this filing.
The purchase price is calculated as follows:
Issuance of 26,616 Units....................... $ 943,205
Cash for general partner interest in Santa Fe.. 84,400
Involuntary termination costs.................. 12,000
Acquisition fees and other costs............... 13,000
---------
Total costs.................................... 1,052,605
Santa Fe net book value........................ 272,938
Excess of purchase price over net assets
acquired..................................... $ 779,667
---------
The excess of the purchase price over the book value of net assets acquired
is allocated to the fair market value of property, plant and equipment
acquired, which is yet to be finalized. The excess of the purchase price
over this fair value, if any, will be allocated to goodwill and amortized
over forty years.
(b) Gives effect to the purchase of a 20% equity interest in Shell CO2 Company
for a contribution of property, plant and equipment with a net book value
of $56,440 and cash of $25,000.
(c) Reflects the assumption of involuntary termination costs of certain Santa
Fe employees in connection with the Partnership's acquisition of Santa Fe
estimated to total $12,000 (net of a $4,500 reimbursement by Santa Fe).
(d) Reflects borrowings totaling $108,923 calculated as follows:
Cash for general partner interest in Santa Fe.. $84,400
Acquisition fees and other costs............... 13,000
General Partner cash contribution.............. (9,623)
Less: utilization of cash resources............ (19,200)
-------
Total Borrowings associated with Partnership's 68,577
acquisition of Santa Fe......................
Purchase of interest in Shell CO2 Company...... 25,000
Refinancing of existing debt................... 12,746
Credit facility fees........................... 2,600
------
Total.......................................... $108,923
--------
The Partnership entered into a revolving credit facility agreement on
February 17, 1998, in which a portion of the proceeds were used to
refinance certain existing long-term debt, including the payment of a
13
<PAGE>
$12,746 make-whole premium on certain debt. The payment of such make-whole
premium and write-off of unamortized debt costs of $895 will result in an
extraordinary loss of approximately $13,641 which is reflected in the Pro
Forma Balance Sheet as a reduction to Partners' Capital and minority
interest. The extraordinary loss and the interest expense associated with
the refinancing of certain debt, borrowings related to the make-whole
premium and the investment in the Shell CO2 Company are not directly
related to the acquisition of Santa Fe and are not reflected in the Pro
Forma Combined Statement of Income. The extraordinary loss will be recorded
in the first quarter of 1998.
(e) Gives effect to the utilization of $5,800 of cash from SFPP, L.P., the
operating partnership of Santa Fe ("SFPP"), to redeem a .5101% special
limited partner interest ("Special LP Interest") owned by the former
general partner of Santa Fe.
(f) To give effect to the removal of the former general partner of Santa Fe as
the general partner of Santa Fe.
(g) To account for the additional $9,623 cash contribution to Kinder Morgan
Operating L.P. "D" ("OLP-D") (minority interest of 1.0101%).
(h) To reduce operating and general and administrative expenses for the costs
related to certain employees involuntarily terminated in connection with
the acquisition of Santa Fe. The Partnership management has made explicit
determinations of salary, benefit, and other cost reductions resulting from
these terminations. Such reductions will have a continuing impact on
expenses in future periods. None of the identified terminations or cost
reductions will reduce revenues or efficiency of operations.
(i) To record estimated additional depreciation expense using a remaining
useful life of 45 years. The actual range of useful lives will not be known
until a formal analysis and appraisal of assets acquired is completed.
(j) Reflects incremental interest expense on new debt associated with the
acquisition of Santa Fe of $68,577 at a rate of 6.63% as discussed in (d)
above.
(k) Gives effect to the redemption of the .5101% Special LP Interest in
connection with the acquisition of Santa Fe. Pursuant to the Purchase
Agreement, SFPP redeemed a portion of the Special LP Interest from the
former Santa Fe general partner for $5,800. These amounts reduce Partners
Capital-Units by $5,020, Partners Capital-General Partner by $50, and
minority interest by $52. This leaves the former Santa Fe general partner
with a remaining minority Special LP Interest of .5% in SFPP.
(l) Gives effect to the allocation of pro forma net income to the General
Partner and the limited partners resulting from the utilization of
Partnership sharing ratios. Amounts are calculated giving consideration to
cash available for distribution after certain anticipated cost savings and
interest expense (see notes g and i, respectively). The General Partner's
interest in net income includes incentive distributions the General Partner
would have received based on total distributions. These incentive
distributions are greater under the Partnership's Partnership Agreement
than they would have been under the Santa Fe Partnership Agreement.
14
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth, for the periods and at the dates indicated,
selected historical financial and operating data for the Partnership and Santa
Fe. The data in the tables is derived from and should be read in conjunction
with the historical financial statements, including the notes thereto, of the
Partnership and Santa Fe incorporated by reference.
The Partnership
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per Unit and operating data)
Income and Cash Flow Data:
Revenues................ $51,180 $ 54,904 $ 64,304 $ 71,250 $ 73,932
Cost of product sold.... 685 940 8,020 7,874 7,154
Operating expense....... 12,932 13,644 15,928 22,347 17,982
------
Fuel and Power.......... 6,875 5,481 3,934 4,916 5,636
Depreciation............ 7,167 8,539 9,548 9,908 10,067
General and
administrative......... 7,073 8,196 8,739 9,132 8,862
----- ----- ----- ----- ------
Operating income........ 16,448 18,104 18,135 17,073 24,231
Equity in earnings of
Partnerships.......... 1,835 5,867 5,755 5,675 5,724
Interest (expense)...... (10,302) (11,989) (12,455) (12,634) (12,605)
Other income (expense).. 510 509 1,311 3,129 (353)
Income tax (provision)
benefit................ 83 (1,389) (1,432) (1,343) 740
--------- --------- --------- -------- -------
Net income.............. $8,574 $ 11,102 $ 11,314 $ 11,900 $ 17,737
========= ========= ======== ======== ========
Net income per Unit(1).. $.75 $ .93 $ .85 $ .90 $ 1.02
========= ========= ======== ======== =======
Cash distributions paid
per Unit.............. $ 1.26 $ 1.26 $ 1.26 $ 1.26 $ 1.63
========= ========= ======== = ========= =======
Additions to property,
plant and
Equipment(2).......... $ 4,688 $ 5,195 $ 7,826 $ 8,575 $ 6,884
Balance Sheet Data (at period end):
Net property, plant and
equipment.............. $228,859 $238,850 $236,854 $235,994 $244,967
Total assets............ 288,345 299,271 303,664 303,603 312,906
Long-term debt.......... 138,485 150,219 156,938 160,211 146,824
Partners' capital....... 132,391 128,474 123,116 118,344 150,224
Operating Data:
Liquids pipelines
transportation
Volumes (MBbls)......... 52,600 46,078 41,613 46,601 46,309
NGL fractionation
volumes
(MBbls)(3)............ 53,053 57,703 59,546 59,912 71,686
Gas processing volumes
(MMcf/d)<F4>.......... - 34 34 14 -
NGL revenue volumes
(MBbls)<F5>........... - - 477 1,638 395
CO2 transportation
Volumes (Bcf)......... 33 32 44 63 76
Coal transport volumes
(Mtons)<F6>........... 1,209 4,539 6,486 6,090 9,087
- --------------------------------------------------------------
<FN>
<F1> Represents net income per Unit adjusted for the 2-for-1 split of Units
effective on October 1, 1997. Allocation of net income per Unit was
computed by dividing the interest of the holders of Units in net income by
the weighted average number of Units outstanding during the period.
<F2> Additions to property, plant and equipment for 1993, 1994 and 1997 exclude
the $25,291, $12,825 and $11,688 of assets acquired in the September 1993
Cora Terminal, the June 1994 Painter Gas Processing Plant ("Painter Plant")
and the September 1997 Grand River Terminal (GRT) acquisitions,
respectively.
<F3> Represents total volumes for the Mont Belvieu Fractionator and the Painter
Plant.
<F4> Represents the volumes of the gas processing portion of the Painter
Plant, which has been operationally idle since June 1996.
<F5> Represents the volumes of the Bushton facility (beginning in October,
1995).
<F6> Represents the volumes of the Cora Terminal, excluding ship or pay volumes
of 252 Mtons for 1996 and the Grand Rivers Terminal from September 1997.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Santa Fe
Year Ended December 31,
(in thousands, except per Unit and operating data)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income and Cash Flow Data:
Total revenues............. $219,471 $228,066 $233,677 $240,142 $244,415
Operating expenses
(excluding provisions
for depreciation &
amortization)............ 95,178 97,199 103,196 107,941 108,754
Provisions for
environmental
And litigation costs... 27,000 - 34,000 23,000 8,000
Depreciation & amortization 18,971 19,820 20,500 21,080 21,351
Operating income........... 78,322 111,047 75,981 88,121 106,310
Interest expense........... 37,086 37,570 37,247 36,518 35,922
Other income (expense),
net..................... 380 3,408 1,633 672 (941)
Net income................. $ 41,616 $ 76,885 $ 40,367 $ 52,275 69,447
Per Unit Data:
Net income................. 2.13 3.93 2.04 2.64 $ 3.51
Cash distributions paid.... 2.80 2.80 2.95 3.00 3.00
Capital Expenditures: $ 21,084 $ 17,913 $ 31,431 $ 27,686 $ 24,934
Balance Sheet Data (at period
end):
Properties, plant and
equipment, net........... $616,610 $613,039 $623,318 $628,694 629,365
Total assets............... 696,980 714,772 720,854 725,818 726,722
Long-term debt............. 355,000 355,000 355,000 355,000 355,000
Total partners' capital.... 265,851 287,961 270,065 262,915 272,937
Operating Data:
Barrels delivered
(thousands)............... 332,679 349,754 354,324 365,377
Barrel miles (millions).... 46,579 49,070 50,010 51,827
Total revenue per barrel... $ 0.66 $ 0.65 $ 0.66 $ 0.66
</TABLE>
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Results of Operations of the Partnership
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Net income of the Partnership 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
("Chevron") for early termination of a gas processing contract at the Painter
Plant. See Note 5 of the Notes to the Consolidated Financial Statements of the
Partnership, incorporated herein by reference.
A significant earnings increase was attributable to the coal transfer,
storage, and services segment. This segment reported net income of $10.7 million
for 1997, $6.3 million (143%) higher than last year. Earnings from the coal
terminals increased 81%, primarily the result of increases in 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.
The liquids pipelines segment's net income increased to $23.9 million (8%) in
1997 compared to $22.1 million in 1996. Earnings from the Central Basin Pipeline
increased by 16%, as a result of higher throughput and a decrease in cost of
products sold. Increased throughput on the Cypress Pipeline, due to a 25,000
barrel per day expansion which came on-line in late November 1997, led to an
earnings increase of 9% over 1996. Earnings on the North System for 1997
increased 3% compared to last year, chiefly due to lower operating and
maintenance expenses.
Higher earnings from the segments cited above were offset by lower earnings in
the gas processing and fractionation segment. Segment earnings decreased $3.1
million in 1997, primarily the result of the $2.5 million non-recurring gain
recognized in 1996 (referred to above). Earnings from the Partnership's interest
in the Mont Belvieu Fractionator increased by 13% from a year ago. The favorable
Fractionator results included $.7 million of tax benefits associated with the
partial liquidating distribution of Kinder Morgan Natural Gas Liquids
Corporation ("KMNGL"), the corporate entity holding the Partnership's interest
in the Fractionator, partially offset by a $0.6 million reserve established for
a contested product loss. Lower overall segment earnings were due to the
termination of the Painter Plant's gas processing agreement by Chevron,
effective as of August 1, 1996.
Revenues of the Partnership increased 4% to $73.9 million in 1997 compared to
$71.3 million in 1996. Revenues from the coal transfer, storage, and services
segment totaled $18.2 million, up $10.1 million from 1996. The large increase
reflects the addition of the Red Lightning Energy Services unit and the Grand
Rivers Terminal starting in April and September, respectively. Revenues from the
Cora Terminal increased to $10.9 million (35%) in 1997. The increase resulted
from a 17% increase in volumes transferred, accompanied by a 6% increase in
average transfer rates.
1997 revenues reported by the liquids pipelines segment remained relatively
flat compared to 1996. Revenues in 1997 were $53.5 million compared to $54.0
million last year. 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. Revenue from the Central Basin Pipeline
was essentially unchanged.
Revenues from the gas processing and fractionation segment declined in 1997
compared to the previous year. The decrease was 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 (the "Mobil Agreement") to
KN Processing, Inc. on April 1, 1997.
Cost of products sold decreased 9% to $7.2 million in 1997 compared to 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. The
lower overall cost of sales was partially offset by costs incurred by the Red
Lightning Energy Services unit.
Fuel and power expense increased to $5.6 million in 1997 compared to $4.9
million in 1996. The 14% increase from the prior period was principally the
result of higher fuel costs reported by the liquids pipelines, as well as
increases in coal tons transferred by the coal terminals.
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<PAGE>
Operating and maintenance expenses, combined with general and administrative
expenses, were $23.9 million in 1997. This amount represents a 15% decrease from
the $28.0 million reported in 1996. A significant decrease in operating and
administrative expense resulted from the gas processing and fractionation
segment's assignment of the Mobil Agreement to KN Processing, Inc. and leasing
of the Painter Plant to Amoco Oil Company. Operating, maintenance, and
administrative expenses for the liquids pipelines in 1997 decreased by 10%
versus 1996 as a result of increased operating efficiencies and cost savings
realized by new management. Lower overall operating, maintenance, and general
and administrative expenses were partially offset by higher expenses from the
coal transfer, storage, and services segment. Higher operating expenses from
this segment were due to increased business activity.
Taxes other than income decreased $0.5 million (15%) in 1997 due to
adjustments to the liquids pipelines' ad valorem tax valuations and prior year
ad valorem tax provisions.
Other income which includes interest income, other non-operating income and
expense, and reserves, decreased $3.4 million in 1997. The decrease reflects the
$2.5 million buyout payment received from Chevron in 1996 and a $0.6 million
contested product loss at the Mont Belvieu Fractionator.
A decrease in the cumulative difference between book and tax depreciation and
the effect of a partial liquidating distribution resulted in a $2.1 million
reduction in income tax expense for 1997 compared to 1996.
Year Ended December 31, 1996 Compared With Year Ended
December 31, 1995
Net income of the Partnership increased to $11.9 million in 1996 from $11.3
million in 1995. The 5% increase was primarily due to increased operating
earnings from the liquids pipelines segment and a $2.5 million buyout payment
received from Chevron for early termination of a gas processing contract at the
Painter Plant. The liquids pipelines segment reported a 15% increase in net
income for 1996, chiefly due to increased earnings from the Central Basin
Pipeline and the Cypress Pipeline of 83% and 12%, respectively. Higher overall
Partnership earnings were partially offset by lower operating earnings from the
gas processing and fractionation segment and the coal transfer, storage, and
services segment.
Revenues of the Partnership increased 11% to $71.3 million in 1996 compared to
$64.3 million in 1995. The liquids pipelines' revenues increased 15% in 1996,
mainly due to a 55% increase in revenues reported by the Central Basin Pipeline.
Central Basin's increase in revenues was due primarily to a 41% increase in
transport volumes in 1996 as compared to 1995. Additionally, the North System's
revenues increased 7% in 1996 over 1995 due to a 12% increase in transport
volumes resulting from a favorable crop drying season and colder weather. The
gas processing and fractionation segment also reported higher revenues in 1996.
Overall, the segment's revenues increased 2% over the comparable period in 1995,
mainly due to a full year of revenues earned at the Bushton facility in
connection with the Mobil Agreement, which was assigned to the Partnership as of
October 1, 1995. The overall increase was somewhat offset by lower revenues at
the Painter Plant due to the Chevron gas processing contract termination and
unscheduled downtime due to an equipment malfunction.
Cost of products sold decreased $0.1 million (2%) in 1996 as compared to 1995
primarily due to reduced product sales on the North System.
Operating expense, including operations and maintenance expense, fuel and
power costs, and taxes other than income taxes, increased 37% to $27.3 million
in 1996 compared to $19.9 million in 1995, due to expenses incurred in
connection with the Mobil Agreement. Additionally, operating expense increased
$0.9 million as a result of a new storage agreement with a Partnership affiliate
on the North System that went into effect on January 1, 1996. The new storage
agreement increased the North System's storage capacity at Bushton, Kansas from
1.5 million barrels to 5.0 million barrels.
Depreciation expenses increased $0.4 million (4%) during 1996 as compared to
1995 primarily as a result of 1996 property additions.
General and administrative expenses increased $0.4 million (4%) in 1996 as
compared to 1995 primarily due to a 6% annual increase in reimbursements to
Enron for services provided to the Partnership by Enron and its affiliates.
Interest expense increased $0.2 million (1%) in 1996 as compared to 1995
primarily as a result of increased borrowings under OLP-A's working capital
facility due to borrowings for expansion capital expenditures.
18
<PAGE>
Interest income and Other, net income increased 128% to $3.3 million in 1996
as compared to $1.4 million in 1995 primarily due to the $2.5 million buyout
payment received from Chevron in 1996. In addition, other income for 1995
included a $0.5 million business interruption insurance settlement related to a
previous year event on the North System.
Results of Operations of Santa Fe
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Net income for Santa Fe increased $17.1 million, or 32.7%, to $69.4
million, or $3.51 per unit, in 1997, compared to $52.3 million, or $2.64 per
unit, in 1996 due to higher revenues and lower operating expenses. Results of
operations included provisions for litigation and transaction costs aggregating
$10.3 million in 1997 and provisions for litigation costs aggregating $23.0
million in 1996.
Total revenues for Santa Fe increased $4.3 million, or 1.8%, to $244.4
million in 1997, compared to $240.1 million in 1996. Trunk revenues increased
$3.8 million, or 2.0%, to $192.0 million in 1997, compared to $189.2 million in
1996, due to increased commercial revenues, partially offset by lower military
revenues, and a longer average length of haul. Storage and terminaling revenues
increased $0.8 million, or 2.1%, to $39.1 million in 1997 compared to $38.3
million in 1996. Other revenues increased $0.6 million, or 4.8%, to $13.3
million in 1997, compared to $12.6 million in 1996.
Total operating expenses decreased $13.9 million, or 9.2%, to $138.1 million in
1997, compared to $152.0 million in 1996, due to lower general and
administrative expenses, facilities costs and provisions for litigation costs,
partially offset by higher field operating expenses. Field operating expenses
increased by $7.5 million, or 20.1%, to $44.9 million in 1997, compared to $37.4
million in 1996, primarily due to lower product gains, higher maintenance costs
and higher centralized control costs. General and administrative expenses
decreased $3.8 million, or 12.5%, to $26.5 million in 1997, compared to $30.3
million in 1996, primarily due to lower property taxes due to tax credits
associated with the prior years. Facilities costs decreased $__ million, or
___%, to $____ million in 1997, compared to $___ million in 1996, primarily due
to interest income associated with the property tax credits.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Santa Fe reported 1996 net income of $52.3 million, or $2.64 per Santa Fe
unit, compared to net income of $40.4 million, or $2.04 per Santa Fe unit, in
1995, with the variance being primarily attributable to special items recorded
in both years. Results of operations included provisions for litigation costs
aggregating $23.0 million in 1996 and provisions for litigation costs
aggregating $23.0 million in 1996 and provisions for environmental and
litigation costs aggregating $34.0 million in 1995. Excluding these provisions,
adjusted net income was $74.5 million, or $3.76 per Santa Fe unit, in 1996,
compared to $73.3 million, or $3.70 per Santa Fe unit, in 1995.
Total 1996 revenues of $240.1 million were approximately 3% above 1995
levels. Trunk revenues of $189.2 million were $6.0 million higher than in 1995
primarily due to growth in total volumes transported. Commercial volumes were
about 3.5% higher, and military volumes 7.5% lower, than in 1995, and the
average length of haul was slightly greater. Commercial deliveries to all of the
major markets served by Santa Fe, including Southern California, increased
during 1996. The reduction in military volumes was largely attributable to the
downsizing and realignment of military bases served by Santa Fe. Storage and
terminaling revenues were about 2% higher than in 1995. Other revenues were 1%
lower than in 1995.
Total operating expenses of $152.0 million were $5.7 million lower than in
1995. Excluding the provisions described above, operating expenses would have
been $5.3 million, or about 4.5%, higher than in 1995, with higher field
operating expenses ($4.4 million), general and administrative expenses ($2.8
million) and depreciation and amortization ($0.6 million), being partially
offset by lower facilities costs ($1.8 million) and power costs ($0.7 million).
The increase in field operating expenses was largely attributable to higher
pipeline repairs and maintenance, including pipeline reconditioning projects,
and higher environmental costs, partially offset by reductions in certain other
field costs. General and administrative expenses were higher due to outside
legal costs, primarily associated with the East Line civil litigation, the FERC
proceedings, and environmental insurance litigation, higher employee health care
and other benefit costs, and business process redesign costs. The increase in
depreciation and amortization resulted from Santa Fe expanding capital asset
base. The decrease in facilities costs is largely attributable to approximately
$3 million in property tax refunds, partially offset by higher insurance
premiums and right-of-way rental costs. The decrease in power costs resulted
from periodic fuel cost adjustments received at several locations and savings
from power transmission capital investments. Excluding provisions,
19
<PAGE>
environmental remediation and East Line litigation costs recorded as operating
expense aggregated $9.6 million in 1996 and $7.0 million in 1995.
Other income, net decreased $0.6 million compared to 1995, primarily due to
lower interest income, attributable to lower cash balances, partially offset by
a gain on the sale of excess land.
Outlook
The Partnership intends to actively pursue a strategy to increase the
Partnership's operating income. A three-pronged strategy will be utilized to
accomplish this goal.
Cost Reductions. The Partnership has substantially
reduced its operating expenses and will continue to
seek further reductions where appropriate.
Internal Growth. The Partnership intends to expand the operations of its
current facilities. The Partnership has taken a number of steps that
management believes will increase revenues from existing operations,
including the following:
The Cypress Pipeline has expanded capacity by 25,000 barrels per day starting
in November, 1997.
The coal terminals, Cora and Grand Rivers, are each expected to handle
approximately 10 million tons during 1998 as a result of sales agreements and
other new business.
Earnings and cash flow as historically related to the operations of the
Central Basin Pipeline are expected to increase in 1998 as a result of the
partnership formed with Shell.
Strategic Acquisitions. The acquisition of Santa Fe closed on March 6, 1998.
The Partnership intends to seek opportunities to make additional strategic
acquisitions to expand existing businesses or to enter into related
businesses. The Partnership periodically considers potential acquisition
opportunities as such opportunities are identified by the Partnership. No
assurance can be given that the Partnership will be able to consummate any
such acquisitions. Management anticipates that acquisitions will be financed
temporarily by bank bridge loans and permanently by a combination of debt and
equity funding from the issuance of new Common Units.
Management increased the quarterly distribution from $0.3150 per Unit in
the first quarter of 1997 to $0.5625 per Unit for the fourth quarter of 1997.
The fourth quarter distribution was paid in February, 1998. Management intends
to maintain the distribution at an annual level of at least $2.25 per Unit
assuming no adverse change in the Partnership's operations, economic conditions
and other factors. See "Risk Factors--Possible Insufficient Cash to Pay Current
Level of Distributions."
Liquidity and Capital Resources
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 Partnership expects
to fund future cash distributions and sustaining capital expenditures with
existing cash and cash flows from operating activities. Discretionary capital
expenditures and principal repayments of indebtedness are expected to be funded
through additional Partnership borrowings. The following discussion of "Cash
Provided by Operating Activities", "Cash Used in Investing Activities" and "Cash
Used in Financing Activities" does not include Santa Fe.
Cash Provided by Operating Activities
Net cash provided by operating activities was $32.0 million for the year ended
December 31, 1997 versus $22.8 million for the comparable period of 1996. This
$9.2 million period-to-period increase in cash flow from operations was
primarily the result of a $5.8 million improvement in net earnings and a $2.8
million increase in distributions received from the Partnership's investment in
Mont Belvieu Associates. Total capital expenditures were $6.9 million in 1997,
including sustaining capital expenditures of $3.1 million.
20
<PAGE>
Net changes in working capital items provided $1.1 million in 1997, as
compared to $1.8 million used in 1996. This positive change in cash flow
resulted principally from an increase in current payables and liabilities. The
benefit was partially offset by lower deferred tax expenses ($2.0 million) in
1997 versus 1996. A 1997 tax benefit, producing an adjustment to deferred taxes,
resulted from the partial liquidation of KMNGL.
Cash Used in Investing Activities
Cash used in investing activities totaled $30.3 million in 1997 compared to
$9.1 million in 1996. This $21.2 million increase was mainly due to the
Partnership's purchase of $20.0 million of long-term assets relating to the
September 1997 acquisition of the Grand Rivers Terminal.
Excluding the effect of long-term assets purchased in the Grand Rivers
acquisition, additions to property, plant, and equipment were $6.9 million, $8.6
million, and $7.8 million for 1997, 1996, and 1995, respectively. Property
additions were highest in 1996 chiefly due to the construction of a new propane
terminal on the North System and pipeline laterals on the Central Basin
Pipeline.
Contributions to partnership investments increased $3.0 million in 1997 over
the prior year. The increase reflects the funding of the Partnership's share of
loan repayments associated with the 1996 expansion project at the Mont Belvieu
Fractionator.
Cash Used in Financing Activities
Net cash used in financing activities totaled $11.8 million in 1997 compared
to $13.6 million in 1996. This decrease of $1.8 million from the comparable 1996
period was the result of $33.7 million in net proceeds received from the
issuance of Common Units, partially offset by an increase in debt payments,
distributions to partners, and an increase in restricted cash.
The proceeds from the issuance of Units relate to the Partnership's issuance
of 1,091,200 Units in the third quarter of 1997. These proceeds were partially
utilized to reduce net debt by $15.1 million in 1997. Overall net debt financing
used for capital expansion projects on the Central Basin Pipeline and the North
System provided $3.3 million and $6.1 million in 1996, and 1995, respectively.
Distributions to partners increased to $24.3 million in 1997 compared to $16.8
million in 1996. This increase reflects an increase in the number of
Unitholders, an increase in paid distributions per Unit and an increase in
incentive distributions to the General Partner as a result of the higher
distributions to Unitholders. The Partnership paid distributions of $1.63 per
Unit in 1997 compared to $1.26 per Unit in 1996. The Partnership believes that
the increase in paid distributions resulted from favorable operating results in
1997. 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.
The Partnership's debt instruments generally require the Partnership 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 such payments. The Partnership's debt instruments generally
require the Partnership to set aside each quarter as a portion of the principal
and interest payments due in the next six to 12 months.
Partnership Distributions
The Partnership Agreement requires the Partnership to distribute 100% of
"Available Cash" (as defined in the Partnership Agreement) 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 Partnership 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 .5% interest in SFPP.
Available Cash of the Partnership generally is distributed 98% to the Limited
Partners (including the approximate 2% limited partner interest of the General
Partner) 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.
21
<PAGE>
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 to the General Partner that are
in excess of 2% of the aggregate amount of cash being distributed. The General
Partner's incentive distributions declared by the Partnership for 1997 were
3.9 million.
Credit Facilities
On February 17, 1998, the Partnership entered into a $325 million revolving
credit facility (the "Loan Facility") with Goldman Sachs Credit Partners L.P.,
as syndication agent, First Union National Bank, as administrative agent,
issuing bank and swingline lender, and the other financial institutions that are
lenders under the agreement. The Partnership and Kinder Morgan Operating L.P.
"B" ("OLP-B") are co-borrowers under the Loan Facility. Commencing in May 2000,
the amount available under the Loan Facility reduces on a quarterly basis, with
the final installment due in February 2005.
The obligations of the Partnership under the Loan Facility are guaranteed by
the Partnership's operating partnerships and each other Restricted Subsidiary
(as defined in the Loan Facility) of the Partnership (other than SFPP). The
Partnership has guaranteed the obligations of OLP-B under the Loan Facility. The
Loan Facility is secured by, among other things, a first priority lien on (i)
the Partnership's limited partner interests in the Partnership's operating
partnerships; (ii) all of the assets of OLP-D (including its general partner
interest in SFPP), (iii) the Partnership's ownership interests in the Mont
Belvieu Fractionator and Shell CO2 Company, and (iv) intercompany notes executed
by each of the Partnership's operating partnerships (other than SFPP) in favor
of the Partnership for loan proceeds lent to them by the Partnership. If the
Partnership fails to maintain certain financial ratios, then each of the
Partnership's operating partnerships will secure its intercompany note with its
assets.
Interest on loans under the Loan Facility accrues at the Partnership's option
at a floating rate equal to either First Union National Bank's base rate (but
not less than the Federal Funds Rate plus .5% per annum) or LIBOR plus a margin
that will vary from .75% to 1.5% per annum depending upon the ratio of the
Partnership's Funded Indebtedness to Cash Flow. Interest on advances is
generally payable quarterly.
The Loan Facility includes restrictive covenants that are customary for this
type of facility, including without limitation, the maintenance of certain
financial ratios and restrictions on (i) the incurrence of additional
indebtedness; (ii) entering into mergers, consolidations, and sales of assets;
(iii) making investments; and (iv) granting liens. In addition, the Loan
Facility generally prohibits the Partnership from making cash distributions to
holders of Common Units more frequently than quarterly, from distributing
amounts in excess of 100% of Available Cash for the immediately preceding
calendar quarter, and from making any distribution to holders of Common Units if
an event of default exists or would exist upon making such distribution.
On February 18, 1998, the Partnership borrowed approximately $142 million to
refinance the First Mortgage Notes, including a prepayment premium, and the bank
credit facilities of Kinder Morgan Operating L.P. "A" ("OLP-A") and OLP-B (the
"Refinanced Indebtedness"). On March 5, 1998, the Partnership borrowed
approximately $25 million to fund its cash investment in Shell CO2 Company. On
March 6, 1998, the Partnership borrowed approximately $90 million to fund its
acquisition of the general partner interest in Santa Fe and a portion of the
transaction costs associated with the acquisition of Santa Fe. The remaining
availability under the Loan Facility will be used to fund the payment at par of
any VREDs not tendered in the exchange offer described below and for general
working capital and other general partnership purposes.
The Partnership First Mortgage Notes were incurred in connection with the
original formation of the Partnership. The remainder of the Refinanced
Indebtedness was incurred for working capital and general partnership purposes.
The Partnership's First Mortgage Notes bore interest at a fixed rate of 8.79%
per annum. The remaining Refinanced Indebtedness bore interest at varying rates
(a weighted average rate of approximately 7.65% per annum as of December 31,
1997). The Partnership's First Mortgage Notes were payable in 10 equal annual
installments of $11 million commencing in June 1998. The remaining Refinanced
Indebtedness was scheduled to mature in 1999.
As of December 31, 1997, SFPP's long term debt aggregated $355 million and
consisted of $276.5 million of First Mortgage Notes (the "SF Notes") and a $78.5
million borrowing under SFPP's $175 million bank credit facility. The SF Notes
are payable in annual installments through December 15, 2004. The credit
facility matures in
22
<PAGE>
August 2000. The Partnership intends to refinance some or all of the remaining
SF Notes as they become payable. The credit facility permits SFPP to refinance
the $64 million of SF Notes due on or before December 15, 1999 (plus a $31.5
million prepayment allowed on such date). The SFPP credit facility also provides
for a working capital facility of up to $25 million.
Capital Requirements for Recent Transactions
Shell CO2 Company. On March 5, 1998, the Partnership transferred the Central
Basin Pipeline and $25 million in cash to Shell CO2 Company in exchange for a
20% limited partner interest in Shell CO2 Company. The Partnership financed its
cash investment in Shell CO2 Company through the Loan Facility.
Santa Fe Pacific Pipeline Partners, L.P. On March 6, 1998, the Partnership
acquired substantially all of the assets of Santa Fe for approximately $1.4
billion in aggregate consideration consisting of approximately 26.6 million
Units, $84.4 million in cash and the assumption of certain liabilities. The
Partnership financed the $84.4 million cash portion of the purchase price and a
portion of the transaction expenses through the Loan Facility.
In September 1990, SFP Pipeline Holdings, Inc., the parent corporation of the
general partner of Santa Fe, ("SF Holdings"), issued $218,981,000 principal
amount of Variable Rate Exchangeable Debentures ("VREDs"). Originally, the VRED
Holders were entitled to received 37.2093 Santa Fe common units for each $1,000
principal amount of VREDs upon the happening of certain triggering events, such
as a change of control, merger or sale of substantially all of the assets (each
an "Exchange Event").
The acquisition of substantially all of the assets of Santa Fe constituted
an Exchange Event. As a result of the acquisition, SF Holdings and the VRED
trustee entered into a supplemental indenture dated as of March 6, 1998,
pursuant to which each $1,000 principal amount of VREDs became exchangeable for
51.720927 Units (the 37.2093 Santa Fe common units for which such VREDs were
previously exchangeable multiplied by 1.39, the exchange ratio for the Santa Fe
transaction) or an aggregate of approximately 11.3 million Units.
The Partnership agreed as part of the acquisition that it would cause OLP-D
to perform all of SF Holdings' obligations related to the VREDs.
Prior to the acquisition of Santa Fe, the former general partner owned
approximately 8.1 million Santa Fe common units, which was approximately equal
to the total number of Santa Fe common units into which the VREDs were
exchangeable. As a result of the acquisition, those Santa Fe common units were
converted into approximately 11.3 million Units. The general partner has placed
the certificate representing the approximately 11.3 million Units into escrow to
satisfy SF Holdings' obligations under the Indenture and these Units will be
delivered in exchange for any VREDs tendered.
Any VREDs that are not validly tendered for exchange will become due and
payable in full in cash at par, plus accrued and unpaid interest, on June 4,
1998 (the "Exchange Date") and the Units into which such VREDs were exchangeable
will be canceled. The Loan Facility permits the Partnership to borrow up to $25
million to finance the payment of any VREDs not tendered for exchange. Since the
value of the Units to be received in the exchange offer currently exceeds the
face value of the VREDs, the Partnership does not anticipate that such amounts
will exceed $25 million.
Year 2000
The Partnership is assessing its internal computer systems and software to
ensure that its information technology infrastructure will be Year 2000 capable.
The Partnership cannot reasonably estimate, at this time, the potential impact
on its financial position and operations if key suppliers, customers and other
third parties with whom the Partnership conducts business (including other
pipelines with which it interconnects) do not become Year 2000 capable on a
timely basis. Costs incurred to become Year 2000 capable are not expected to
have a material adverse effect on the Partnership's financial position or
results of operations.
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THE PARTNERSHIP
General
The Partnership is a publicly traded MLP formed in August 1992. The
Partnership manages a diversified portfolio of midstream energy assets,
including six refined products/liquids pipeline systems containing over 5,000
miles of trunk pipeline and 21 truck loading terminals. The Partnership also
owns two coal terminals, a 20% interest in Shell CO2 Company and a 25% interest
in a Y-grade fractionation facility.
On March 6, 1998, the Partnership acquired substantially all of the assets
of Santa Fe, which assets currently comprise the Partnership's Pacific
Operations, for an aggregate consideration of approximately $1.4 billion,
consisting of approximately 26.6 million Units, $84.4 million in cash and the
assumption of certain liabilities. On March 5, 1998, the Partnership contributed
its 157 mile Central Basin CO2 Pipeline and approximately $25.0 million in cash
for a 20% limited partner interest in Shell CO2 Company.
The address of the Partnership's principal executive offices is 1301
McKinney Street, Suite 3450, Houston, Texas 77010 and its telephone number at
this address is (713) 844-9500.
Business Strategy
General. Management's objective is to operate as a growth-oriented,
publicly traded MLP by reducing operating costs, better utilizing and expanding
its asset base, and making selective, strategic acquisitions that are accretive
to Unitholder distributions. The General Partner's incentive distributions
provide it with a strong incentive to increase Unitholder distributions through
successful management and business growth. With the addition of the Pacific
Operations, the Partnership has become the largest pipeline MLP and the second
largest products pipeline system in the United States in terms of volumes
delivered.
Pacific Operations. The Partnership plans to extend its presence in the
rapidly growing refined products market in the Western United States through
incremental expansions and accretive acquisitions. In the near term, the
Partnership expects to realize $15-$20 million per year in cost savings through
elimination of redundant general and administrative and other expenses.
North System. Because the North System serves a relatively mature market,
the Partnership's strategic development will focus on increasing incremental
throughput by remaining a reliable, cost-effective provider of transportation
services, by using creative incentive programs that ensure product supply
availability, and by continuing to increase the range of products transported
and services offered.
Shell CO2 Company. Within the Permian Basin, the strategy of Shell CO2
Company is to offer customers "one-stop shopping" for CO2 supply, transportation
and technical support service. Outside the Permian Basin, Shell CO2 Company will
compete aggressively for the new supply and transportation projects which will
arise as other U.S. oil producing basins mature and make the transition from
primary production to enhanced recovery methods.
Coal Terminals. Both of the Partnership's coal terminals are strategically
positioned to benefit from the expected increased demand for low sulfur western
coals in eastern U.S. markets due to increasing environmental compliance
standards. Because many utilities' compliance strategies require a diverse blend
of higher and lower sulfur coals, the Partnership's modern blending facilities
and large storage capacities enable it to offer higher margin services to its
customers. During 1997, the Partnership expanded throughput and storage capacity
at the Cora Terminal and in 1998 began expansion of its Grand Rivers Terminal.
24
<PAGE>
The Partnership's operations are grouped into three reportable business
segments: Liquid Pipelines; Coal Transfer, Storage and Services; and, Gas
Processing and Fractionation. The following charts reflect 1997 revenues,
earnings and EBITDA for the Partnership's segments.
[Pie Charts showing the following information:
<TABLE>
<CAPTION>
1997 1997 Segment 1997 Segment
Revenues Earnings (a) EBITDA (b)
-------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Pacific Liquids Pipelines(c) $244.415 76.8% $134.179 77.8% $155.530 78.8%
Mid-Continent Liquids Pipelines 53.511 16.8% 23.884 13.9% 31.953 15.7%
Coal Transfer, Storage and
Services(d) 18.155 5.7% 10.708 6.2% 11.788 5.8%
Gas Processing and Fractionation 2.266 0.7% 3.598 2.1% 3.798 1.9%
-------- ------ -------- ------ -------- ------
318.347 100.0% 172.389 100.0% 203.047 100.0%
<FN>
(a)Excludes interest and debt expense, general and administrative expense,
minority expense and other insignificant items.
(b)Segment Earnings plus depreciation, amortization and income taxes.
(c) The amounts reflected state the historical performance of Santa Fe and may
not be indicative of the results that would have occurred if the acquisition of
Santa Fe had been consummated on January 1, 1997 or which will be obtained in
the future.
(d)1997 results include only four months of Grand Rivers Terminal operations
(acquired 9/1/97).]
</FN>
</TABLE>
Liquids Pipelines
The Partnership's Liquids Pipelines segment is conducted through two
geographic divisions; Pacific Operations and Mid-Continent Operations. The
segment includes both interstate common carrier pipelines regulated by the FERC
and intrastate pipeline systems, which are regulated by the CPUC in California.
Products transported on these pipelines include refined petroleum products, NGLs
and CO2.
Refined petroleum products and related uses are:
Product Use
- ---------------------------------------------------------------------------
Gasoline Transportation
Jet / Kerosene Commercial and military air transportation
Distillate Transportation (auto, rail, marine), farm, industrial and
commercial
Residual Fuels Marine transportation, power generation
- ---------------------------------------------------------------------------
Natural gas liquids are typically extracted from natural gas in liquid form
under low temperature and high pressure conditions. NGL products and related
uses are:
Product Use
- --------------------------------------------------------------------------
Propane Residential heating and agricultural uses, 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
- --------------------------------------------------------------------------
CO2 is used in enhanced oil recovery projects as a flooding medium for
recovering crude oil from mature oil fields.
The Liquids Pipelines are, in general, located on land owned by others and
are operated under easements or rights-of-way granted by land owners. Where
Partnership facilities are located on or across public property, railways,
rivers, roads or highways, or similar crossings, they are operating under
permits or easements from public authorities, railways, or public utilities,
some of which are revocable at the election of the grantor.
Pacific Operations
The Pacific Operations, which include the South Line, North Line, Oregon
Line and San Diego Line, serve six western states with approximately 3,300 miles
of refined petroleum products pipeline and related terminal facilities. The
Pacific Operations pipelines transport approximately one million barrels per day
of refined petroleum products, consisting primarily of: gasoline (63%), diesel
fuel (20%) and jet fuel (17%). The operations also include 13 truck
25
<PAGE>
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 Los Angeles and Orange, California areas as well as the Las
Vegas, Nevada and the Tucson-Phoenix, Arizona regions. Pipeline transportation
of gasoline and jet fuels has a direct correlation with demographic patterns.
The positive demographic changes associated with the Pacific Operations are
expected to continue in the future.
South Line. The South Line consists of two pipeline segments, the West Line
and the East 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 and various intermediate commercial and military delivery 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 and intermediate
points. The West Line serves Partnership 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. 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 transports
refined petroleum products for approximately 17 shippers and serves Partnership
terminals located in Tucson and Phoenix.
In late 1995, Diamond Shamrock, Inc. completed construction of a new
10-inch diameter refined petroleum products pipeline from its refinery near
Dumas, Texas to El Paso. In late 1996, Diamond Shamrock connected this pipeline
to the East Line and began shipping products to Tucson and Phoenix.
Longhorn Partners Pipeline is a proposed joint venture project which 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, such shift of supply sourcing has not had, and is not expected to have, a
material effect on operating results.
North Line. The North Line consists of approximately 1,075 miles of
pipeline in six segments originating in Richmond, Concord and Bakersfield,
California. This line serves the Partnership's 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 area. A small percentage of supply is received from various pipeline
and marine terminals that deliver products from foreign and domestic ports.
Substantially all of the products shipped through the Bakersfield-Fresno segment
of the North Line are supplied by a refinery located in Bakersfield.
Oregon Line. The Oregon Line is a 114-mile pipeline serving approximately
ten shippers. The Oregon Line receives products from marine terminals in
Portland, Oregon and from Olympic Pipeline, a non-affiliated carrier, which
transports products from the Puget Sound, Washington area to Portland. From its
origination point in Portland, the Oregon Line extends south and serves the
Partnership terminal located in Eugene, Oregon.
San Diego Line. The San Diego Line is a 135-mile pipeline serving major
population areas in Orange County (immediately south of Los Angeles) and San
Diego, California. Approximately 20 shippers transport products on this line,
supplied by the same refineries and terminals that supply the West Line, and
extends south to serve Partnership terminals in the cities of Orange and San
Diego.
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 certain intermediate points along each line where deliveries are
made. These terminals furnish short-term product storage, truck loading and
ancillary services, such as vapor recovery, additive injection, oxygenate
blending and quality control. The simultaneous truck loading capacity of each
terminal ranges from 2 to 12 trucks.
26
<PAGE>
The capacity of terminaling facilities varies throughout the pipeline
systems and terminal facilities are not owned at all pipeline delivery
locations. At certain locations, product deliveries are made to facilities owned
by shippers or independent terminal operators. Truck loading and other terminal
services are provided as an additional service, and a separate fee (in addition
to transportation tariffs) is charged.
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, the demand for which is dependent on
such factors as prevailing economic conditions and demographic changes in the
markets served. The majority of the Pacific Operations' market is expected to
maintain growth rates that exceed the national average for the foreseeable
future.
Currently, the California gasoline market is approximately 900,000 barrels
per day, of which the Partnership transports in excess of 65%. The Arizona
gasoline market is served primarily by the Partnership 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 market is approximately 377,000 barrels per day, 78,000 barrels per
day, 72,000 barrels per day and 62,000 barrels per day in California, Arizona,
Nevada and Oregon, respectively.
The volume of products transported is directly affected by the level of
end-user demand for such products in the geographic regions served. Certain
product volumes can experience seasonal variations and overall volumes are
generally slightly lower during the first and fourth quarters of each year.
Supply. The majority of refined products supplied to the Pacific Operations
initiate 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: (1) terminals operated by GATX,
Mobil and others on the Washington/Oregon coast; (2) the Wickland Terminal on
the Northern California Coast; and (3) terminals operated by GATX, Shell and
ASTC on the Southern California Coast.
Competition. The most significant competitors of the Pacific Operations
pipeline systems are proprietary pipelines owned and operated by major oil
companies in the area where the pipeline system delivers products, refineries
within the Partnership's market areas and related trucking arrangements. The
Partnership believes 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, provided that the Partnership has available capacity to satisfy demand
and its tariffs remain at reasonable levels. However, the possibility of
pipelines being constructed to serve specific markets is a continuing
competitive factor. Trucks may competitively deliver products in certain
markets. Increased utilization of trucking by major oil companies has caused
minor but notable reductions in product volumes delivered to certain
shorter-haul destinations, primarily Orange and Colton, California. Management
cannot predict with certainty whether this trend towards increased short-haul
trucking will continue in the future.
Mid-Continent Operations
The Mid-Continent Operations include the North System, the Cypress
Pipeline, and the Partnership's interests in Shell CO2 Company and the Heartland
Pipeline Company.
North System
General. The North System is an approximately 1,600 mile interstate common
carrier NGL and refined petroleum products pipeline system that extends from
South Central Kansas to the Chicago area. South Central Kansas is a major hub
for producing, gathering, storing, fractionating and transporting NGLs. The
North System's primary pipeline is composed of approximately 1,400 miles of 8"
and 10" pipelines and includes (i) two parallel pipelines (except for a 50-mile
segment in Nebraska) originating at Bushton, Kansas and continuing to a major
storage and terminal area in Des Moines, Iowa, (ii) a third pipeline, which
extends from Bushton to the Kansas City, Missouri area, and (iii) a fourth
pipeline that transports product to the Chicago area from Des Moines. Through
interconnections with other major liquids pipelines, the pipeline system
connects Mid-Continent producing areas to markets in the Midwest and eastern
United States. The North System operated at approximately 62%, 66% and 59% of
capacity during 1997, 1996, and 1995 respectively.
27
<PAGE>
The Partnership has defined sole carrier rights to utilize capacity on an
extensive pipeline system owned by the Williams Company which interconnects with
the North System. The Partnership negotiated an amendment to this capacity lease
agreement in March, 1998 which extends the lease term to February, 2013, with a
five year renewal option. A reduction in the minimum guaranteed payment and an
increase in capacity provided for such payment under this agreement should
result in expected annual cost savings to the Partnership of approximately
$600,000.
The following table sets forth volumes (MBbls) of NGLs transported on the
North System for delivery to the various markets for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ----- ---- ---- ----
Volumes (MBbls)
<S> <C> <C> <C> <C> <C>
Petrochemicals 1,200 684 1,125 2,861<F1> 11,201
Refineries & line reversal 10,600 9,536 9,765 10,478 9,676
Fuels 7,976 10,500 7,763<F2> 10,039 8,957
Other <F3> 7,399 8,126 7,114 6,551 6,879
------- ------- ------ ------ -----
Total 27,175 28,846 25,767 29,929 36,713
====== ====== ====== ====== ======
<FN>
<F1> The 1994 volumes reflect the loss of the major petrochemical shipper as of
February 28, 1994.
<F2> The 1995 volumes reflect the shut down of a synthetic natural gas plant in
1995.
<F3> NGL gathering systems and Chicago originations other than long-haul volumes
of refinery butanes.
</FN>
</TABLE>
The North System has approximately 7.3 million barrels of storage capacity
which include caverns, steel tanks, pipeline line-fill 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-terminal complex at Morris, Illinois, in the Chicago
area, which is capable of loading 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 NGLs.
These shippers include all four major refineries in the Chicago area. Wholesale
marketers of NGLs primarily make direct large volume sales to major end-users,
such as propane marketers, refineries, petrochemical plants, and industrial
concerns.
Market demand for NGLs varies in respect to the different end uses to which
NGL products may be applied. Demand for transportation services is influenced
not only by demand for NGLs, but also by the available supply of NGLs.
Supply. NGLs extracted or fractionated at the Bushton gas processing plant
operated by KN Processing, Inc. have historically accounted for a significant
portion of the NGLs transported through the North System (approximately 40-50%).
Other sources of NGLs transported in the North System include major independent
oil companies, marketers, end-users and natural gas processors that use
interconnecting pipelines to transport hydrocarbons.
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 NGLs and refined
petroleum products. Therefore, the Partnership's primary competition is
represented by pipelines owned and operated by others.
In the Chicago area, the North System competes with other NGL 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 not served by the North System, such
as the Gulf Coast market area.
Shell CO2 Company
General. On March 5, 1998, the Partnership and affiliates of Shell agreed
to combine their CO2 activities and assets into a partnership (Shell CO2
Company) to be operated by Shell. The Partnership acquired, through a
28
<PAGE>
newly created limited liability company, a 20% interest in Shell CO2 Company in
exchange for contributing its Central Basin Pipeline and approximately $25
million in cash. Shell contributed its approximately 45% interest in the McElmo
Dome CO2 reserves, its 11% interest in the Bravo Dome CO2 reserves, its indirect
50% interest in the Cortez pipeline, its indirect 13% interest in the Bravo
pipeline and other related assets in exchange for an 80% interest in Shell CO2
Company. The Cortez and Bravo pipelines connect CO2 reserves in the McElmo and
Bravo Domes principally to Denver City, Texas, where they interconnect with the
Central Basin Pipeline, among others. Shell CO2 Company is the industry leader
in the supply and transportation of CO2.
The Partnership's approval will be required for certain key decisions,
including (i) capital calls in excess of $5 million, (ii) changes in
distribution policy and (iii) approval of the five-year budget. The combination
of Partnership and Shell assets facilitates the marketing of CO2 by bringing a
complete package of CO2 supply, transportation and technical expertise to the
customer. By creating an area of mutual interest in the continental U.S., the
Partnership will have the opportunity to participate with Shell in certain new
CO2 projects in the region. Altura, Shell's joint venture with Amoco, is also a
major user of CO2 in its West Texas fields.
Under the terms of the Shell CO2 Company partnership agreement, the
Partnership will receive a priority distribution of $14.5 million per year for
the first four years. To the extent the amount paid to the Partnership over the
first four years is in excess of 20% of Shell CO2 Company's distributable cash
flow for such period (discounted at 10%), the amount of such overpayment will be
deducted from the Partnership's distributions equally over years five and six.
At any time after March 5, 2002, Shell has the right to purchase the
Partnership's interest in Shell CO2 Company, and the Partnership has the right
to require Shell to purchase the Partnership's interest in Shell CO2 Company.
The purchase price for the Partnership's interest in Shell CO2 Company will be
at a discount from fair value in the event the Partnership exercises its put
option, and at a premium over fair value in the event Shell exercises its call
option. The amount of the discount or premium declines during the period from
March 5, 2003 through March 5, 2006 and is thereafter fixed at a 5%
discount/premium. If the parties are unable to agree to the fair value of the
Partnership's interest in Shell CO2 Company, then the Partnership and Shell will
use an agreed-upon appraisal methodology to determine fair value.
McElmo and Bravo Domes. Shell CO2 Company operates and owns 45% of the
McElmo Dome which contains more than 10 trillion cubic feet ("TCF") of nearly
pure CO2. The remaining interest in McElmo is owned by Mobil (approximately
40%), Chevron (approximately 4%) and others. This dome produces from the
Leadville formation at 8,000 feet through wells that deliver gas at individual
rates up to 50 MMcf/d. Delivery capacity exceeds one Bcf per day to the Permian
Basin and 60 MMcf/d to Utah, and additional expansions are under consideration.
The Bravo Dome, of which Shell CO2 Company owns 11%, holds reserves of
approximately eight TCF and covers an area of more than 1,400 square miles. It
produces more than 400 MMcf/d from more than 350 wells in the Tubb Sandstone at
2,300 feet. The remaining interest in the Bravo Dome is owned by Amoco
(approximately 74%), Amerada Hess (approximately 10%) and others.
CO2 Pipelines. The 502-mile, 30-inch Cortez Pipeline, operated by a Shell
affiliate, carries CO2 from the McElmo Dome source reservoir to the Denver City,
Texas hub. The Cortez line currently transports in excess of 800 MMcf/d,
including approximately 90% of the CO2 transported on the Central Basin Pipeline
(see below). The Cortez Pipeline is owned by Shell CO2 Company (50%), Mobil
(37%) and Cortez Vickers Pipeline Company (13%).
The 20-inch Bravo pipeline runs 218 miles to the Denver City hub and has a
capacity of more than 350 MMcf/d. Major delivery points along the line include
the Slaughter Field in Cochran and Hockley counties, Texas, and the Wasson field
in Yoakum County, Texas. Tariffs on the Cortez and Bravo pipelines are not
regulated. The Bravo Pipeline is owned by Amoco (81%), Shell CO2 Company (13%)
and Markland (6%).
Placed in service in 1985, the Central Basin Pipeline consists of
approximately 143 miles of 16" to 20" main pipeline and 157 miles of 4" to 12"
lateral supply lines located in the Permian Basin between Denver City and
McCamey, Texas with a throughput capacity of 600 MMcf/d. At its origination
point in Denver City, the Central Basin Pipeline interconnects with all three
major CO2 supply pipelines from Colorado and New Mexico, namely the Cortez,
Bravo and Sheep Mountain pipelines (operated by Shell, Amoco, and ARCO,
respectively). The mainline terminates near McCamey where it interconnects with
the Canyon Reef Carriers, Inc. pipeline.
29
<PAGE>
CO2 pipeline profitability is dependent upon the demand among oil producers
for CO2 in connection with enhanced oil recovery programs. The level of enhanced
oil recovery programs is sensitive to the level of oil prices. Although CO2
floods are initially capital-intensive, they have relatively low ongoing
operational costs. Many existing floods remain economic at oil prices as low as
$5 per barrel. While volumes have increased on all three of Shell CO2 Company's
pipelines, significant capacity exists for additional CO2 movement. This system
should benefit from increased utilization due to the increased use of enhanced
recovery techniques by companies expanding or initiating recovery projects. The
CO2 pipelines' tariffs are not regulated.
Competition. Shell CO2 Company's primary competitors for the sale of CO2
include suppliers which have an ownership interest in McElmo Dome, Bravo Dome
and Sheep Mountain Dome CO2 reserves.
Shell CO2 Company's ownership interests in the Cortez and Bravo pipelines
are in direct competition with Sheep Mountain pipeline, as well as competing
with one another, for transportation of CO2 to the Denver City market area.
Competitive position is influenced by providing a lower laid in price in Denver
City. The laid in price is a combination of the commodity price from the source
field and the transportation fee to move it to the market. Utilization of Shell
CO2 Company's Central Basin pipeline, which runs from Denver City to the Permian
Basin is generally dependent upon the relative distance between it and other
competing pipelines to a CO2 flood project.
There is no assurance that new CO2 source fields will not be discovered
which could compete with Shell CO2 Company or that new methodologies for
enhanced oil recovery could replace CO2 flooding.
Cypress Pipeline
General. The Cypress Pipeline, which began operations in April 1991, 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 NGL gathering, transportation, fractionation and storage in the
United States and is located at the intersection of multiple long-haul NGL
pipelines as well as NGL pipelines for transportation to the Port of Houston,
the area with the largest concentration of major petrochemical plants and
refineries in the United States.
Markets. The 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 producer is a private company engaged primarily in the
olefins and vinyls businesses in North America with 20 operating sites producing
in excess of 7 billion pounds per year of product. The contract requires a
minimum volume of 30,000 barrels per day. In 1996, the Partnership entered into
an agreement with the producer to expand the Cypress Pipeline's capacity by
25,000 barrels per day to 57,000 barrels per day. The expansion was completed on
October 31, 1997. In addition, a new five-year ship-or-pay contract with the
producer was signed for a minimum of 13,700 additional barrels per day and
shipment of additional volumes began on December 1, 1997. Management continues
to pursue projects that could increase throughput on the Cypress Pipeline.
The producer has elected to be an "investor shipper" and as such has the
right, at the end of any year during the contract term, to purchase up to a 50%
joint venture interest in the Cypress Pipeline at a price established in
accordance with a formula contained in the transportation agreement. The
Partnership believes, based on the formula purchase price and current market
conditions, that it would be uneconomical for the producer to exercise its
buy-in option in the foreseeable future.
Supply. The Cypress Pipeline originates in Mont Belvieu where it is able to
receive ethane from local storage facilities. Mont Belvieu has facilities to
fractionate NGLs received from several pipelines into ethane and other
components. Additionally, ethane is supplied to Mont Belvieu through pipeline
systems that transport specification NGLs from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma, and the Mid-Continent Region.
Heartland Pipeline Company
General. The Heartland pipeline was completed in the fall of 1990 and is
owned by Heartland Pipeline Company ("Heartland"), a partnership owned equally
by the Partnership and Conoco. The core of Heartland's pipeline system is one of
the North System's main line sections that originates in Bushton, Kansas.
Heartland leases certain specified pipeline capacity to ship refined petroleum
products on this line under a long-term lease agreement that will expire in
2010. Heartland's Des Moines terminal has five main tanks that allow storage of
approximately 200,000 barrels of gasoline and fuel oils.
30
<PAGE>
Under Heartland's organizational structure and partnership agreement, the
Partnership operates the pipeline, and Conoco operates Heartland's Des Moines
terminal and serves as the managing partner.
Markets. Heartland provides transportation of refined petroleum products
from refineries in the Kansas and Oklahoma area to a Conoco terminal in Lincoln,
Nebraska and Heartland's Des Moines terminal. The volume of refined petroleum
products transported by Heartland is directly affected by the demand for, and
supply of, refined petroleum products in the geographic regions served. The
major portion of refined petroleum product volumes transported by Heartland is
motor gasoline, the demand for which is dependent on price, prevailing economic
conditions and demographic changes in the markets served. Heartland's business
has experienced only minor seasonal fluctuations in demand.
Supply. Refined petroleum products transported by Heartland 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. The Ponca City volumes move to the North System through
interconnecting third-party pipelines, while the McPherson volumes are
transported directly through the North System.
Competition. Heartland competes with other refined product carriers in the
geographic market served. Heartland's principal competitor is Williams Pipeline
Company.
Coal Transfer, Storage and Services
Coal continues to dominate as the fuel for electric generation, accounting
for more than 55% of U.S. capacity. 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 more than 300 years. Most of
the Partnership's coal terminals' volume is destined for use in coal-fired
electric generation.
Environmental legislation is currently driving changes in specification of
coal used for electric generation to low-sulfur products. When burned, the
sulfur in coal converts to an air pollutant known as sulfur dioxide (SO2).
Effective January 1, 1995, Phase I of the Clean Air Act Amendments required the
110 largest sulfur-emitting power plants to reduce SO2 emissions. Effective
January 1, 2000, Phase II of the Clean Air Act requires the plants to further
decrease emissions. The Partnership believes that obligations to comply with the
Clean Air Act Amendments of 1990 will drive shippers to increase the use of
low-sulfur coal from the western United States. Approximately 80% of the coal
loaded through the Cora Terminal and the Grand Rivers Terminal is low sulphur
coal originating from mines located in the western United States, including the
Hanna basin, Powder River basin, western Colorado and Utah.
Cora Coal Terminal
The Cora Terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, the Cora Terminal is located on approximately 480 acres
of land along the upper Mississippi River near Cora, Illinois, about 80 miles
south of St. Louis, Missouri. The terminal's equipment includes 3.5 miles of
railroad track, a rotary dumping station and train indexer, a multidirectional
coal stacker/reclaimer, approximately 4,000 feet of conveyor belts and an
anchored terminaling facility on the Mississippi River that takes advantage of
approximately five miles of owned and leased available riverfront access with
approximately 7,000 feet developed. The Cora Terminal is located on lands owned
by the Partnership and on private lands under lease to the Partnership. The
primary lease for the Cora Terminal expires December 2015.
The terminal has a throughput capacity of about 15 million tons per year
which can be expanded to 20 million tons with certain capital additions. The
facility's equipment permits it to continuously unload 115-car unit trains at a
rate of 3,500 tons per hour. The terminal can transfer the coal to a storage
yard or unload to barges at a rate up to 5,700 tons per hour. The railroad track
can accommodate two 115-car trains simultaneously and the riverfront access
permits simultaneous fleeting of up to 100 barges. The terminal also has
automatic sampling, programmable controls, certified belt scales, computerized
inventory control and the ability to blend different types of coal. The terminal
currently is equipped to store up to 1.0 million tons of coal, which gives
customers the flexibility to coordinate their supplies of coal with the demand
at power plants.
Management believes there is significant opportunity to increase the
volumes of coal handled through the Cora Terminal. A $1.5 million capital
expenditure, completed in 1997, increased throughput capacity by approximately
25% and doubled storage capacity. The terminal handled approximately 7.1 million
tons, 6.0 million tons, and 6.5 million tons of coal in 1997, 1996, and 1995,
respectively. Increased volume in 1997 resulted from
31
<PAGE>
higher volumes shipped under certain existing contracts plus volumes shipped
under a new contract with the Tennessee Valley Authority and other new business.
Management plans to continue to lower costs in order to remain competitive and
intends to cultivate strategic partners such as rail and major barge carriers.
Markets. Four major customers ship approximately 80% of all the coal loaded
through the terminal. TECO Energy, Inc. ("TECO") is the parent of Tampa Electric
of Tampa, Florida. TECO Transport, TECO's barge subsidiary, transports the coal
by barge down the Mississippi River and intercoastal waterway and burns the coal
in Tampa Electric's power plants. Through Ziegler Coal, TECO has two contracts
with Cora Terminal which expire December 31, 2004. Carboex International Limited
("Carboex") is a Spanish state-owned coal purchasing company, which purchases
coal for the various Spanish state-owned utilities. Carboex transports the coal
by barge to New Orleans and then by ship to Spain for use in the Puentes de
Garcia Rodriguez Power Plant. Carboex's contract with Cora expires December 31,
2001. Indiana-Kentucky Electric Corp. ("IKEC") is a subsidiary of American
Electric Power ("AEP") of Columbus, Ohio, which transports coal by barge to its
various power plants on the Ohio River. The IKEC contract continues through
December 31, 2004. The Partnership signed a coal transfer contract with the
Tennessee Valley Authority on May 15, 1997 (effective January 1, 1997)
continuing through December 31, 1999.
Supply. Historically, the Cora Terminal has moved coal that originated in
the mines of southern Illinois. Many shippers, however, particularly in the
East, are now using western coal loaded at the Cora Terminal or a mixture of
western coal and Illinois coal as a means of meeting environmental restrictions.
The Partnership believes that Illinois coal producers and shippers will continue
to be important customers, but anticipates that growth in volume through the
terminal will be primarily due to western coal originating in Wyoming, Colorado
and Utah.
The Cora Terminal sits on the mainline of the Union Pacific Railroad and is
strategically well positioned to receive coal shipments from the West. Mines in
southern Illinois and in Wyoming (Hanna and Powder River basins) are within the
Union Pacific's service area and its connecting lines. With the recent merger of
the Union Pacific and Southern Pacific Railroads, coal mined in the Colorado and
Utah basins can now be shipped through the Cora Terminal. Union Pacific is one
of only two major rail lines connected to the western mines that ship coal to
the East and serves major coal companies that have substantial developed and
undeveloped reserves.
Grand Rivers Terminal
On September 4, 1997, the Partnership acquired at a cost of approximately
$20 million the assets of BRT Transfer Terminal, Inc. and other assets from
Vulcan Materials Company and the name of the terminal was subsequently changed
to Grand Rivers Terminal. The Grand Rivers Terminal is operated on land under
easements with an initial expiration of July 2014.
The Grand Rivers Terminal is a coal transloading and storage facility
located on the Tennessee River, just above the Kentucky Dam. The Grand Rivers
Terminal is a modern, high-speed coal handling terminal featuring a direct dump
train-to-barge facility, a bottom dump train-to-storage facility, a barge
unloading facility and a coal blending facility that can blend up to four
different coals at one time. The terminal has four distinct and separate
facilities, three of which are in close proximity. Three of the facilities
receive coal by rail and the fourth by truck and barge. Coal blending can be
done in two of the facilities. The terminal has an annual throughput capacity of
approximately 25 million tons with a storage capacity of approximately 2 million
tons.
Coal can be unloaded and sent either to storage or directly dumped into
barges at the rate of 5,000 tons per hour. Coal can be automatically blended and
loaded into barges at the rate of 3,000 tons per hour. The fleeting of barges is
currently handled by Vulcan pursuant to an operating agreement with the
Partnership. Other features of the terminal include automatic sampling,
programmable controls, computerized blending, belt scales, and computerized
inventory control.
Management believes there is significant opportunity to increase throughput
at the Grand Rivers Terminal because it offers access to seven Class I
railroads, is located on two major waterways (the Tennessee and Cumberland
Rivers) with further access to the Ohio and Mississippi Rivers and the Gulf
Coast via the Tombigbee System and is isolated from flooding problems due to its
location near the Kentucky Dam.
Supply. Grand Rivers has its main operations on the Tennessee River, near
Grand Rivers, Kentucky. The terminal provides easy access to the
Ohio-Mississippi River network, the Tennessee-Tombigbee System, major trucking
routes on the interstate highway system and is served by the Paducah &
Louisville Railroad, a short line railroad with connections to seven Class I
rail lines including the Union Pacific, CSX, Illinois Central and
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<PAGE>
Burlington Northern. The Grand Rivers Terminal is situated between the Illinois
and western low-sulphur coal fields. The major coal companies served by these
railroads have substantial developed and undeveloped reserves.
Markets. The Grand Rivers Terminal's primary business has been to supply
blends of western United States, southern Illinois and western Kentucky coal to
the power plants operated by the Tennessee Valley Authority and other power
plants located on the Ohio-Mississippi and Tennessee-Tombigbee Systems. The
Grand Rivers Terminal is strategically positioned to receive and store both
local and western basin coals and can also blend large volumes of coal with
speed and accuracy. The strategic position and blending capabilities will
provide an advantage in meeting increased demand by power plants for blends of
western and eastern coals necessary for continued compliance with the Clean Air
Act Amendments of 1990. The Grand Rivers Terminal is the only major terminal in
the area that can both receive and load barge coal.
Competition. The Cora Terminal and the 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. Management 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. Some of the major competing terminals include:
American Commercial Marines' Hall Street Terminal, owned by CSX, is located in
St. Louis. This terminal is similar to Cora in design and operation, with annual
volumes estimated at 6 million tons. Like Cora, this terminal experiences
occasional interruptions of service due to high water conditions.
Cook Terminal, owned by a consortium of power companies led by American Electric
Power, is located north of the Grand Rivers Terminal on the Ohio River. This
terminal is connected to both the Union Pacific and Burlington Northern
railroads. Annual volumes are estimated at 12 million tons.
Kellogg Dock, owned by Consolidated Coal Company ("Consol"), is located 25 miles
north of the Cora Terminal. Kellogg is connected to the Union Pacific railroad
and has annual volumes estimated at 3 million tons.
There are numerous other terminals, many that are for proprietary use by
the owners.
Red Lightning Energy Services
In 1997, the Partnership began marketing energy related products and coal
terminal services through its Red Lightning Energy Services unit ("Red
Lightning"). Products marketed include coal and propane. The unit provides
marketing of coal terminal services for both the Cora Terminal and the Grand
Rivers Terminal.
Markets. Coal is marketed and sold to utilities and industrial customers in
the Midwest and Southeastern region of the United States on short term delivery
or spot contracts. These customers use coal primarily for the generation of
electricity. Propane is marketed and sold to industrial customers in the Midwest
for use as fuel for a variety of industrial applications. Terminal services are
marketed to utility and industrial customers on both short and long term
contracts for storage and blending of coal.
Supply. Red Lightning obtains coal primarily through producers in the
Powder River and Illinois Basins on short term or spot sales contracts. Some
coal is purchased through other coal marketers and brokers. Propane is purchased
from propane marketers. Other services marketed by Red Lightning include storage
and blending at the Partnership's two coal terminals.
The Partnership plans to expand Red Lightning in 1998 by adding refined
fuels and natural gas to the products it is currently marketing to utilities and
municipal and industrial customers. The Partnership does not utilize derivatives
or other similar instruments to hedge its risk with respect to commodity price
fluctuations.
Gas Processing and Fractionation
The Partnership's gas processing and fractionating assets include its
indirect interest in the Mont Belvieu Fractionator and the Painter Plant.
33
<PAGE>
Mont Belvieu Fractionator
General. The Partnership owns an indirect 25% interest in the Mont Belvieu
Fractionator, located approximately 20 miles east of Houston in Mont Belvieu,
Texas. The fractionator is a 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). The facility, which was built in 1980, is operated by Enterprise
Products Company and has access to virtually all major liquids pipelines and
storage facilities located in the Mont Belvieu area. The Partnership's cash flow
from its indirect interest in the Mont Belvieu Fractionator depends on the
difference between fractionation revenues and fractionation costs (including the
level of capital expenditures), as well as demand for fractionation services.
The Mont Belvieu Fractionator has two major components: NGL fractionating and
butane splitting. The NGL fractionating component consists of two trains: The
West Texas train and the Seminole train. Each train consists of a de-ethanizer,
a de-propanizer and a de-butanizer. Each major unit has an associated reboiler
and related control equipment. The fractionation process uses heat recovery
equipment and cogeneration. In December 1996, the total capacity of the
fractionator was expanded by approximately 45,000 barrels per day to
approximately 200,000 barrels per day. The Mont Belvieu Fractionator operated at
approximately 98%, 100% and 96% of capacity, respectively, during 1997, 1996,
and 1995.
The fractionator is owned 50% by Mont Belvieu Associates, which is owned
50% by each of the Partnership and Enterprise Products. The remaining 50% of the
fractionator is owned equally by Enterprise, Texaco, Union Pacific Fuels and
Burlington Resources. The owners of the fractionator, with the exception of the
Partnership, account for approximately 75% of its revenues. Other major
customers include Enron, Exxon, ARCO, Marathon, Warren and Phillips.
Markets. The fractionator is located in proximity to major end-users of its
specification products, ensuring consistent access to the largest domestic
market for NGL 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
(Attco, Chevron, Black Lake, Seminole, Chaparral and Panola). 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 directed into underground salt dome
storage. The Chaparral and Seminole pipelines gather Y-grade from a variety of
natural gas processing plants in Texas, New Mexico, Oklahoma and the
Mid-Continent area. The Chevron line transports NGLs from Chevron's East Texas
and Central Texas facilities. Black Lake draws its supply from the Northern
Louisiana region. The Attco pipeline draws its supply from South Texas and the
Panola pipeline transports NGLs from East Texas. Additionally, import barrels
can be brought to the Mont Belvieu Fractionator from locations on the Port of
Houston.
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 is located near Evanston, Wyoming and consists of a
natural gas processing plant, a nitrogen rejection unit, a fractionator, an NGL
terminal and interconnecting pipelines with truck and rail loading facilities.
The fractionation facility has a capacity of approximately 6,000 barrels per
day, depending on the feedstock composition. After fractionation, the propane,
mixed butanes and natural gasoline are delivered through three interconnecting
NGL pipelines to the Partnership's Millis Terminal and Storage Facility, which
is located approximately seven miles from the Painter Plant. Truck and rail
loading of fractionated products is provided at Millis, where there is
approximately 14,000 barrels of aboveground storage for all products. The
Painter Plant is located on Bureau of Land Management land that is leased to the
Partnership and Enron (50% each) until September 2009. Millis is located on
private lands and is under lease to the Partnership until September 2009.
On February 14, 1997, the Partnership executed an operating lease agreement
with Amoco Oil Company for Amoco's use of the Painter Plant fractionator and the
Millis facilities with the nearby Amoco Painter Complex gas plant. The lease
will generate approximately $1.0 million of cash flow per year for the
Partnership. The primary term of the lease expires February 14, 2007, with
evergreen provisions at the end of the primary term. Amoco took an assignment of
all commercial arrangements in place on February 14, 1997, and assumed all day
to day operations, maintenance, repairs and replacements, and all expenses
(other than minor easement fees), taxes and
34
<PAGE>
charges associated with the fractionator and the Millis facilities. After year
seven, Amoco may elect to purchase the fractionator and Millis facilities under
certain terms.
Major Customers of the Partnership
Although the Partnership's 1997 revenues were derived from a wide customer
base, revenues from Amoco Corporation, including its subsidiaries, accounted for
approximately 11.9% of consolidated revenues. In 1996, revenues from Mobil
Corporation and Amoco Corporation, including their subsidiaries, accounted for
approximately 12.4% and 10.4%, respectively, of revenues. For the year ended
December 31, 1995, revenues from Chevron Corporation and Amoco Corporation,
including their subsidiaries, each accounted for approximately 10.2% of
revenues.
Employees
The Partnership does not have any employees. The General Partner employs
all persons necessary for the operation of the Partnership's business and the
Partnership reimburses the General Partner for the services of such persons. As
of March 6, 1998, the General Partner had approximately 550 employees. Twenty
hourly personnel at the Cora Terminal are represented by the International Union
of Operating Engineers under a collective bargaining agreement that expires in
September 1998. No other employees of the General Partner are members of a union
or have a collective bargaining agreement. The General Partner considers its
relations with its employees to be good.
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<PAGE>
MANAGEMENT
Directors and Executive Officers of the General Partner
As is commonly the case with publicly-traded limited partnerships, the
Partnership does not employ any of the persons responsible for managing or
operating the Partnership, but instead reimburses the General Partner for their
services. Set forth below is certain information concerning the directors and
executive officers of the General Partner. All directors of the General Partner
are elected annually by, and may be removed by, Kinder Morgan, Inc. as the sole
shareholder of the General Partner. All officers serve at the discretion of the
directors of the Board of Directors of the General Partner.
<TABLE>
<CAPTION>
Name Age Position with the General Partner
---- --- ---------------------------------
<S> <C> <C>
Richard D. Kinder 53 Director, Chairman, and CEO
William V. Morgan 54 Director and Vice Chairman
Alan L. Atterbury* 55 Director
Edward O. Gaylord* 66 Director
Thomas B. King 36 Director, President, and Chief Operating Officer
David G. Dehaemers, Jr. 37 Vice President, Treasurer, and Chief Financial Officer
Clare H. Doyle 43 Vice President, Secretary, and Corporate Counsel
James E. Higgins 41 Vice President, Pacific Business Development and Marketing
Roger M. Knouse 47 Vice President, Houston Commercial Operations, Pipelines
Mary F. Morgan 45 Vice President, Pacific Customer Service
Michael C. Morgan 29 Vice President, Corporate Development and Investments
Roger C. Mosby 50 Vice President, Coal Commercial and Terminal Operations
William M. White 52 Vice President, Pipeline Field Operations
Eashy Yang 56 Vice President, Technical Services
- --------------
*Member of the Conflicts and Audit Committee
</TABLE>
Richard D. Kinder was elected Director, Chairman, and Chief Executive
Officer of the General Partner in February 1997. From 1992 to 1994, Mr. Kinder
served as Chairman of the General Partner. From October 1990 until December
1996, Mr. Kinder was President of Enron Corp. Mr. Kinder was employed by Enron
and its affiliates and predecessors for over 16 years.
William V. Morgan was elected Director of the General Partner in June 1994
and Vice Chairman of the General Partner in February 1997. Mr. Morgan has been
the President of Morgan Associates, Inc., an investment and pipeline management
company, since February 1987, and Cortez Holdings Corporation, a related
pipeline investment company, since October 1992. He 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 a
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.
Alan L. Atterbury was elected Director of the General Partner in February
1997. Mr. Atterbury is a co-founder of Midland Loan Services, L.P., a real
estate financial services company, and has served as its Chief Executive Officer
and President since its inception in 1992. Mr. Atterbury has also been the
President and a Director of Midland Data Systems, the general partner of Midland
Loan Services, since its inception in 1990 and the President of Midland
Properties, a property management and real estate development company, since
1980.
Edward O. Gaylord was elected Director of the General Partner in February
1997. Mr. Gaylord is the President of Gaylord & Company, a venture capital
company located in Houston, Texas. Mr. Gaylord also serves as Chairman of the
Board for EOTT Energy Corporation, an oil trading and transportation company
also located in Houston, Texas. He is also President of Jacintoport Terminal
Company.
Thomas B. King was elected Director, President, and Chief Operating Officer
of the General Partner in February, 1997. Prior to that, he held the position of
Vice-President, Midwest Region for the General Partner from July 1995 until
February 1997. Mr. King has held several positions since he joined Enron in
1989, including Vice President, Gathering Services of Transwestern Pipeline
Company and Northern Natural Gas Company and as Regional
36
<PAGE>
Vice President, Marketing of Northern Natural Gas Company. From December 1989 to
August 1993, he served as Director, Business Development for Northern Border
Pipeline Company in Omaha, Nebraska.
David G. Dehaemers, Jr. was elected Vice President and Chief Financial
Officer of the General Partner in August 1997. He was elected Secretary and
Treasurer of the General Partner in February 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 CPA firms of Ernst & Whinney and Arthur Young. He is a
CPA and received his undergraduate Accounting degree from Creighton University
in Omaha, Nebraska. Mr. Dehaemers received his law degree from the University of
Missouri-Kansas City and is a member of the Missouri Bar.
Clare H. Doyle was elected Vice President, Corporate Counsel and Secretary
of the General Partner in August 1997. Prior to that, she was employed as
counsel for Enron Operations Corp. from September 1996 to March 1997. From April
1988 to June 1996, she was counsel for PanEnergy Corp. (now Duke Energy).
James E. Higgins was elected Vice President, Pacific Business Development
and Marketing of the General Partner in March 1998. Previously, Mr. Higgins was
Director of Business Development for Santa Fe Pacific Pipelines, L.P. from 1993
until March 1998. Prior to that, he was Director of Business Development and
Administration for Enron Oil Trading and Transportation in 1992 and Director of
Business Development for GATX Terminals Corporation from 1989 until 1992. Mr.
Higgins held manager positions in sales and operations for GATX from 1985 until
1989. He also held treasury and economic analyst positions with Powerline Oil
Company from 1979 until 1983.
Roger M. Knouse was elected Vice President, Houston Commercial Operations,
Pipelines of the General Partner in March 1998. Prior to that, he served as
Director of Business Development for the General Partner 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 the
General Partner in March 1998. Prior to that, she was Director, Customer Service
Center for Santa Fe Pacific Pipelines, L.P. since 1997. Prior to this
assignment, Ms. Morgan served as Director, Products Movement and District
Manager, Western District for Santa Fe. Over the past twenty years, she also
served in various engineering and operations assignments with Santa Fe, Exxon
Pipeline Company, and Amoco Production Company.
Michael C. Morgan was elected Vice President, Corporate Development and
Investments of the General Partner in 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.
Roger C. Mosby was elected Vice President, Coal Commercial and Terminal
Operations of the General Partner in February 1997. Prior to that, Mr. Mosby was
Vice President for Enron Liquid Services Corp. from July 1994 until February
1997. He was Vice President of Enron Gas Processing Company from January 1990
until March 1994.
William M. White was elected Vice President, Pipeline Field Operations of
the General Partner in March 1998. Previously, Mr. White served as Vice
President of Engineering for Santa Fe Pacific Pipelines, L.P. from 1993 until
March 1998. Prior to that, he held various engineering and operation positions
with Santa Fe 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.
Eashy Yang was elected Vice President, Technical Services of the General
Partner in July 1997. Mr. Yang was Director of Engineering and Technical
Services for Enron Operations Corp. from June 1993 until February 1997. Prior to
that, he was Director of Technical Operations and held various engineering
positions with Enron from September 1974 until June 1993.
37
<PAGE>
SELLING UNITHOLDERS
In September 1990, SFP Pipeline Holdings, Inc. issued $218,981,000
principal amount of its Variable Rate Exchangeable Debentures due 2010 (the
"VREDs"). The VREDs were initially exchangeable into common units of Santa Fe
upon the happening of certain events. As a result of the Partnership's
acquisition of SFPP, each $1,000 principal amount of VREDs became exchangeable
for 51.720927 Units (the "VRED Exchange"). Holders of $_____ million principal
amount of VREDs elected to exchange their VREDs for an aggregate of ______ Units
in the VRED Exchange, which terminated on May 25, 1998. The Partnership did not
issue any new Units in the VRED Exchange. Instead, outstanding Units owned by
the former general partner of Santa Fe were delivered to the VRED holders.
On June 4, 1998, the Partnership paid at par the $___ million of VREDs that
were not tendered in the VRED Exchange. The Partnership financed the payment of
such amount through borrowings under its credit facility.
As part of the VRED Exchange, the Partnership agreed to permit the VRED
holders to resell the Units received in the VRED Exchange in this Offering. The
Units offered by the Selling Unitholders represent Units that the former VRED
holders requested to be included in this Offering.
The following table sets forth certain information with respect to the
Selling Unitholders and their beneficial ownership of the Units as of
_______________, 1998 and as adjusted to reflect the sale of Units offered by
the Selling Unitholders Hereby. None of the Selling Unitholders has held any
position or office or had any other material relationship with the Partnership
or any predecessor or affiliate thereof, other than as a Unitholder thereof,
during the past three years. Unless otherwise indicated, each Selling
Unitholder named has sole voting and investment power with respect to its Units.
The information presented in the preceding discussion and in the following
table assumes that the over-allotment options are exercised in full.
<TABLE>
<CAPTION>
Beneficially Owned Number Units Beneficially
Prior To of Units Owned After
Name and Address of Offerings Offered Offerings
Beneficial Owner ------------------- -------- --------------------
Number Percent Number Percent
<S> <C> <C> <C> <C> <C>
- --------------------
* Less than 1% of class.
</TABLE>
38
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion is a summary of material tax considerations that
may be relevant to a prospective Unit holder. To the extent set forth herein the
discussion is the opinion of Morrison & Hecker L.L.P. ("Counsel") as to the
material federal income tax consequences of the ownership and disposition of
Units. Counsel's opinion does not include portions of the discussion regarding
factual matters or portions of the discussion which specifically state that it
is unable to opine. There can be no assurance that the IRS will take a similar
view of such tax consequences. Moreover, the Partnership has not and will not
request a ruling from the IRS as to any matter addressed in this discussion.
The following discussion is based upon current provisions of the Code,
existing and proposed regulations thereunder and current administrative rulings
and court decisions, including modifications made by the Taxpayer Relief Act of
1997 (the "1997 Act"), all as in effect on the date hereof. Such discussion is
also based on the assumptions that the operation of the Partnership and its
operating partnerships (collectively, the "Operating Partnerships") will be in
accordance with the relevant partnership agreements. Such discussion is subject
both to the accuracy of such assumptions and the continued applicability of such
legislative, administrative and judicial authorities, all of which authorities
are subject to change, possibly retroactively. Subsequent changes in such
authorities may cause the tax consequences to vary substantially from the
consequences described below, and any such change may be retroactively applied
in a manner that could adversely affect a holder of Units.
The discussion below is directed primarily to a Unit Holder which is a
United States person (as determined for federal income tax purposes). Except as
specifically noted, the discussion does not address all of the federal income
tax consequences that may be relevant (i) to a holder in light of such holder's
particular circumstances, (ii) to a holder that is a partnership, corporation,
trust or estate (and their respective partners, shareholders and beneficiaries),
(iii) to holders subject to special rules, such as certain financial
institutions, tax-exempt entities, foreign corporations, non-resident alien
individuals, regulated investment companies, insurance companies, dealers in
securities, or traders in securities who elect to mark to market, and (iv)
persons holding Units as part of a "straddle," "synthetic security," "hedge" or
"conversion transaction" or other integrated investment. Moreover, the effect of
any applicable state, local or foreign tax laws is not discussed.
The discussion deals only with Units held as "capital assets" within the
meaning of Section 1221 of the Code.
The federal income tax treatment of holders of Units depends in some
instances on determinations of fact and interpretations of complex provisions of
federal income tax laws for which no clear precedent or authority may be
available. ACCORDINGLY, EACH PROSPECTIVE UNIT HOLDER SHOULD CONSULT HIS OWN TAX
ADVISORS WHEN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF UNITS.
Legal Opinions and Advice
The remainder of the discussion under this "Material Federal Income Tax
Considerations" section is the opinion of Counsel as to material federal income
tax consequences of the ownership and disposition of Units.
Counsel has rendered its opinion to the Partnership to the effect that:
(a) the Partnership and the Operating Partnerships are and will
continue to be classified as partnerships for federal income tax purposes
and will not be classified as associations taxable as corporations,
assuming that the factual representations set forth in "-General Features
of Partnership Taxation-Partnership Status" are adhered to by such
partnerships.
(b) Each person who (i) acquires beneficial ownership of Units pursuant
to the Offering and either has been admitted or is pending admission to the
Partnership as an additional limited partner or (ii) acquired beneficial
ownership of Units and whose Units are held by a nominee (so long as such
person has the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of such Units) will be
treated as a partner of the Partnership for federal income tax purposes.
The following are material federal income tax issues associated with the
ownership of Units and the operation of the Partnership with respect to which
Counsel is unable to opine:
39
<PAGE>
1. Whether the appraised valuations of assets and allocation of such
amounts (the "Book-Tax Disparity") between and among tangible assets (and
the resulting net Curative Allocations) will be sustained if challenged by
the IRS.
2. Whether certain procedures utilized by the Partnership in
administering the Section 754 election and the resulting Section 743(b)
adjustments to any Unit holder's basis in their Units will be sustained if
challenged by the IRS. See "-Tax Treatment of Operations-Section 754
Election."
3. Whether the Partnership's monthly convention for allocations of
Partnership income, gain, loss, deduction or credit to Partners will be
respected. See "Disposition of Units--Allocations Between
Transferors and Transferees."
A more detailed discussion of these items is contained in the applicable
sections below.
The opinion of Counsel is based on certain representations of the
Partnership and the General Partner with respect to the nature of the income of
which is relevant to a determination of whether its income qualifies for the
Natural Resource Exception pursuant to Section 7704 of the Code. See "-General
Features of Partnership Taxation-Partnership Status." The opinion of Counsel is
based upon existing provisions of the Code and the Regulations, existing
administrative rulings and procedures of the IRS and existing court decisions.
There can be no assurances that any of such authorities will not be changed in
the future, which change could be retroactively applied. Such opinions represent
only Counsel's best legal judgment as to the particular issues and are not
binding on the IRS or the courts.
General Features of Partnership Taxation
Partnership Status. The applicability of the federal income tax
consequences described herein depends on the treatment of the Partnership and
the Operating Partnerships as partnerships for federal income tax purposes and
not as associations taxable as corporations. For federal income tax purposes, a
partnership is not a taxable entity, but rather a conduit through which all
items of partnership income, gain, loss, deduction and credit are passed through
to its partners. Thus, income and deductions resulting from partnership
operations are allocated to the partners and are taken into account by the
partners on their individual federal income tax returns. In addition, a
distribution of money from a partnership to a partner generally is not taxable
to the partner, unless the amount of the distribution exceeds the partner's tax
basis in the partner's interest in the partnership. If the Partnership or any of
the Operating Partnerships were classified for federal income tax purposes as an
association taxable as a corporation, the entity would be a separate taxable
entity. In such a case, the entity, rather than its members, would be taxed on
the income and gains and would be entitled to claim the losses and deduction
resulting from its operations. A distribution from the entity to a member would
be taxable to the member in the same manner as a distribution from a corporation
to a shareholder (i.e., as ordinary income to the extent of the current and
accumulated earnings and profits of the entity, then as a nontaxable reduction
of basis to the extent of the member's tax basis in the member's interest in the
entity and finally as gain from the sale or exchange of the member's interest in
the entity). Any such characterization of either the Partnership or one of the
Operating Partnerships as an association taxable as a corporation would likely
result in a material reduction of the anticipated cash flow and after-tax return
to the Unit holders.
Pursuant to Final Treasury Regulations 301.7701-1, 301.7701-2 and
301.7701-3, effective January 1, 1997 (the "Check-the-Box Regulations"), an
entity in existence on January 1, 1997, will generally retain its current
classification for federal income tax purposes. As of January 1, 1997, the
Partnership was classified and taxed as a partnership. Pursuant to the
Check-the-Box Regulations this prior classification will be respected for all
periods prior to January 1, 1997, if (1) the entity had a reasonable basis for
the claimed classification; (2) the entity recognized federal tax consequences
of any change in classification within five years prior to January 1, 1997; and
(3) the entity was not notified prior to May 8, 1996, that the entity
classification was under examination. Prior to the finalization of the
Check-the-Box Regulations, the classification of an entity as a partnership was
determined under a four factor test developed by a number of legal authorities.
Based on this four factor test, the Partnership had a reasonable basis for its
classification as a partnership. Moreover, the Partnership has not changed its
classification and it has not received any notification that its classification
was under examination.
Section 7704 provides that publicly traded partnerships will, as a general
rule, be taxed as corporations. However, an exception exists with respect to
publicly traded partnerships 90% or more of the gross income of which for every
taxable year consists of "qualifying income" (the "Natural Resource Exception").
"Qualifying income" includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines) or marketing of any mineral or natural resource including
oil, natural gas or products thereof. Other
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types of "qualifying income" include interest, 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 constitute "qualifying income."
The General Partner has represented that in excess of 90% of the Partnership's
gross income will be derived from fees and charges for transporting (through the
Liquids Pipelines) NGLs, CO2 and other hydrocarbons, dividends from the
corporation that owns the Mont Belvieu Fractionator and interest. Based upon
that representation, Counsel is of the opinion that the Partnership's gross
income derived from these sources will constitute "qualifying income."
If (a) a publicly traded partnership fails to meet the National Resource
Exception for any taxable year, (b) such failure is inadvertent, as determined
by the IRS, and (c) the partnership takes steps within a reasonable time to once
again meet the gross income test and agrees to make such adjustments and pay
such amounts (including, possibly, the amount of tax liability that would be
imposed on the partnership if it were treated as a corporation during the period
of inadvertent failure) as are required by the IRS, such failure will not cause
the partnership to be taxed as a corporation. The General Partner, as general
partner of the Partnership, will use its best efforts to assure that the
Partnership will continue to meet the gross income test for each taxable year
and the Partnership anticipates that it will meet the test. If the Partnership
fails to meet the gross income test with respect to any taxable year, the
General Partner, as general partner of the Partnership, will use its best
efforts to assure that the Partnership will qualify under the inadvertent
failure exception discussed above.
If the Partnership fails to meet the Natural Resource Exception (other than
a failure determined by the IRS to be inadvertent that is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly-formed
corporation (on the first day of the year in which it fails to meet the Natural
Resource Exception) in return for stock in such corporation, and then
distributed such stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to the holders
of Units and the Partnership, so long as the Partnership, at such time, does not
have liabilities in excess of the basis of its assets. Thereafter, the
Partnership would be treated as a corporation.
If the Partnership or any Operating Partnership were treated as an
association or otherwise taxable as a corporation in any taxable year, as a
result of a failure to meet the Natural Resource Exception or otherwise, its
items of income, gain, loss, deduction and credit would be reflected only on its
tax return rather than being passed through to the holders of Units, and its net
income would be taxed at the entity level at corporate rates. In addition, any
distribution made to a holder of Units would be treated as either taxable
dividend income (to the extent of the Partnership's current or accumulated
earnings and profits), or, in the absence of earnings and profits as a
nontaxable return of capital (to the extent of the holder's basis in the Units)
or taxable capital gain (after the holder's basis in the Units is reduced to
zero.) Accordingly, treatment of either the Partnership or any of the Operating
Partnerships as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax economic return on
an investment in the Partnership.
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity-level taxation for federal income tax purposes, certain provisions of
the Partnership Agreement relating to the General Partner's incentive
distributions will be subject to change.
Under current law, the Partnership and the Operating Partnerships will be
classified and taxed as partnerships for federal income tax purposes and will
not be classified as associations taxable as corporations. This conclusion is
based upon certain factual representations and covenants made by the General
Partner including:
(a) the Partnership and the Operating Partnerships will be operated
strictly in accordance with (i) all applicable partnership statutes, and
(ii) the Partnership Agreements, and (iii) the description thereof in this
Prospectus;
(b) Except as otherwise required by Section 704 and the Regulations
promulgated thereunder, the General Partner will have an interest in each
material item of income, gain, loss, deduction or credit of the Partnership
and each of the Operating Partnerships equal to at least 1% at all times
during the existence of the Partnership and the Operating Partnerships;
(c) The General Partner will maintain a minimum capital account balance
in the Partnership and in the Operating Partnerships equal to 1% of the
total positive capital account balances of the Partnership and the
Operating Partnerships;
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(d) The General Partner will at all times act independently of the
Unitholders;
(e) For each taxable year, less than 10% of the aggregate gross income
of the Partnership and the Operating Partnerships will be derived from
sources other than (i) the exploration, development, production,
processing, refining, transportation or marketing of any mineral or natural
resource, including oil, gas or products thereof and naturally occurring
carbon dioxide or (ii) other items of "qualifying income" within the
definition of Section 7704(d);
(f) Prior to January 1, 1997, the General Partner maintained throughout
the term of the Partnership and the Operating Partnerships substantial
assets (based upon the fair market value of its assets and excluding its
interest in, and any account or notes receivable from or payable to, any
limited partnership in which the General Partner has any interest) that
could be reached by the creditors of the Partnership and the Operating
Partnerships; and
(g) The Partnership and each of the Operating Partnerships have not
elected association classification under the Check-the-Box Regulations or
otherwise and will not elect such classification.
No ruling from the IRS has been requested or received with respect to the
classification of the Partnership and the Operating Partnerships for federal
income tax purposes and the opinion of Counsel is not binding on the IRS. The
IRS imposed certain procedural requirements for years prior to 1997 to be met
before it would issue a ruling to the effect that a limited partnership with a
sole corporate general partner would be classified as a partnership for federal
income tax purposes. These procedural requirements were not rules of substantive
law to be applied on audit, but served more as a "safe-harbor" for purposes of
obtaining a ruling. The General Partner believes that the Partnership and the
Operating Partnerships did not satisfy all such procedural requirements. The
conclusion described above as to the partnership status of the Partnership for
years before January 1, 1997 does not depend upon the ability of the Partnership
to meet the criteria set forth in such procedural requirements.
The following discussion assumes that the Partnership and the Operating
Partnerships are, and will continue to be, treated as partnerships for federal
income tax purposes. If either assumption proves incorrect, most, if not all, of
the tax consequences described herein would not be applicable to Unit holders.
In particular, if the Partnership is not a partnership, a Unit holder may be
treated for federal income tax purposes (i) as recognizing ordinary income, as
the result of any payments to him in respect of partnership distributions and
(ii) as not being entitled to allocations of partnership income, gain, loss and
deduction.
Limited Partner Status. Holders of Units who have been admitted as limited
partners will be treated as partners of the Partnership for federal income tax
purposes. Moreover, the IRS has ruled that assignees of partnership interests
who have not been admitted to a partnership as partners, but who have the
capacity to exercise substantial dominion and control over the assigned
partnership interests, will be treated as partners for federal income tax
purposes. On the basis of this ruling, except as otherwise described herein, (a)
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners and (b) holders of Units whose Units are
held in street name or by a nominee and who have the right to direct the nominee
in the exercise of all substantive rights attendant to the ownership of their
Units will be treated as partners of the Partnership for federal income tax
purposes. As this ruling does not extend, on its facts, to assignees of Units
who are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver Transfer Applications, Counsel cannot opine as to the status of these
persons as partners of the Partnership. Income, gain, deductions, losses or
credits would not appear to be reportable by such a holder of Units, and any
cash distributions received by such holders of Units would therefore be fully
taxable as ordinary income. These holders should consult their own tax advisors
with respect to their status as partners in the Partnership for federal income
tax purposes. A purchaser or other transferee of Units who does not execute and
deliver a Transfer Application may not receive certain federal income tax
information or reports furnished to record holders of Units, unless the Units
are held in a nominee or street name account and the nominee or broker has
executed and delivered a Transfer Application with respect to such Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose the status as a partner
with respect to such Units for federal income tax purposes. See "-Disposition of
Units-Treatment of Short Sales."
Tax Consequences of Unit Ownership
Ratio of Taxable Income to Distributions. Kinder Morgan G.P., Inc., the
General Partner of the Partnership (the "General Partner"), estimates that a
purchaser of a Unit in the offering made hereby who holds such Unit
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through the record date for the distribution with respect to the final calendar
quarter of 2001 (assuming for this purpose quarterly distributions on the Units
with respect to each year during that period are equal to the most recent
quarterly distribution rate of $0.5625 per Unit) will be allocated an amount of
federal taxable income of less than 20% of the amount of cash distributed to
such Unitholder with respect to each such year during that period. It is
extremely difficult to project with any precision the ratio of taxable income to
cash distributions for any particular Unit holder. The amount of taxable income
recognized by any particular Unit holder in any particular year will depend upon
a number of factors including, but not limited to: (a) the amount of federal
taxable income generally recognized by the Partnership; (b) the gains
attributable to specific asset sales that may be wholly or partially
attributable to Section 704(c) Gain (as defined below) which will be specially
allocated to certain Unit holders depending on which asset(s) are sold; (c) the
Section 743(b) basis adjustment available to any particular Unit holder based
upon its purchase price for a Unit and the amount by which such price exceeded
the proportionate share of inside tax basis of the Partnership's assets
attributable to such Unit when such Unit was purchased; and (d) the impact of
any adjustments to taxable income reported by the Partnership or conventions
utilized by the General Partner in allocating Curative Allocations between and
among Unitholders. The amounts of depreciation deductions and net Curative
Allocations available to a Unitholder may be a major contributing factor to the
differences in the amount of taxable income allocated to any Unitholder.
Thereafter, the federal taxable income as a percentage of cash distributed
will increase primarily because of the continuing reduction in depreciation
expense attributable to the use of 150% declining balance depreciation method
for a significant portion of the Partnership's assets.
The foregoing estimates are based upon numerous assumptions regarding the
business and operations of the Partnership (including assumptions as to tariffs,
capital expenditures, cash flows and anticipated cash distributions). Such
estimates and assumptions are subject to, among other things, numerous business,
economic, regulatory and competitive uncertainties that are beyond the control
of the General Partner or the Partnership and to certain tax reporting positions
(including estimates of the relative fair market values of the assets of the
Partnership and the validity of certain curative allocations) that the General
Partner has adopted or intends to adopt and with which the Internal Revenue
Service ("IRS") could disagree. Accordingly, no assurance can be given that the
estimates will prove to be correct. The actual percentages could be higher or
lower than as described above, and such differences could be material.
Basis of Units. A Unitholder's initial tax basis for a Unit will be the
amount paid for the Unit plus his share, if any, of nonrecourse liabilities of
the Partnership. A partner also includes in the tax basis for such partnership
interest any capital contributions that such partner actually makes to the
Partnership and such partner's allocable share of all Partnership income and
gains, less the amount of all distributions that such partner receives from the
Partnership and such partner's allocable share of all Partnership losses. For
purposes of these rules, if a partner's share of Partnership liabilities is
reduced for any reason, the partner is deemed to have received a cash
distribution equal to the amount of such reduction. The partner will recognize
gain as a result of this deemed cash distribution if, and to the extent that,
the deemed cash distribution exceeds the partner's adjusted tax basis for his
partnership interest.
Flow-through of Taxable Income. No federal income tax will be paid by the
Partnership. Instead, each holder of Units will be required to report on such
holder's income tax return such holder's allocable share of the income, gains,
losses and deductions without regard to whether corresponding cash distributions
are received by such Unitholders. Consequently, a holder of Units may be
allocated income from the Partnership even though the holder has not received a
cash distribution in respect of such income.
Treatment of Partnership Distributions. Under Section 731 of the Code, a
partner will recognize gain as a result of a distribution from a partnership if
the partnership distributes an amount of money to the partner which exceeds such
partner's adjusted tax basis in the partnership interest prior to the
distribution. The amount of gain is limited to this excess. Cash distributions
in excess of such Unit holder's basis generally will be considered to be gain
from the sale or exchange of the Units, taxable in accordance with the rules
described under "-Disposition of Units."
A decrease in a Unit holder's percentage interest in the Partnership,
because of the issuance by the Partnership of additional Units, or otherwise,
will decrease a Unit holder's share of nonrecourse liabilities of the
Partnership, if any, and thus will result in a corresponding deemed distribution
of cash. The Partnership does not currently have, and the General Partner does
not anticipate that it will have, any material amounts of nonrecourse
liabilities.
A non-pro rata distribution of money or property may result in ordinary
income to a holder of Units, regardless of such holder's tax basis in Units, if
the distribution reduces such holder's share of the Partnership's "Section 751
Assets." "Section 751 Assets" are defined by the Code to include assets giving
rise to depreciation recapture or other
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"unrealized receivables" or "substantially appreciated inventory". For this
purpose, inventory is substantially appreciated if its value exceeds 120% of its
adjusted basis. In addition to depreciation recapture, "unrealized receivables"
include rights to payment for goods (other than capital assets) or services to
the extent not previously includable in income under a partnership's method of
accounting. To the extent that such a reduction in a Unit holder's share of
Section 751 Assets occurs, the Partnership will be deemed to have distributed a
proportionate share of the Section 751 Assets to the Unit holders followed by a
deemed exchange of such assets with the Partnership in return for the non-pro
rata portion of the actual distribution made to such holder. This deemed
exchange will generally result in the realization of ordinary income under
Section 751(b) by the Unitholder. Such income will equal the excess of (1) the
non-pro rata portion of such distribution over (2) the Unitholder's tax basis in
such holder's share of Section 751 Assets deemed relinquished in the exchange.
Limitations on Deductibility of Losses. Generally, a Unitholder may deduct
his share of losses incurred by the Partnership only to the extent of his tax
basis in the Units which he holds. A further "at risk" limitation may operate to
limit deductibility of losses in the case of an individual holder of Units or a
corporate holder of Units (if more than 50% in the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations) if the "at risk" amount is less than the holder's basis in the
Units. A holder of Units must recapture losses deducted in previous years to the
extent that the Partnership distributions cause such Unit holder's at risk
amount to be less than zero at the end of any taxable year. Losses disallowed to
a holder of Units or recaptured as a result of theses limitations will carry
forward and will be allowable to the extent that the Unit holder's basis or at
risk amount (whichever is the applicable limiting factor) is increased.
In general, a holder of Units will be "at risk" to the extent of the
purchase price of the holder's Units but this may be less than the Unit holder's
basis for the Units in an amount equal to the Unit holder's share of nonrecourse
liabilities, if any, of the Partnership. A Unit holder's at risk amount will
increase or decrease as the basis of such Units held increases or decreases
(exclusive of any effect on basis attributable to changes in the Unit holder's
share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely-held corporations and personal service corporations can
only deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) that are not in excess of the
taxpayer's income from such passive activities or investments. The passive loss
limitations are not applicable to a widely held corporation. The passive loss
limitations are to be applied separately with respect to each publicly traded
partnership. Consequently, the losses generated by the Partnership, if any, will
only be available to offset future income generated by the Partnership and will
not be available to offset income from other passive activities or investments
(including other publicly traded partnerships) or salary or active business
income. Passive losses that are not deductible, because they exceed the Unit
holder's allocable share of income generated by the Partnership would be
deductible in the case of a fully taxable disposition of such Units to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
The IRS has announced that Treasury Regulations will be issued that
characterize net passive income from a publicly traded partnership as investment
income for purposes of the limitations on the deductibility of investment
interest.
Allocation of Income, Gain, Loss and Deduction. In general, the
Partnership's items of income, gain, loss and deduction will be allocated, for
book and tax purposes, among the General Partner, in its capacity as general
partner, and the holders of Units in the same proportion that Available Cash is
distributed (as between the General Partner and the holders of Units) in respect
of such taxable year. If distributions of Available Cash are not made in respect
of a particular taxable year, such items will be allocated among the partners in
accordance with their respective percentage interests. If the Partnership has a
net loss, items of income, gain, loss and deduction will be allocated, first, to
the General Partner and the Unit holders to the extent of their positive book
capital accounts, and second, to the General Partner. On a liquidating sale of
assets, the Partnership Agreement provides separate gain and loss allocations,
designed to the extent possible, (i) to eliminate a deficit in any partner's
book capital account and (ii) to produce book capital accounts which, when
followed on liquidation, will result in each holder of Units recovering
Unrecovered Capital, and a distributive share of any additional value.
Under Section 704(b), a partnership's allocation of any item of income,
gain, loss or deduction to a partner will not be given effect for federal income
tax purposes, unless it has "substantial economic effect," or is otherwise
allocated in accordance with the partner's interest in the partnership. If the
allocation does not satisfy this standard, it will be reallocated among the
partners on the basis of their respective interests in the partnership, taking
into account all facts and circumstances.
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Regulations under Section 704(b) delineate the circumstances under which
the IRS will view partnership allocations as having an "economic effect" that is
"substantial." Generally, for an allocation to have "economic effect" under the
Regulations (a) the allocation must be reflected as an appropriate increase or
decrease in a capital account maintained for each partner in accordance with
specific rules set forth in the Regulations, (b) liquidating distributions
(including complete redemptions of a partner's interest in the partnership)
must, throughout the term of the partnership, be made in accordance with the
partner's positive capital account balances and (c) any partner with a deficit
balance in such partner's capital account following a liquidating distribution
must be unconditionally obligated (either by contract or state law) to restore
the amount of such deficit to the partnership within a limited period of time.
If the first two of these requirements are met, but the partner to whom an
allocation of loss or deduction is made is not obligated to restore the full
amount of any deficit balance in such partner's capital account upon liquidation
of the partnership, an allocation of loss or deduction may still have economic
effect, if (1) the agreement contains a "qualified income offset" provision, and
(2) the allocation either does not (i) cause a deficit balance in a partner's
capital account (reduced by certain anticipated adjustments, allocations and
distributions specified in the Regulations) as of the end of the partnership
taxable year to which the allocation relates or (ii) increase any such deficit
balance in this specially adjusted capital account by more than the partner's
unpaid obligation to contribute additional capital to the partnership. A
qualified income offset provision requires that in the event of any unexpected
distribution (or specified adjustments or allocations) there must be an
allocation of income or gain to the distributees that eliminates the resulting
capital account deficit as quickly as possible. (This rule is referred to herein
as the "Alternate Economic Effect Rule.")
The Regulations require that capital accounts be (1) credited with the fair
market value of property contributed to the partnership (net of liabilities
encumbering the contributed property that the partnership is considered to
assume or take subject to pursuant to Section 752) ("Contributed Property"), (2)
credited with the amount of cash contributed to the partnership and (3) adjusted
by items of depreciation, amortization, gain and loss attributable to
partnership properties that have been computed by taking into account the book
value (rather than tax basis) of such properties. (As a result, such capital
accounts are often referred to as "book" capital accounts.) A partner's capital
account must also be reduced by (i) the amount of money distributed to such
partner by the partnership, (ii) the fair market value of property distributed
to such partner by the partnership (net of liabilities encumbering the
distributed property that such holder is considered to assume or take subject to
pursuant to Section 752) and (iii) a distributive share of certain partnership
expenses that are neither deductible nor amortizable.
The "Book-Tax Disparities" created by crediting capital accounts with the
value of Contributed Properties are eliminated through tax allocations that
cause the partner whose book capital account reflects unrealized gain or loss to
bear the corresponding tax benefit or burden associated with the recognition of
such unrealized gain or loss in accordance with the principles of Section
704(c). The allocations of these tax items that differ in amount from their
correlative book items do not have economic effect, because they are not
reflected in the partners' capital accounts. However, the allocations of such
items will be deemed to be in accordance with the partners' interests in the
partnership if they are made in accordance with the Section 704(c) Regulations.
In addition, the Regulations permit the partners' capital accounts to be
increased or decreased to reflect the revaluation of partnership property (at
fair market value) if the adjustments are made for a substantial non-tax
business purpose in connection with a contribution or distribution of money or
other property in consideration for the acquisition or relinquishment of an
interest in the partnership. These adjustments may also create Book-Tax
Disparities, which the Regulations require to be eliminated through tax
allocations in accordance with Section 704(c) principles.
An allocation must not only have economic effect to be respected, but that
economic effect must also be "substantial." The economic effect of an allocation
is substantial if there is a reasonable possibility that the allocation will
affect substantially the dollar amounts to be received by the partners from the
partnership, independent of tax consequences. As a general matter, however, the
economic effect of an allocation is not substantial if, at the time the
allocation is adopted, the after-tax economic consequences of at least one
partner may, in present value terms, be enhanced by such allocation, but there
is a strong likelihood that the after-tax economic consequences of no other
partner will, in present value terms, be substantially diminished by such
allocation.
The Partnership Agreement provides that a capital account be maintained for
each partner, that the capital accounts generally be maintained in accordance
with the applicable tax accounting principles set forth in the Regulations, and
that all allocations to a partner be reflected by an appropriate increase or
decrease in the partner's capital account. In addition, distributions upon
liquidation of the Partnership are to be made in accordance with positive
capital account balances. The limited partners are not required to contribute
capital to the Partnership to restore deficit balances in their capital accounts
upon liquidation of the Partnership. However, the Partnership Agreement contains
qualified income
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offset and minimum gain chargeback provisions, which under the Section 704(b)
Regulations comply with the Alternate Economic Effect Rule and will obviate the
requirement to restore negative capital accounts. The Partnership Agreement
provides that any losses or deductions otherwise allocable to a holder of Units
that have the effect of creating a deficit balance in such holder's capital
account (as specially adjusted) will be reallocated to the General Partner.
Except as discussed below, items of income, gain, loss and deduction
allocated to the holders of Units, in the aggregate, will be allocated among the
holders of Units in accordance with the number of Units held by such Unit
holder. Special tax (but not book) allocations will be made to reflect Book-Tax
Disparities with respect to Contributed Properties. The Partnership Agreement
also provides for certain special allocations of income and gain as required by
the qualified income offset and minimum gain chargeback provisions. In addition,
the General Partner is empowered by the Partnership Agreement to allocate
various Partnership items other than in accordance with the percentage interests
of the General Partner and the holders of Units when, in its judgment, such
special allocations are necessary to comply with applicable provisions of the
Code and the Regulations and to achieve uniformity of Units. See "-Uniformity of
Units."
With respect to Contributed Property, the Partnership Agreement provides
that, for federal income tax purposes, items of income, gain, loss and deduction
shall first be allocated among the partners in a manner consistent with Section
704(c). In addition, the Partnership Agreement provides that items of income,
gain, loss and deduction attributable to any properties when, upon the
subsequent issuance of any Units, the Partnership has adjusted the book value of
such properties to reflect unrealized appreciation or depreciation in value from
the later of the Partnership's acquisition date for such properties or the
latest date of a prior issuance of Units ("Adjusted Property") shall be
allocated for federal income tax purposes in accordance with Section 704(c)
principles. Thus, deductions for the depreciation of Contributed Property and
Adjusted Property will be specially allocated to the non-contributing Unit
holders and gain or loss from the disposition of such property attributable to
the Book-Tax Disparity (the "Section 704(c) Gain") will be allocated to the
contributing Unit holders so that the non-contributing Unit holders will be
allowed, to the extent possible, cost recovery and depreciation deductions and
will be allocated gain or loss from the sale of assets generally as if they had
purchased a direct interest in the Partnership's assets.
The Partnership Agreement also requires gain from the sale of properties
that is characterized as recapture income to be allocated among the holders of
Units and the General Partner (or its successors) in the same manner in which
such partners were allocated the deductions giving rise to such recapture
income. Final Treasury Regulations under Section 1245 provide that depreciation
recapture will be specially allocated based on the allocation of the deductions
giving rise to such recapture income, as provided for in the Partnership
Agreement.
Items of gross income and deduction will be allocated in a manner intended
to eliminate Book-Tax Disparities, if any, that are not eliminated by Section
704(c) allocations as a result of the application of the Ceiling Rule with
respect to Contributed Property or Adjusted Property. Such Curative Allocations
of gross income and deductions to preserve the uniformity of the income tax
characteristics of Units will not have economic effect, because they will not be
reflected in the capital accounts of the holders of Units. However, such
allocations will eliminate Book-Tax Disparities and are thus consistent with the
Regulations under Section 704(c). With the exception of certain conventions
adopted by the Partnership with respect to administration of the Section 754
election and the attendant Section 743(b) basis adjustments discussed at "-Tax
Treatment of Operations-Section 754 Election"; and allocation of the effect of
unamortizable Section 197 Book-Up amounts and common inside basis, allocations
under the Partnership Agreement will be given effect for federal income tax
purposes in determining a holder's distributive share of an item of income,
gain, loss or deduction. There are, however, uncertainties in the Regulations
relating to allocations of partnership income, and Unit holders should be aware
that some of the allocations in the Partnership Agreement may be successfully
challenged by the IRS.
Tax Treatment of Operations
Accounting Method and Taxable Year. The Partnership currently maintains the
calendar year as its taxable year and has adopted the accrual method of
accounting for federal income tax purposes.
Tax Basis, Depreciation and Amortization. The Partnership's tax bases for
its assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, after adjustment for intervening depreciation or
cost recovery deductions, gain or loss on the disposition of such assets.
The Partnership and the Operating Partnerships will have tangible assets of
substantial value (including the pipelines and related equipment). A significant
portion of the assets were placed in service prior to the effective dates of the
accelerated cost recovery system and will be depreciated over a 171/2 year
period on a declining balance method.
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The General Partner will depreciate certain assets using the accelerated methods
provided for under Section 168 of the Code. In addition, the Partnership, will
use accelerated methods provided for under Section 167 of the Code to depreciate
certain other assets during the early years of the depreciable lives of those
assets, and then elect to use the straight line method in subsequent years.
The Partnership allocated the capital account value among the Partnership's
assets after the acquisition of Santa Fe based upon their relative fair market
values established by an independent appraisal. Any amount in excess of the fair
market values of specific tangible assets may constitute non-amortizable
intangible assets (including goodwill).
The tax basis of goodwill and most other intangible assets used in a trade
or business acquired after August 10, 1993 (or prior to that time in certain
events), may be amortized over 15 years. The Partnership will not amortize the
goodwill, if any, created as a result of the acquisition of Santa Fe for tax
capital account or income tax purposes because of the Step-in-the Shoes and
Anti-Churning rules. However, see "-Section 754 Election" with respect to the
amortization of Section 743(b) adjustments available to purchase of Units. The
IRS may challenge either the fair market values or the useful lives assigned to
such assets. If any such challenge or characterization were successful, the
deductions allocated to a holder of Units in respect of such assets would be
reduced and a Unitholder's share of taxable income from the Partnership would be
increased accordingly. Any such increase could be material.
If the Partnership disposes of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner that has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions upon a sale of such partner's interest in the
Partnership. See "-Allocation of Partnership Income, Gain, Loss and Deduction"
and "-Disposition of Common Units-Recognition of Gain or Loss."
Costs incurred in organizing a partnership may be amortized over any period
selected by the partnership not shorter than 60 months. The costs incurred in
promoting the issuance of Units, including underwriting commissions and
discounts, must be capitalized and cannot be deducted currently, ratably or upon
termination of the Partnership. There are uncertainties regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses which may not be amortized.
Section 754 Election. The Partnership has previously made a Section 754
election and will make another Section 754 election for protective purposes.
This election is irrevocable without the consent of the IRS. The election will
generally permit a purchaser of Units to adjust such purchaser's share of the
basis in the Partnership's properties ("Common Basis") pursuant to Section
743(b) to reflect the purchase price paid for such Units. In the case of Units
purchased in the market, the Section 743(b) adjustment acts in concert with
Section 704(c) allocations (and Curative Allocations, if respected) in providing
the purchaser of such Units with the equivalent of a fair market value Common
Basis. See " -Allocation of Partnership Income, Gain, Loss and Deduction." The
Section 743(b) adjustment is attributed solely to a purchaser of Units and is
not added to the bases of the Partnership's assets associated with Units held by
other Unit holders. (For purposes of this discussion, a Unit holder's inside
basis in the Partnership's assets will be considered to have two components: (1)
the Unit holder's share of the Partnership's actual basis in such assets
("Common Basis") and (2) the Unit holder's Section 743(b) adjustment allocated
to each such asset.)
A Section 754 election is advantageous if the transferee's basis in Units
is higher than the Partnership's aggregate Common Basis allocable to that
portion of its assets represented by such Units immediately prior to the
transfer. In such case, pursuant to the election, the transferee would take a
new and higher basis in the transferee's share of the Partnership's assets for
purposes of calculating, among other items, depreciation deductions and the
applicable share of any gain or loss on a sale of the Partnership's assets.
Conversely, a Section 754 election is disadvantageous if the transferee's basis
in such Units is lower than the Partnership's aggregate Common Basis allocable
to that portion of its assets represented by such Units immediately prior to the
transfer. Thus, the amount that a holder of Units will be able to obtain upon
the sale of Units may be affected either favorably or adversely by the election.
A constructive termination of the Partnership will also cause a Section 708
termination of the Operating Partnerships. Such a termination could also result
in penalties or loss of basis adjustments under Section 754, if the General
Partner were unable to determine that the termination had occurred and,
therefore, did not timely file a tax return or make appropriate Section 754
elections for the "new" Partnership.
Proposed Treasury Regulation Section 1.743-1(j)(4)(B) generally requires
the Section 743(b) adjustment attributable to recovery property to be
depreciated as if the total amount of such adjustment were attributable to
newly-acquired recovery property placed in service when the purchase of a Unit
occurs. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
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rather than cost recovery deductions under Section 168 is generally required to
be depreciated using either the straight-line method or the 150% declining
balance method. Although Counsel is unable to opine as to the validity of such
an approach, the Partnership intends to depreciate the portion of a Section
743(b) adjustment attributable to unrealized appreciation in the value of the
Partnership property (to the extent of any unamortized Book-Tax Disparity) using
a rate of depreciation derived from the depreciation method and useful life
applied to the Common Basis of such property, despite its inconsistency with
Proposed Treasury Regulation Section 1.743(j)(4)(B) and Treasury Regulation
Section 1.167(c)-1(a)(6). If an asset is not subject to depreciation or
amortization, no Section 743(b) adjustment would be available to that extent. If
the General Partner determines that such position cannot reasonably be taken, it
may adopt a depreciation convention under which all purchasers acquiring Units
in the same month would receive depreciation, whether attributable to Common
Basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. Such an aggregate
approach, or any other method required as a result of an IRS examination, may
result in lower annual depreciation deductions than would otherwise be allowable
to certain holders of Units. See "-Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060. Based on these principles, the IRS may seek
to reallocate some or all of any Section 743(b) adjustment not so allocated by
the Partnership to intangible assets which have a longer 15 year amortization
period and which are not eligible for accelerated depreciation methods generally
applicable to other assets of the Partnership.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of the Partnership assets and other matters. There is no assurance that the
determinations made by the General Partner will not be successfully challenged
by the IRS and that the deductions attributable to them will not be disallowed
or reduced.
Valuation of Property of the Partnership. The federal income tax
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the General Partner of the relative fair market values,
and determinations of the tax basis, of the assets of the Partnership. Although
the General Partner may from time to time consult with professional appraisers
with respect to valuation matters, many of the relative fair market value
estimates will be made solely by the General Partner. These estimates are
subject to challenge and will not be binding on the IRS or the courts. In the
event the determinations of fair market value are subsequently found to be
incorrect, the character and amount of items of income, gain, loss, deductions
or credits previously reported by Unit holders might change, and Unit holders
might have additional tax liability for such prior periods.
Mont Belvieu Fractionator. OLP-A owns all of the capital stock of a
corporation that owns an indirect interest in the Mont Belvieu Fractionator. As
a corporation, it will be subject to entity-level taxation for federal and state
income tax purposes. The Partnership, as its shareholder, will include in its
income any amounts distributed to it by such corporation to the extent of such
corporation's current and accumulated earnings and profits. The General Partner
estimates that a portion of the cash distributions to the Partnership by such
corporation will be treated as taxable dividends. It is anticipated, however,
that such corporation will be liquidated in 1998.
Alternative Minimum Tax. Each holder of Units will be required to take into
account such holder's distributive share of any items of the Partnership's
income, gain or loss for purposes of the alternative minimum tax
("AMT")-currently a tax of 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income of individuals. Alternative minimum taxable
income is calculated using the 150% declining balance method of depreciation
with respect to personal property and 40-year straight-line depreciation for
real property. These depreciation methods are not as favorable as the
alternative straight line and accelerated methods provided for under Section 168
which the Partnership will use in computing its income for regular federal
income tax purposes. Accordingly, a Unit holder's AMT taxable income derived
from the Partnership may be higher than such holder's share of the Partnership's
net income. Prospective holders of Units should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
Disposition of Units
Recognition of Gain or Loss. A Unit holder will recognize gain or loss on a
sale of Units equal to the difference between the amount realized and a holder's
tax basis for the Units sold. A holder's amount realized will be measured by the
sum of the cash received or the fair market value of other property received,
plus such holder's share of the Partnership's nonrecourse liabilities. Because
the amount realized includes a Unit holder's share of the Partnership's
nonrecourse liabilities, the gain recognized on the sale of Units could result
in a tax liability in excess of any cash received from such sale.
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In general, the Partnership's items of income, gain, loss and deduction
will be allocated, for book and tax purposes, among the General Partner, in its
capacity as general partner, and the holders of Units in the same proportion
that Available Cash is distributed (as between the General Partner and the
holders of Units) in respect of such taxable year. If distributions of Available
Cash are not made in respect of a particular taxable year, such items will be
allocated among the partners in accordance with their respective percentage
interests. Moreover, if a Unit holder has received distributions from the
Partnership which exceed the cumulative net taxable income allocated to him, his
basis will decrease to an amount less than his original purchase price for the
Units. In effect, this amount would increase the gain recognized on sale of the
Unit(s). Under such circumstances, a gain could result even if the Unit(s) are
sold at a price less than their original cost.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of such aggregate tax basis must
be allocated to the interests sold on the basis of some equitable apportionment
method. The ruling is unclear as to how the holding period is affected by this
aggregation concept. If this ruling is applicable to the holders of Units, the
aggregation of tax bases of a holder of Units effectively prohibits such holder
from choosing among Units with varying amounts of unrealized gain or loss as
would be possible in a stock transaction. Thus, the ruling may result in an
acceleration of gain or deferral of loss on a sale of a portion of a holder's
Units. It is not clear whether the ruling applies to publicly traded
partnerships, such as the Partnership, the interests in which are evidenced by
separate Units and, accordingly, Counsel is unable to opine as to the effect
such ruling will have on a holder of Units. A holder of Units considering the
purchase of additional Units or a sale of Units purchased at differing prices
should consult a tax advisor as to the possible consequences of such ruling.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"-Tax Treatment of Operations-Section 754 Election") attributable to an
Amortizable Section 197 Intangible after a sale of Units, a holder of Units
could realize more gain from the sale of its Units than if such convention had
been respected. In that case, the holder of Units may have been entitled to
additional deductions against income in prior years, but may be unable to claim
them, with the result of greater overall taxable income than appropriate.
Counsel is unable to opine as to the validity of the convention because of the
lack of specific regulatory authority for its use.
Treatment of Short Sales and Deemed Sales Under the 1997 Act, a taxpayer is
treated as having sold an "appreciated" partnership interest (one in which gain
would be recognized if such interest were sold), if such taxpayer or related
persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the appreciated
financial position (including selling "short against the box" transactions).
Holders of Units should consult with their tax advisers in the event they are
considering entering into a short sale transaction or any other risk arbitrage
transaction involving Units.
A holder whose Units are loaned to a "short seller" to cover a short sale
of Units will be considered as having transferred beneficial ownership of those
Units and will, thus, no longer be a partner with respect to those Units during
the period of the loan. As a result, during this period, any the Partnership
income, gain, deductions, losses or credits with respect to those Units would
appear not to be reportable by the holders thereof, any cash distributions
received by such holders with respect to those Units would be fully taxable and
all of such distributions would appear to be treated as ordinary income. The IRS
may also contend that a loan of Units to a "short seller" constitutes a taxable
exchange. If this contention were successfully made, a lending holder of Units
may be required to recognize gain or loss. Holders of Units desiring to assure
their status as partners should modify their brokerage account agreements, if
any, to prohibit their brokers from borrowing their Units.
Character of Gain or Loss. Generally, gain or loss recognized by a Unit
holder (other than a "dealer" in Units) on the sale or exchange of a Unit will
be taxable as capital gain or loss. For transactions after July 29, 1997, the
1997 Act lengthens the holding period required for long-term capital gain
treatment to 18 months in order to qualify a gain for an effective maximum tax
rate of 20%. The 1997 Act also creates a mid-term capital gain concept for
assets held for more than 12 months, but not more than 18 months, for which the
maximum tax rate is 28%. Capital assets sold at a profit within 12 months of
purchase would result in short term capital gains taxed at ordinary income tax
rates. Any gain or loss, however, will be separately computed and taxed as
ordinary income or loss under Section 751 to the extent attributable to assets
giving rise to depreciation recapture or other "unrealized receivables" or to
"inventory" owned by the Partnership. The 1997 Act provides for a maximum 25%
tax rate for depreciation recapture attributable to "unrecaptured Section 1250
gain". Section 1250 generally applies to depreciation recognized in excess of
straight line depreciation on real property (other than Section 1245 property)
which is of a character subject to depreciation. The term "unrealized
receivables" also includes potential recapture items other than depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory and
depreciation recapture may exceed net taxable gain realized upon
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the sale of a Unit and may be recognized even if there is a net taxable loss
realized on the sale of a Unit. Any loss recognized on the sale of Units will
generally be a capital loss. Thus, a holder of Units may recognize both ordinary
income and a capital loss upon a disposition of Units. Net capital loss may
offset no more than $3,000 of ordinary income in the case of individuals and may
only be used to offset capital gain in the case of a corporation.
Allocations between Transferors and Transferees. In general, the
Partnership's taxable income and losses will be determined annually and will be
prorated on a monthly basis and subsequently apportioned among the holders in
proportion to the number of Units owned by them as of the opening of the first
business day of the month to which the income and losses relate even though Unit
holders may dispose of their Units during the month in question. Gain or loss
realized on a sale or other disposition of Partnership assets other than in the
ordinary course of business will be allocated among the Unit holders of record
as of the opening of the NYSE on the first business day of the month in which
such gain or loss is recognized. As a result of this monthly allocation, a
holder of Units transferring Units in the open market may be allocated income,
gain, loss, deduction, and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between a
transferor and a transferee of Units. If a monthly convention is not allowed by
the Treasury Regulation (or only applies to transfers of less than all of the
holder's Units), taxable income or losses of the Partnership might be
reallocated among the holders of Units. The General Partner is authorized to
review the Partnership's method of allocation between transferors and
transferees (as well as among partners whose interests otherwise vary during a
taxable period) to conform to a method permitted by future Treasury Regulations.
A holder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a distribution with respect to such
quarter will be allocated items of Partnership income and gain attributable to
such quarter for the months during which such Units were owned but will not be
entitled to receive such cash distribution.
Notification Requirements. A Unitholder who sells or exchanges Units is
required to notify the Partnership in writing of such sale or exchange within 30
days of the sale or exchange and in any event by no later than January 15 of the
year following the calendar year in which the sale or exchange occurred. The
Partnership is required to notify the IRS of such transaction and to furnish
certain information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker.
Additionally, a transferor and a transferee of a Unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, which set forth the amount
of the consideration received for such Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination. The Partnership and the Operating Partnerships
will be considered to have been terminated if there is a sale or exchange of 50%
or more of the total interests in partnership capital and profits within a
12-month period. A constructive termination results in the closing of a
partnership's taxable year for all partners and the "old" Partnership (before
termination) is deemed to have contributed its assets to the "new" Partnership
and distributed interests in the "new" Partnership to the holders of Units. The
"new" Partnership is then treated as a new partnership for tax purposes. A
constructive termination of the Partnership will also cause a Section 708
termination of the Operating Partnerships. Such a termination could also result
in penalties or loss of basis adjustments under Section 754, if the Partnership
were unable to determine that the termination had occurred and, therefore, did
not timely file a tax return and make the appropriate Section 754 elections for
the "new" Partnership.
In the case of a holder of Units reporting on a fiscal year other than a
calendar year, the closing of a tax year of the Partnership may result in more
than 12 months' taxable income or loss of the Partnership being includable in
its taxable income for the year of termination. New tax elections required to be
made by the Partnership, including a new election under Section 754, must be
made subsequent to the constructive termination. A constructive termination
would also result in a deferral of the Partnership deductions for depreciation
and amortization. In addition, a termination might either accelerate the
application of or subject the Partnership to any tax legislation enacted with
effective dates after the date of the termination.
Entity-Level Collections. If the Partnership is required under applicable
law to pay any federal, state or local income tax on behalf of any holder of
Units or the General Partner or former holders of Units, the General Partner is
authorized to pay such taxes from Partnership funds. Such payments, if made,
will be deemed current distributions of cash to such Unit holder or the General
Partner as the case may be. The General Partner is authorized to amend the
Partnership Agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of Units and to
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adjust subsequent distributions so that after giving effect to such deemed
distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Partnership as described above could give rise to
an overpayment of tax on behalf of an individual partner in which event, the
partner could file a claim for credit or refund.
Uniformity of Units. The Partnership cannot trace the chain of ownership of
any particular Unit. Therefore, it is unable to track the economic and tax
characteristics related to particular Units from owner to owner. Consequently,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units must be maintained. In order to achieve uniformity, compliance with a
number of federal income tax requirements, both statutory and regulatory, could
be substantially diminished. For example, a lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and
Treasury Regulation Section 1.167(c)-1(a)(6) and from the effect of the Ceiling
Rule on the Partnership's ability to make allocations to eliminate Book-Tax
Disparities attributable to Contributed Properties and partnership property that
has been revalued and reflected in the partners' capital accounts. If the IRS
were to challenge such conventions intended to achieve uniformity and such
challenge were successful, the tax consequences of holding particular Units
could differ. Any such non-uniformity could have a negative impact on the value
of Units.
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation derived from the depreciation method and
useful life applied to the Common Basis of such property, despite its
inconsistency with Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and
Treasury Regulation Section 1.167(c)-1(a)(6). See "Tax Treatment of
Operations-Section 754 Election." If the Partnership determines that such a
position cannot reasonably be taken, the Partnership may adopt a depreciation
convention under which all purchasers acquiring Units in the same month would
receive depreciation, whether attributable to Common Basis or Section 743(b)
basis, based upon the same applicable rate as if they had purchased a direct
interest in the Partnership's property. If such an aggregate approach is
adopted, it may result in lower annual depreciation deductions than would
otherwise be allowable to certain holders of Units and risk the loss of
depreciation deductions not taken in the year that such deductions are otherwise
allowable. This convention will not be adopted if the Partnership determines
that the loss of depreciation deductions would have a material adverse effect on
a holder of Units. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation convention to
preserve the uniformity of the intrinsic tax characteristics of Units that would
not have a material adverse effect on the holders of Units. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were to be sustained, the uniformity of
Units might be affected.
Items of income and deduction, including the effects of any unamortizable
intangibles under the Proposed Treasury Regulation Section 197-2(g)(1), will be
specially allocated in a manner that is intended to preserve the uniformity of
intrinsic tax characteristics among all Units, despite the application of the
Ceiling Rule to Contributed Properties and Adjusted Properties. Such special
allocations will be made solely for federal income tax purposes. See "-Tax
Consequences of Ownership of Units" and "-Allocations of Income, Gain, Loss and
Deduction."
Tax-Exempt Organizations and Certain Other Investors. Ownership of Units by
certain tax-exempt entities, regulated investment companies and foreign persons
raises issues unique to such persons and, as described below, may have
substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs and other retirement plans) are subject to federal
income tax on unrelated business taxable income in excess of $1,000, and each
such entity must file a tax return for each year in which it has more than
$1,000 of gross income included in computing unrelated business taxable income.
Substantially all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a holder of Units at the maximum corporate tax rate. Also, to
the extent that the Partnership holds debt financed property, the disposition of
a Unit could result in unrelated business taxable income.
A regulated investment company is required to derive 90% or more of its
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not anticipated
that any significant amount of the Partnership's gross income will include those
categories of income.
Non-resident aliens and foreign corporations, trusts or estates which
acquire Units will be considered to be engaged in business in the United States
on account of ownership of Units. As a result, they will be required to file
federal tax returns in respect of their distributive shares of Partnership
income, gain, loss, deduction or credit and pay federal income tax at regular
tax rates on such income. Generally, a partnership is required to pay a
withholding tax on the portion of the partnership income which is effectively
connected with the conduct of a United States trade or business
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and which is allocable to the foreign partners, regardless of whether any actual
distributions have been made to such partners. However, under procedural
guidelines applicable to publicly traded partnerships, the Partnership has
elected instead to withhold (or a broker holding Units in street name will
withhold) at the rate of 39.6% on actual cash distributions made quarterly to
foreign holders of Units. Each foreign holder of Units must obtain a taxpayer
identification number from the IRS and submit that number to the Transfer Agent
on a Form W-8 in order to obtain credit for the taxes withheld. Subsequent
adoption of Treasury Regulations or the issuance of other administrative
pronouncements may require the Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a holder may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate holder
of Units is a "qualified resident."
An interest in the Partnership may also constitute a "United States Real
Property Interest" ("USRPI") under Section 897(c) of the Code. For this purpose,
Treasury Regulation Section 1.897-1(c)(2)(iv) treats a publicly traded
partnership the same as a corporation. Assuming that the Units continue to be
regularly traded on an established securities market, a foreign holder of Units
who sells or otherwise disposes of a Unit and who has not held more than 5% in
value of the Units, including Units held by certain related individuals and
entities at any time during the five-year period ending on the date of the
disposition, will qualify for an exclusion from USRPI treatment and will not be
subject to federal income tax on gain realized on the disposition that is
attributable to real property held by the Partnership. However, such holder may
be subject to federal income tax on any gain realized on the disposition that is
treated as effectively connected with a United States trade or business of the
foreign holder of Units (regardless of a foreign Unit holder's percentage
interest in the Partnership or whether Units are regularly traded). A foreign
holder of Units will be subject to federal income tax on gain attributable to
real property held by the Partnership if the holder held more than 5% in value
of the Units, including Units held by certain related individuals and entities,
during the five-year period ending on the date of the disposition or if the
Units were not regularly traded on an established securities market at the time
of the disposition.
A foreign holder of Units will also be subject to withholding under Section
1445 of the Code if such holder owns, including Units held by certain related
individuals and entities, more than a 5% interest in the Partnership. Under
Section 1445 a transferee of a USRPI is required to deduct and withhold a tax
equal to 10% of the amount realized on the disposition of a USRPI if the
transferor is a foreign person.
Administrative Matters
Information Returns and Audit Procedures. The Partnership intends to
furnish to each holder of Units within 90 days after the close of each
Partnership taxable year, certain tax information, including a Schedule K-1,
which sets forth each holder's allocable share of the Partnership's income,
gain, loss, deduction and credit. In preparing this information, which will
generally not be reviewed by counsel, the General Partner will use various
accounting and reporting conventions, some of which have been mentioned in the
previous discussion, to determine the respective Unit holder's allocable share
of income, gain, loss, deduction and credits. There is no assurance that any
such conventions will yield a result which conforms to the requirements of the
Code, the Regulations or administrative interpretations of the IRS. The General
Partner cannot assure a current or prospective holder of Units that the IRS will
not successfully contend in court that such accounting and reporting conventions
are impermissible.
No assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made. The rights of a holder of Units
owning less than a 1% profits interest in the Partnership to participate in the
income tax audit process have been substantially reduced. Further, any
adjustments in the Partnership's returns will lead to adjustments in Unit
holder's returns and may lead to audits of their returns and adjustments of
items unrelated to the Partnership. Each Unit holder would bear the cost of any
expenses incurred in connection with an examination of such holder's personal
tax return.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. Under the 1997 Act, any penalty relating to an adjustment to a
partnership item is determined at the partnership level. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner.
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The Tax Matters Partner will make certain elections on behalf of the
Partnership and holders of Units and can extend the statute of limitations for
assessment of tax deficiencies against holders of Units with respect to the
Partnership items. The Tax Matters Partner may bind a holder of Units with less
than a 1% profits interest in the Partnership to a settlement with the IRS,
unless such holder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review (to which all the holders of Units are bound) of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any holder having at least a 1% interest in
the profits of the Partnership or by holders of Units having in the aggregate at
least a 5% profits interest. However, only one action for judicial review will
go forward, and each holder of Units with an interest in the outcome may
participate.
A holder of Units must file a statement with the IRS identifying the
treatment of any item on its federal income tax return that is not consistent
with the treatment of the item on the Partnership's return to avoid the
requirement that all items be treated consistently on both returns. Intentional
or negligent disregard of the consistency requirement may subject a holder of
Units to substantial penalties.
Electing Large Partnerships. The 1997 Act provides that certain
partnerships with at least 100 partners may elect to be treated as an electing
large partnership ("ELP") for tax years ending after December 31, 1997. If
further revisions are made to the law, it is possible that at some future date
the Partnership will make this election to be taxed as an electing large
partnership, however, based on current law it is not contemplated that such an
election will be made for 1998 or any subsequent year.
Under the reporting provisions of the 1997 Act, each partner of an ELP will
take into account separately such partner's share of several designated items,
determined at the partnership level. The ELP procedures provide that any tax
adjustments generally would flow through to the holders of Units for the year in
which the adjustment takes effect, and the adjustments would not affect
prior-year returns of any holder, except in the case of changes to any holder's
distributive share. In lieu of passing through an adjustment to the holders of
Units, the Partnership may elect to pay an imputed underpayment. The
Partnership, and not the holders of Units, would be liable for any interest and
penalties resulting from a tax adjustment.
Nominee Reporting. Persons who hold an interest in the Partnership as a
nominee for another person are required to furnish to the Partnership (a) the
name, address and taxpayer identification number of the beneficial owners and
the nominee; (b) whether the beneficial owner is (i) a person that is not a
United States person, (ii) a foreign government, an international organization
or any wholly-owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity; (c) the amount and description of Units held,
acquired or transferred for the beneficial owners; and (d) certain information
including the dates of acquisitions and transfers, means of acquisitions and
transfers, and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are required to furnish
additional information, including whether they are a United States person and
certain information on Units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such information to the
Partnership. The nominee is required to supply the beneficial owner of the Units
with the information furnished to the Partnership.
Registration as a Tax Shelter. The Code requires that "tax shelters" be
registered with the Secretary of the Treasury. The Treasury Regulations
interpreting the tax shelter registration provisions of the Code are extremely
broad. It is arguable that the Partnership is not subject to the registration
requirement on the basis that (i) it does not constitute a tax shelter, or (ii)
it constitutes a projected income investment exempt from registration. However,
the General Partner registered the Partnership as a tax shelter with the IRS
when it was originally formed in the absence of assurance that the Partnership
would not be subject to tax shelter registration and in light of the substantial
penalties which might be imposed if registration was required and not
undertaken. The Partnership's tax shelter registration number with the IRS is
9228900496. This number will be provided to every Unit holder with year-end tax
information. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the registration
number to the holder of Units, and a holder of Units who sells or otherwise
transfers a Unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a Unit to
furnish such registration number to the transferee is $100 for each such
failure. The holder of Units must disclose the tax shelter registration number
of the Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss, credit or other benefit generated by the Partnership is claimed
or income of the Partnership is included. A holder of Units who fails to
disclose the tax shelter registration number on such holder's tax return,
without reasonable cause for such failure, will be subject to a $250 penalty for
each such failure. Any penalties discussed herein are not deductible for federal
income tax purposes.
53
<PAGE>
Accuracy-Related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Code. No penalty will be
imposed, however, with respect to any portion of an underpayment if it is shown
that there was a reasonable cause for such portion and that the taxpayer acted
in good faith with respect to such portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion (i) is attributable to an item with respect to which
there is, or was, "substantial authority" for the position taken on the return
or (ii) is attributable to an item for which there was a reasonable basis for
the tax treatment of the items and as to which the pertinent facts are disclosed
on the return. Certain more stringent rules apply to "tax shelters," which term
includes a partnership if a significant purpose of such entity is the avoidance
or evasion of income tax. This term does not appear to include the Partnership.
If any Partnership item of income, gain, loss, deduction or credit included in
the distributive shares of Unit holders might result in such an "understatement"
of income for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the Partnership will
make a reasonable effort to furnish sufficient information for holders of Units
to make adequate disclosure on their returns to avoid liability for this
penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement is in excess of $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
State, Local and Other Taxes
Holders of Units may be subject to other taxes, such as state and local
taxes, unincorporated business taxes, and estate, inheritance or intangible
taxes that may be imposed by the various jurisdictions in which the Partnership
does business or owns property. Unit holders should consider state and local tax
consequences of an investment in the Partnership. The Partnership owns an
interest in the Operating Partnerships, which own property or conduct business
in Arizona, California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Missouri, Nebraska, Nevada, New Mexico, Oregon, Texas and Wyoming. A holder of
Units will likely be required to file state income tax returns and/or to pay
such taxes in most of such states and may be subject to penalties for failure to
do so. Some of the states may require the Partnership to withhold a percentage
of income from amounts that are to be distributed to a holder of Units that is
not a resident of the state. Such amounts withheld, if any, which may be greater
or less than a particular holder's income tax liability to the state, generally
do not relieve the non-resident Unit holder from the obligation to file a state
income tax return. Amounts withheld, if any, will be treated as if distributed
to holders of Units for purposes of determining the amounts distributed by the
Partnership. Based on current law and its estimate of future partnership
operations, the General Partner anticipates that any amounts required to be
withheld will not be material. In addition, an obligation to file tax returns or
to pay taxes may arise in other states.
It is the responsibility of each prospective holder of Units to investigate
the legal and tax consequences, under the laws of pertinent states or
localities, of such investment in the Partnership. Further, it is the
responsibility of each holder of Units to file all state and local, as well as
federal tax returns that may be required of such holder. Counsel has not
rendered an opinion on the state and local tax consequences of an investment in
the Partnership.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Partnership and the Selling Unitholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman Sachs
& Co. are acting as representatives, has severally agreed to purchase from the
Partnership and the Selling Unitholders, the respective number of Units set
forth opposite its name below:
54
<PAGE>
Underwriter Number of Units
Goldman, Sachs & Co.......
Total.................... _________
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Units offered hereby,
if any are taken.
The Underwriters propose to offer the Units in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $_______ per Unit. The Underwriter may allow, and such dealers may
reallow, a concession not in excess of $____ per Unit to certain brokers and
dealers. After the Units are released for sale to the public, the offering price
and other selling terms may from time to time be varied by Goldman, Sachs & Co.
The Partnership has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
__________ additional Units solely to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Units to be purchased by each of
them, as shown in the foregoing table, bears to the Units offered.
The Partnership and the Selling Unitholders has/have agreed that, during
the period beginning from the date of this Prospectus and continuing to and
including the date ________ days after the date of the Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Partnership (other than pursuant to employee unit option plans existing, or on
the conversion of exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar to
the Units or which are convertible into or exchangeable for securities which are
substantially similar to the Units without the prior written consent of the
representatives, except for the Units offered in connection with the offering.
In connection with the offering, the Underwriters may purchase and sell the
Units in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created by the
Underwriters in connection with the offering. Stabilizing transactions consist
of certain bids or purchases for the purpose of preventing or retarding a
decline in the market price of the Units and short positions created by the
Underwriters involve the sale by the Underwriters of a greater number of shares
of Units than they are required to purchase from the Partnership in the
offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
offering may be reclaimed by the Underwriters if such Units are repurchased by
the Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Units, which may
be higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
Goldman, Sachs & Co. and its affiliates have from time to time performed
various investment banking and financial advisory services for the Partnership
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. acted as financial advisors to the General
Partner in connection with the Partnership's acquisition of SFPP and the general
partner interest in Santa Fe.
In addition, Goldman, Sachs & Co. provides a full range of financial,
advisory and securities services and, in the course of its normal trading
activities, may from time to time effect transactions and hold positions in the
securities of the Partnership, and have held such positions in the securities of
Santa Fe, for its own account and for the account of customers. As of the date
hereof, Goldman, Sachs & Co. is the beneficial owner of ____ Units. Goldman,
Sachs & Co. acquired ___ of such Units upon the exchange of VREDs on the
Exchange Date. Goldman, Sachs & Co. is including ___ of such Units in this
Offering and, accordingly, it is a Selling Unitholder. See "Selling
Unitholders." In addition, Goldman, Sachs Credit Partners L.P., an affiliate of
Goldman, Sachs & Co., served as syndication agent and a lender under the
Partnership's Credit Facility for which it received customary fees and
out-of-pocket expense reimbursement. The proceeds of this Offering will be used
in part to repay borrowings under the Credit Facility, under which Goldman,
Sachs Credit Partners L.P. is a lender.
55
<PAGE>
The Partnership and the Selling Unitholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Units and certain
federal income tax considerations are being passed upon by Morrison & Hecker
L.L.P., Kansas City, Missouri, as counsel for the Partnership. Certain legal
matters are being passed upon for the Underwriters by Andrews & Kurth LLP.
EXPERTS
The consolidated financial statements as of and for the year ended December
31, 1997 of the Partnership and its subsidiaries and the financial statements as
of and for the year ended December 31, 1997 of Mont Belvieu Associates
incorporated in this Prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 1997, have been so incorporated in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of the Partnership and subsidiaries
and the financial statements of Mont Belvieu Associates as of December 31, 1996
and for the two years ended December 31, 1996 included in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated
by reference in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are incorporated herein in reliance upon the authority of said firm
as experts in giving said reports.
The consolidated financial statements of Santa Fe as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
incorporated in this Prospectus by reference to the Partnership's Current Report
on Form 8-K dated March 5, 1998, as amended, have been so incorporated in
reliance upon the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The balance sheet of the General Partner as of December 31, 1997, included
in the Registration Statement of which this Prospectus is a part, has been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
56
<PAGE>
No person has been authorized to
give any information or to make any
representations not contained in this
Prospectus, and, if given or made, such
information or representations must
not be relied upon as Common Units
having been authorized. Representing Limited
This Prospectus does not Partner Interests
constitute an offer to
sell or the solicitation
of an offer to buy any
securities other than the KINDER MORGAN
securities to which it ENERGY PARTNERS, L.P.
relates or an offer to
sell or the solicitation
of any offer to buy such
securities in any
circumstances in which
such offer or solicitation
would be unlawful.
Neither the delivery of __________________
this Prospectus nor any
sale made hereunder shall, PROSPECTUS
under any circumstances, __________________
create any implication
that there has been no
change in the affairs of
the Partnership since the
date hereof or that the
information contained
herein is correct as of Goldman, Sachs & Co.
any time subsequent its
date.
----------------
______________, 1998
TABLE OF CONTENTS
AVAILABLE INFORMATION i
INCORPORATION OF CERTAIN
DOCUMENTS i
INFORMATION REGARDING
FORWARD LOOKING STATEMENTS ii
SUMMARY 1
RISK FACTORS 6
USE OF PROCEEDS 8
PRICE RANGE OF UNITS AND
DIVIDEND POLICY 9
SELECTED HISTORICAL AND
PRO FORMA FINANCIAL AND
OPERATING DATA 15
THE PARTNERSHIP 24
MANAGEMENT 36
SELLING UNITHOLDERS 38
MATERIAL FEDERAL INCOME
TAX CONSIDERATIONS 39
UNDERWRITING 54
LEGAL MATTERS 56
EXPERTS 56
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses and costs expected to be
incurred in connection with the issuance and distribution of the securities
registered hereby. All such costs shall be paid pro rata by the Partnership and
the Selling Unitholders based upon the number of Units being sold in the
Offering.
Securities and Exchange Commission registration fee.............$ *
-------
NYSE Fees.......................................................$ *
-------
NASD Filing Fees................................................$ *
-------
Printing........................................................$ *
-------
Legal fees and expenses ........................................$ *
-------
Accounting fees and expenses ...................................$ *
-------
Transfer Agent and Registrar Fees and Expenses..................$ *
-------
Miscellaneous...................................................$ *
-------
Total $ *
- -------
*To be filed by amendment
Item 15. Indemnification of Directors and Officers
The Partnership Agreement provides that the Partnership will indemnify 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. In addition, the
Partnership may indemnify, to the extent deemed advisable by the General Partner
and to the fullest extent permitted by law, 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 or director of the General Partner, a
departing partner or any of their Affiliates (as defined in Partnership
Agreement) ("Indemnitees") from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, settlements 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 an officer or director or a person serving at the request of the
Partnership in another entity in a similar capacity, provided that in each case
the Indemnitee acted in good faith and in a manner which such Indemnitee
believed to be in or not opposed to the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful. Any indemnification under these provisions will be only
out of the assets of the Partnership and the General Partner shall not be
personally liable for, or have any obligation to contribute or loan funds or
assets to the Partnership to enable it to effectuate, such indemnification. The
Partnership is authorized to purchase (or to reimburse the General Partner or
its affiliates for the cost of) insurance against liabilities asserted against
and expenses incurred by such person to indemnify such person against such
liabilities under the provisions described above.
Article XII(c) of the Certificate of Incorporation of the General Partner
(the "Corporation" therein) contains the following provisions relating to
indemnification of directors and officers:
(c) Each director and each officer of the corporation (and such
holder's heirs, executors and administrators) shall be indemnified by the
corporation against expenses reasonably incurred by him in connection with
any claim made against him or any action, suit or proceeding to which he
may be made a party, by reason of such holder being or having been a
director or officer of the corporation (whether or not he continues to be a
director or officer of the corporation at the time of incurring such
expenses), except in cases where the claim made against him shall be
admitted by him to be just, and except in cases where such action, suit or
proceeding shall be settled prior to adjudication by payment of all or a
substantial portion of the amount claimed, and except in cases in which he
shall be adjudged in such action, suit or proceeding to be liable or to
have been derelict in the performance of such holder's duty as such
director or officer. Such right of indemnification shall not be exclusive
of other rights to which he may be entitled as a matter of law.
Richard D. Kinder, the Chairman of the Board of Directors and Chief
Executive Officer of the General Partner, and William V. Morgan, a Director and
Vice Chairman of the General Partner, are also officers and directors
II-1
<PAGE>
of Kinder Morgan, Inc., the parent corporation of the General Partner ("KMI")
and are entitled to similar indemnification from KMI pursuant to KMI's
certificate of incorporation and bylaws.
Item 16. Exhibits
***1.1 Underwriting Agreement dated as of __________, 1998 by and among Kinder
Morgan Energy Partners, L.P.and Goldman Sachs & Co. , as representative
for the Underwriters.
*2.1 Second Amended and Restated Partnership Agreement of Kinder Morgan
Energy Partners, L.P. dated January 14, 1998.
*4.1 Form of Certificate representing a Unit.
***5.1 Form of Opinion of Morrison & Hecker L.L.P. as to the legality of the
securities registered hereby.
***8.1 Form of Opinion of Morrison & Hecker L.L.P. as to certain tax matters.
***23.1 Consent of Morrison & Hecker L.L.P. (included in Exhibits 5.1 and 8.1).
****23.2 Consent of Price Waterhouse LLP.
****23.3 Consent of Price Waterhouse LLP.
****23.4 Consent of Arthur Andersen LLP.
****24.1 Power of Attorney (included on signature page).
**99.1 Balance Sheet of Kinder Morgan G.P., Inc. dated December 31, 1997.
- ---------------------
* Incorporated by reference from Kinder Morgan Energy Partners, L.P.'s
Amendment No. 1 to Registration Statement on Form S-4 filed February 4,
1998 (file no. 333-44519).
** Incorporated by reference from Amendment No. 1 to Kinder Morgan Energy
Partners, L.P.'s registration statement on Form S-4 filed April 14, 1998
(File No. 333-46709).
*** To be filed by amendment.
**** Filed herewith.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to 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 Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of 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 Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement 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.
The undersigned registrant hereby undertakes that:
II-2
<PAGE>
(1) For purposes of determining any liability under the Securities Act of
1933, 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 pursuant to 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 the purpose of determining any liability under the Securities Act
of 1933, 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and 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 April 17, 1998.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., INC.
as General Partner
By: /s/ Thomas B. King
-----------------------------
Thomas B. King
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard D. Kinder, Thomas B. King and William V.
Morgan, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign and file (i) any or all amendments (including
post-effective amendments) to this Registration Statement and any and all other
documents in connection therewith, with all exhibits thereto, and (ii) a
Registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as might or could be done in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Richard D. Kinder Director, Chairman of the Board
- ---------------------- and Chief Executive Officer of April 17, 1998
Richard D. Kinder Kinder Morgan G.P., Inc. (Principal
Executive Officer)
/s/ William V. Morgan Director and Vice Chairman of Kinder
- ---------------------- Morgan G.P., Inc. April 17, 1998
William V. Morgan
/s/ Alan L. Atterbury Director of Kinder Morgan G.P., Inc. April 17, 1998
- ----------------------
Alan L. Atterbury
/s/ Edward O. Gaylord Director of Kinder Morgan G.P., Inc. April 17, 1998
- ----------------------
Edward O. Gaylord
/s/ Thomas B. King Director, President and Chief April 17, 1998
- ---------------------- Operating Officer of Kinder Morgan
Thomas B. King G.P., Inc.
/s/ David G. Dehaemers, Jr. Vice President, Treasurer and Chief April 17, 1998
- ----------------------- Financial Officer (Principal
David G. Dehaemers, Jr. Financial and Accounting Officer)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
***1.1 Underwriting Agreement dated as of __________, 1998 by and among Kinder
Morgan Energy Partners, L.P.and Goldman Sachs & Co. , as representative
for the Underwriters.
*2.1 Second Amended and Restated Partnership Agreement of Kinder Morgan
Energy Partners, L.P. dated January 14, 1998.
*4.1 Form of Certificate representing a Unit.
***5.1 Form of Opinion of Morrison & Hecker L.L.P. as to the legality of the
securities registered hereby.
***8.1 Form of Opinion of Morrison & Hecker L.L.P. as to certain tax matters.
***23.1 Consent of Morrison & Hecker L.L.P. (included in Exhibits 5.1 and 8.1).
****23.2 Consent of Price Waterhouse LLP.
****23.3 Consent of Price Waterhouse LLP.
****23.4 Consent of Arthur Andersen LLP.
****24.1 Power of Attorney (included on signature page).
**99.1 Balance Sheet of Kinder Morgan G.P., Inc. dated December 31, 1997.
- ---------------------
* Incorporated by reference from Kinder Morgan Energy Partners, L.P.'s
Amendment No. 1 to Registration Statement on Form S-4 filed February 4,
1998 (file no. 333-44519).
** Incorporated by reference from Amendment No. 1 to Kinder Morgan Energy
Partners, L.P.'s registration statement on Form S-4 filed April 14, 1998
(File No. 333-46709).
*** To be filed by amendment.
**** Filed herewith.
II-5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Kinder Morgan
Energy Partners, L.P. of our report dated March 6, 1998 relating to the
consolidated financial statements of Kinder Morgan Energy Partners, L.P.
appearing on page F-2 and of our report dated March 6, 1998 relating to the
financial statements of Mont Belvieu Associates appearing on page F-20 of Kinder
Morgan Energy Partners, L.P.'s Annual Report on Form 10-K for the year ended
December 31, 1997. We also hereby consent to the incorporation by reference in
Exhibit 99.1 of this Registration Statement on Form S-3 of Kinder Morgan Energy
Partners, L.P. of our report dated March 16, 1998 relating to the balance sheet
of Kinder Morgan G.P., Inc., appearing in Exhibit 99.1 of Kinder Morgan Energy
Partnes, L.P.'s Amendment 1 to Form S-4 (No. 333-46709). We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
April 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Kinder Morgan
Energy Partners, L.P. of our report dated January 30, 1998 appearing on page F-1
of Kinder Morgan Energy Partners, L.P.'s Current Report on Form 8-K dated March
5, 1998, as amended. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Los Angeles, California
April 13, 1998
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, 1997, and to all references to our Firm
included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
April 13, 1998
