UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 8-K/A NO. 3
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report March 5, 1998
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 1-11234 76-0380342
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification)
1301 McKinney Street, Ste. 3450, Houston, Texas 77010
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 713-844-9500
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Item 2. Acquisition or Disposition of Assets.
Acquisition of Santa Fe Pacific Pipelines, L.P.
On March 6, 1998, Kinder Morgan Operating L.P. "D" ("OLP-D") acquired 99%
of SFPP, L.P., the operating partnership of Santa Fe Pacific Pipeline Partners,
L.P. ("Santa Fe"). SFPP, L.P. owned substantially all of Santa Fe's assets and
conducted all of its business activities. Kinder Morgan Energy Partners, L.P.
(the "Partnership" or "KMEP") acquired the interest of Santa Fe's common unit
holders in SFPP, L.P. in exchange for 26.6 million Common Units (1.39 Common
Units for each Santa Fe common unit). The Partnership paid $84.4 million to
Santa Fe Pacific Pipelines, Inc. (the "SF General Partner") in exchange for the
general partner interest in Santa Fe.
Also on March 6, 1998, SFPP, L.P. redeemed from the SF General Partner a
.5% special limited partner interest ("Special LP Interest") in SFPP, L.P. for
$5.8 million. The redemption was paid from SFPP, L.P.'s cash reserves. After the
redemption, the SF General Partner continues to own a .5% Special LP Interest in
SFPP, L.P. and OLP-D owns a 99.5% general partner interest in SFPP, L.P. The
Partnership owns a 99% limited partner interest in OLP-D and the general partner
of the Partnership owns a 1% general partner interest in OLP-D. The foregoing is
collectively referred to as the "Transaction".
The Partnership and a special committee of independent directors of the SF
General Partner determined the purchase price for Santa Fe (including the
exchange ratio for the Santa Fe common units) through negotiations. The
Partnership financed the purchase of the Santa Fe general partner interest
through its syndicated credit facility with First Union National Bank, as
administrative agent, swingline lender and issuing bank, Goldman Sachs Credit
Partners, as syndication agent, and the other lenders that are parties to the
credit facility.
At the time of the acquisition, Santa Fe was one of the largest
independent refined petroleum products pipelines in the United States serving,
six Western states with approximately 3,300 miles of common carrier pipeline and
thirteen truck loading terminals.
Formation of Shell CO2 Company
On March 5, 1998, the Partnership and affiliates of Shell Oil Company
("Shell") formed Shell CO2 Company, Ltd. ("Shell CO2"), which will explore,
produce, market and transport CO2 for enhanced oil recovery onshore throughout
the continental United States. The Partnership received a 20% limited partner
interest in Shell CO2 in exchange for contributing its Central Basin Pipeline
and $25 million in cash. Affiliates of Shell contributed their interests in CO2
reserves, pipelines, and other related assets in exchange for an 80% interest in
Shell CO2.
An affiliate of Shell will be the general partner of Shell CO2 and will
manage its operations.
2
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The Partnership is entitled, if there is sufficient available cash from
operations, to a fixed quarterly distribution of approximately $3.6 million
($14.5 million per year) during the four-year period ended December 31, 2001. In
2002 and 2003, the Partnership's cash distributions will be increased or
decreased so that the total cash distributions during the first six years of
Shell CO2's existence will be equal to the Partnership's percentage interest of
the cumulative cash distributions of Shell CO2 during such period on a
present-value basis (discounted at 10%).
At any time after March 5, 2002, Shell has the right to purchase the
Partnership's interest in Shell CO2 and the Partnership has the right to require
Shell to purchase the Partnership's interest in Shell CO2. The purchase price
for the Partnership's interest in Shell CO2 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,
then the Partnership and Shell will use an agreed-upon appraisal methodology to
determine fair value.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The financial statements of Santa Fe Pacific Pipeline Partners, L.P.
as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997 are included herein commencing on page F-1.
(b) Pro forma financial information.
The pro forma financial statements of Kinder Morgan Energy Partners, L.P.
giving effect to the acquisition of Santa Fe Pacific Pipelines, L.P. and
the formation of Shell CO2 Company as of December 31, 1997 and for the
year ended December 31, 1997 are included herein commencing on page PF-1.
(c) Exhibits.
* Exhibit 2.1 Purchase Agreement dated October 18, 1997 between Kinder
Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc.,
Santa Fe Pacific Pipeline Partners, L.P., Santa Fe Pacific
Pipelines, Inc. and SFP Pipeline Holdings, Inc. (Exhibit 2
to Amendment No. 1 to the Partnership's Registration
Statement on Form S-4 (File No. 333-44519) filed February 4,
1998).
**Exhibit 2.2 Master Agreement dated as of January 1, 1998 among Shell
Western E&P Inc., Shell Western Pipelines Inc., Shell Cortez
Pipeline Company,
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Shell CO2, LLC, Shell CO2 General LLC, Shell Land & Energy
Company, Kinder Morgan Operating L.P. "A" and Kinder Morgan
CO2, LLC.
** Exhibit 2.3 First Amended and Restated Agreement of Limited Partnership
dated as of March 5, 1998, by and between Shell CO2 General
LLC, Kinder Morgan CO2, LLC and Shell CO2, LLC.
**Exhibit 2.4 Assumption and Indemnification Agreement dated as of
January 1, 1998 among Shell CO2 General LLC, Shell CO2, LLC,
Shell Western E&P Inc., Shell Western Pipelines Inc., Shell
Cortez Pipeline Company, Shell Land & Energy Company, Kinder
Morgan CO2, LLC, Kinder Morgan Operating L.P. "A" and Shell
CO2 Company, Ltd.
**Exhibit 2.5 Guaranty and Indemnification Agreement ated as of January 1,
1998 between Shell Western E&P Inc. and Kinder Morgan Energy
Partners, L.P.
***Exhibit 23.1 Consent of Price Waterhouse LLP
- ---------------------------
*Incorporated by reference.
**Previously filed.
***Filed with this report.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Santa Fe Pacific Pipeline Partners, L.P.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and of cash flows present fairly, in all
material respects, the financial position of Santa Fe Pacific Pipeline Partners,
L.P. and its majority-owned operating partnership at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As explained in Note 9, on March 6, 1998, the unitholders of both the
Partnership and Kinder Morgan Energy Partners, L.P. approved the terms of the
Purchase Agreement referred to in Note 1 and the transactions described therein
were completed later that day.
/s/ PRICE WATERHOUSE LLP
Los Angeles, California
January 30, 1998, except as to Note 9, which is as of March 6, 1998
F-1
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(In thousands)
December 31,
----------------------
1997 1996
---------- ----------
ASSETS
Current assets
Cash and cash equivalents...........................$ 40,872 $ 42,122
Accounts receivable, net............................ 34,307 33,563
Other current assets................................ 2,875 2,224
--------- ---------
Total current assets........................... 78,054 77,909
--------- ---------
Properties, plant and equipment.......................... 744,925 738,395
Less accumulated depreciation....................... 115,560 109,701
--------- ---------
Net properties, plant and equipment............ 629,365 628,694
Other assets........................................ 19,303 19,215
--------- ---------
Total assets...................................$ 726,722 $ 725,818
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable....................................$ 5,755 $ 3,212
Accrued liabilities................................. 32,920 32,333
--------- ---------
Total current liabilities...................... 38,675 35,545
Long-term debt...................................... 355,000 355,000
Other long-term liabilities......................... 58,770 71,351
--------- ---------
Total liabilities.............................. 452,445 461,896
--------- ---------
Minority interest................................... 1,340 1,007
--------- ---------
Commitments and contingencies (Note 4).............. -- --
--------- ---------
Partners' capital
General partner................................ 1,340 1,007
Limited partner................................ 271,597 261,908
--------- ---------
Total partners' capital................... 272,937 262,915
--------- ---------
Total liabilitis and partners' capital.... 726,722 725,818
========= =========
See Notes to Consolidated Financial Statements.
F-2
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per unit amounts)
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- -------- ---------
Operating revenues
Trunk revenues..............................$192,031 $189,207 $183,255
Storage and terminaling revenues............ 39,121 38,302 37,653
Other revenues.............................. 13,263 12,633 12,769
--------- --------- ---------
Total operating revenues 244,415 240,142 233,677
--------- --------- ---------
Operating expenses
Field operating expenses................... 44,924 37,375 33,013
General and administrative expenses........ 26,495 30,260 27,462
Depreciation and amortization.............. 21,351 21,080 20,500
Power costs................................ 20,674 21,062 21,715
Facilities costs........................... 16,661 19,244 21,006
Provisions for environmental and
litigation costs (Note 4)................. 8,000 23,000 34,000
--------- --------- ---------
Total operating expenses............... 138,105 152,021 157,696
--------- --------- ---------
Operating income................................. 106,310 88,121 75,981
Interest expense................................. 35,922 36,518 37,247
Kinder Morgan transaction costs (Note 1)......... 2,300 -- --
Other income, net................................ 3,674 2,415 2,978
--------- --------- ---------
Net income before minority interest.............. 71,762 54,018 41,712
Less minority interest in net income............. (2,315) (1,743) (1,345)
--------- --------- ---------
Net income.......................................$ 69,447 $ 52,275 $ 40,367
========= ========= =========
Basic income per unit............................$ 3.51 $ 2.64 $ 2.04
========= ========= =========
Operating expenses reflected above include
the following expenses incurred by, and
reimbursed to, the General Partner (Note 5).....$ 51,385 $ 50,425 $ 45,845
========= ========= =========
See Notes to Consolidated Financial Statements.
F-3
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- -------- ---------
Cash flows from operating activities:
Net income..................................$ 69,447 $ 52,275 $ 40,367
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization............ 21,351 21,080 20,500
Minority interest in net income.......... 2,315 1,743 1,345
Net additions to (payments against)
environmental and litigation reserves... (10,278) 8,816 24,738
Other, net............................... 3,520 (4,392) (429)
Changes in:
Accounts receivable..................... (742) 5,334 (2,427)
Accounts payable and accrued
liabilities............................ 127 2,475 (634)
Other current assets.................... (649) (84) 281
--------- --------- ---------
Total adjustments.................... 15,644 34,972 43,374
--------- --------- ---------
Net cash provided by operating
activities.......................... 85,091 87,247 83,741
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures........................ (24,934) (27,686) (31,431)
Proceeds from property sales................ -- 2,749 --
--------- --------- ---------
Net cash used by investing
activities.......................... (24,934) (24,937) (31,431)
--------- --------- ---------
Cash flows from financing activities:
Cash distributions.......................... (61,407) (61,407) (60,039)
Repayments of long-term debt................ (28,500) (22,000) (17,000)
Proceeds from issuance of long-term debt.... 28,500 22,000 17,000
--------- --------- ---------
Net cash used by financing
activities.......................... (61,407) (61,407) (60,039)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents. (1,250) 903 (7,729)
Cash and cash equivalents--
Beginning of year........................... 42,122 41,219 48,948
--------- --------- ---------
End of year.................................$ 40,872 $ 42,122 $ 41,219
========= ========= =========
See Notes to Consolidated Financial Statements.
F-4
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization and Basis of Accounting - The accompanying consolidated financial
statements include the accounts of Santa Fe Pacific Pipeline Partners, L.P. (the
"Trading Partnership") and SFPP, L.P., (the "Operating Partnership"),
collectively referred to as the "Partnership", on a consolidated basis. The
Trading Partnership is a publicly traded limited partnership organized under the
laws of the state of Delaware in 1988 which owns a 99% limited partnership
interest in the Operating Partnership, through which the Partnership conducts
all its operations. The Operating Partnership was acquired by the Trading
Partnership in December 1988 and is engaged in the transportation of refined
petroleum products and related services.
The Operating Partnership is managed by its general partner, Santa Fe Pacific
Pipelines, Inc. (the "General Partner"), which, by virtue of its 1% general
partner interest, represents the minority interest in the Partnership's
consolidated financial statements. The General Partner also holds a 1% general
partner interest in the Trading Partnership and, therefore, in total, holds a 2%
general partner interest in the Partnership on a consolidated basis. In
addition, the General Partner owns 8,148,148 Partnership common units,
representing an approximate 42% limited partner interest in the Trading
Partnership. The remaining approximate 56% limited partner ownership in the
Trading Partnership is represented by 11,000,000 publicly traded common units.
On October 18, 1997, the Trading Partnership, together with the General Partner
and SFP Pipeline Holdings, Inc. entered into a definitive Purchase Agreement
with Kinder Morgan Energy Partners, L.P. and Kinder Morgan G.P., Inc.
(collectively, "Kinder Morgan") pursuant to which Kinder Morgan and its
affiliates would acquire the Trading Partnership's limited partner interest in
the Operating Partnership. Upon completion of the transaction, the Trading
Partnership would liquidate and the Trading Partnership's unitholders would
receive 1.39 Kinder Morgan Energy Partners, L.P. units in respect of each of the
Trading Partnership's common units. In addition, Kinder Morgan would pay the
General Partner $84.4 million for its general partner interest in the Trading
Partnership, and the Operating Partnership would redeem approximately one-half
of the General Partner's interest in such subsidiary for an additional $5.8
million.
The transaction has been approved by the boards of directors of the General
Partner and Kinder Morgan G.P., Inc., but completion of the transaction is
subject to a number of conditions, including approval by the unitholders of both
the Trading Partnership and Kinder Morgan Energy Partners, L.P., receipt of
certain third party consents and approval by certain regulatory agencies.
Management anticipates closing the transaction in the first quarter of 1998.
The General Partner is a wholly owned subsidiary of SFP Pipeline Holdings, Inc.,
which is a wholly owned subsidiary of Santa Fe Pacific Corporation ("Santa Fe")
which is, in turn, a wholly owned subsidiary of Burlington Northern Santa Fe
Corporation ("BNSF").
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
F-5
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the reported amounts of revenues and expenses during the periods presented.
Actual results could differ from those estimates.
Revenue Recognition - Substantially all revenues are derived from pipeline
transportation and storage and terminaling charges and are recognized in income
upon delivery. Other revenues, primarily incidental service charges and tank and
land rentals, are recognized as earned.
Operating revenues received from Tosco Corporation, Chevron U.S.A. Products
Company ("Chevron") and ARCO Products Company ("ARCO") accounted for 15.2%,
13.9% and 13.8% of total 1997 revenues, respectively. ARCO and Chevron accounted
for 14.8% and 12.1%, respectively, of total 1996 revenues, and for 16.3% and
13.3%, respectively, of total 1995 revenues.
The Partnership's interstate common carrier pipeline operations are subject to
rate regulation by the Federal Energy Regulatory Commission ("FERC") under a
rate-making methodology that is subject to clarification and reconsideration in
individual cases and leaves many issues for determination on a case-by-case
basis. The Partnership's California intrastate common carrier pipeline
operations are subject to rate regulation by the California Public Utilities
Commission.
Properties, Plant and Equipment - Properties are stated at cost and include
capitalized interest on borrowed funds. Additions and replacements are
capitalized. Expenditures for maintenance and repairs are charged to income.
Upon sale or retirement of depreciable properties, cost less salvage is charged
to accumulated depreciation.
Properties are depreciated on a straight-line basis over the estimated service
lives of the related assets. Rates for the Partnership's interstate pipeline
properties are prescribed by the FERC. The Partnership's intrastate pipeline
properties and its terminal properties are depreciated using similar rates. The
following annual rates were used in computing depreciation:
Rights-of-way..................................... 2.60%
Line pipe, fittings and pipeline construction..... 2.22% to 2.60%
Buildings and field equipment..................... 2.95% to 4.00%
Storage tanks and delivery facilities............. 3.10% to 3.20%
Vehicles, office and communications equipment..... 3.00% to 15.70%
Depreciation expense aggregated $18,950,000 in 1997, $18,600,000 in 1996 and
$17,680,000 in 1995.
Environmental Costs - Environmental expenditures that relate to current or
future revenues are expensed or capitalized, as appropriate. Expenditures that
relate to an existing condition caused by past operations, and do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or clean-ups are probable and the costs can
be reasonably estimated.
Income Per Unit - Income per unit is computed based upon net income of the
Partnership less an allocation of income to the general partner of the Trading
Partnership in accordance with the partnership agreement, and is based upon
19,148,148 common units. The quarterly allocation of net income to the general
partner of the Trading Partnership (which is always equivalent to the minority
interest in net income) is based on its percentage of cash distributions from
Available Cash at the end of each quarter (see Note 7). Income allocated to the
general partner of the Trading Partnership was
F-6
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$2,315,000, $1,743,000 and $1,345,000 in 1997, 1996 and 1995, respectively, and
income allocated to the common unitholders was $67,132,000, $50,532,000 and
$39,022,000 in those same years, respectively.
Income Tax - For federal and state income tax purposes, the Partnership is not a
taxable entity. Accordingly, the taxable income or loss resulting from the
operations of the Partnership is ultimately includable in the federal and state
income tax returns of the general and limited partners, and may vary
substantially from the income or loss reported for financial reporting purposes.
Cash Equivalents and Short-Term Investments - The Partnership considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Reclassifications - Certain comparative prior year amounts have been
reclassified to conform with the current year presentation.
Note 2 - Detail of Selected Balance Sheet Accounts
December 31,
-------------------
(In thousands) 1997 1996
-------- ---------
Accounts receivable:
Trade accounts receivable................ $21,575 $20,675
Recollectible construction and
maintenance expenditures................ 6,620 7,200
Environmental insurance claims........... 4,770 4,465
Other.................................... 1,342 1,223
-------- ---------
$34,307 $33,563
======== =========
Properties, plant and equipment:
Land..................................... $54,110 $53,730
Rights-of-way............................ 12,793 12,758
Line pipe, fittings and pipeline
construction............................ 304,612 300,403
Buildings and equipment.................. 173,133 176,733
Storage tanks and delivery facilities.... 175,645 165,592
Construction in progress................. 24,632 29,179
-------- ---------
744,925 738,395
Less accumulated depreciation............ 115,560 109,701
-------- ---------
$629,365 $628,694
======== =========
Accrued liabilities:
Environmental costs...................... $ 6,500 $ 8,500
East Line litigation costs............... 8,000 3,000
Right-of-way rents....................... 4,115 6,545
Major maintenance........................ 3,460 1,200
Capital expenditures..................... 3,285 2,410
Property taxes........................... 3,110 3,433
Other.................................... 4,450 7,245
-------- ---------
$32,920 $32,333
======== =========
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Note 3 - Long-Term Debt
Long-term debt consists of the following:
December 31,
-------------------
(In thousands) 1997 1996
-------- ---------
First Mortgage Notes:
Series D 10.15% due December 1997....... $ -- $ 28,500
Series E 10.25% due December 1998....... 32,500 32,500
Series F 10.70% due December 1999
through 2004........................... 244,000 244,000
-------- --------
276,500 305,000
Bank term loans, due August 2000............ 78,500 50,000
-------- ---------
$355,000 $355,000
======== =========
The Partnership intends to refinance the Series E Notes on a long-term basis
upon their maturity and, therefore, has included them in long-term debt at
December 31, 1997. The Series F Notes become payable in annual installments,
including $31.5 million in 1999, $32.5 million in 2000, $39.5 million in 2001
and $42.5 million in 2002. The Notes may also be prepaid beginning in 1999 in
full or in part at a price equal to par plus, in certain circumstances, a
premium. The First Mortgage Notes (the "Notes") are secured by mortgages on
substantially all of the properties of the Partnership (the "Mortgaged
Property"). The Notes contain covenants specifying certain limitations on the
Partnership's operations, including the amount of additional debt or equity that
may be issued, cash distributions, investments and property dispositions.
Management does not believe such limitations will adversely affect the
Partnership's ability to fund its operations or planned capital expenditures.
The Partnership presently has available a $175 million multi-year term credit
facility with six banks. The term facility is available for refinancing portions
of the Partnership's long-term debt and capital projects, and may be utilized on
a revolving basis through August 2000, at which time the outstanding balance
will be payable. Borrowings under the term facility are also secured by the
Mortgaged Property and are generally subject to the same terms and conditions as
the Notes. To date, the Partnership has refinanced the first four series of the
Notes by borrowing an aggregate of $78.5 million under this facility. The
Partnership has selected an interest rate on these loans that is presently
determined by reference to a short-term Eurodollar rate, and was 6.1% at
December 31, 1997.
Interest on the Notes is payable semiannually in June and December. Interest on
the bank term loans is generally payable quarterly. Total interest paid was
$35,480,000 during 1997, $36,285,000 during 1996 and $36,985,000 during 1995.
Interest capitalized during the years 1997, 1996 and 1995 aggregated $280,000,
$515,000 and $405,000, respectively.
The fair value of the Partnership's long-term debt was approximately $400
million at December 31, 1997. Such estimate represents the present value of
interest and principal payments on the Notes discounted at present market
yields, and assumes that options to prepay a total of $61 million of Series F
Notes at par will be exercised in 1999 and 2000. The fair market value of the
term loans is considered to be equal to their $78.5 million principal amount.
F-8
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Note 4 - Commitments and Contingencies
East Line Civil Litigation and FERC Proceedings
Beginning in 1992, certain of the Partnership's shippers have filed civil suits
and initiated Federal Energy Regulatory Commission ("FERC") complaint
proceedings against the Partnership. The civil suits alleged, among other
things, that the shippers were damaged by the Partnership's failure to fulfill
alleged promises to expand the East Line's capacity between El Paso, Texas and
Phoenix, Arizona to meet shipper demand. The original FERC proceedings involve
claims, among other things, that certain of the Partnership's rates and charges
on its East and West Lines are excessive, however, in October 1997, certain
shippers filed a new complaint at FERC challenging all of the Partnership's
interstate rates. The complainants have filed testimony in the original FERC
proceeding seeking reparations for East and West Line shipments between 1990 and
1994 aggregating approximately $35 million, as well as rate reductions of
between 30% and 40% for shipments in 1995 and thereafter. If the complainants
were to prevail on all of their claims, it is estimated that reparations
resulting from such rate reductions for shipments in 1995, 1996 and 1997 would
aggregate approximately $80 million, resulting in total reparations for the
period 1990 to 1997 of approximately $115 million, plus interest of
approximately $30 million. Also in October 1997, complainants in a separate rate
proceeding before the California Public Utilities Commission ("CPUC") filed
testimony seeking prospective intrastate rate reductions aggregating
approximately $15 million per year.
On September 25, 1997, the presiding Administrative Law Judge ("ALJ") in the
original FERC proceeding challenging the Partnership's rates on its East and
West Lines issued an initial decision (the "Initial Decision"). Virtually all of
the Partnership's West Line interstate rates were deemed to be "just and
reasonable" by virtue of the "grandfathering" provisions of the Energy Policy
Act of 1992 and are not subject to challenge, either for the past or
prospectively, in that proceeding. The ALJ ruled adversely, however, to the
Partnership's position on several cost of service issues that would affect East
Line, and non-grandfathered West Line, rates and on certain other regulatory
issues. The Initial Decision is subject to review by the FERC commissioners, who
could reach different conclusions, either favorable or unfavorable, on these and
other matters in their final decision. If the Initial Decision was affirmed in
its current form by FERC, management estimates that the total reparations and
interest that would be payable as of December 31, 1997 would approximate the $30
million in reserves that had been recorded as of that date. Partnership
management also estimates that the Initial Decision, in its current form, would
reduce revenues prospectively in the range of $8 million to $10 million
annually. During the quarter ended December 31, 1997, the Partnership recorded a
$2 million provision for litigation costs to reflect the revenue recorded during
that quarter that would be subject to refund under the Initial Decision rate
methodology.
During 1996, the Partnership pursued settlement efforts to resolve the claims
raised in the FERC proceedings. Accordingly, during the quarter ended September
30, 1996, the Partnership recorded an $8 million provision for litigation costs
to increase its existing reserves to reflect the total amount that would have
been payable under the settlement offers that had been extended as of that date,
and, during the quarter ended December 31, 1996, recorded an additional $15
million provision to increase its reserves to reflect management's then current
estimate of the ultimate costs of resolution of the FERC proceedings.
Previously, during the quarter ended December 31, 1995, the Partnership recorded
a $10 million provision to increase its existing reserves relating to the FERC
proceedings, the El Paso action and certain other matters.
Partnership management does not believe that the Initial Decision, if affirmed
in its current form by FERC, would have a material adverse effect on the
Partnership's financial condition, liquidity or ability
F-9
<PAGE>
to maintain its quarterly cash distribution at the current level. Management
cannot predict with certainty, however, whether the ALJ's conclusions in the
Initial Decision will be affirmed by the FERC or whether the FERC's final
decision will be more or less favorable to the Partnership's rate structure than
the Initial Decision, nor can management predict with certainty the outcome of
the complaint proceedings filed at FERC in October 1997 challenging all of the
Partnership's interstate rates. Furthermore, the Partnership is not able to
predict whether any prospective California intrastate rate reductions will be
required upon the resolution of the CPUC proceeding. As additional information
becomes available, it may be necessary for the Partnership to record additional
charges to earnings to maintain its applicable reserves at a level deemed
adequate at that time, and the costs associated with the ultimate resolution of
these matters could have a material adverse effect on the Partnership's results
of operations, financial condition, liquidity and ability to maintain its
quarterly cash distribution at the current level.
In the remaining civil action, brought by El Paso Refinery, L.P. ("El Paso") and
its general partner, the settlement agreement resolving this matter was approved
by the bankruptcy court in April 1997 and the orders of the bankruptcy court
became final in July 1997. As the amount of the settlement exceeded the amount
that had previously been reserved for this matter, the Partnership recorded a
provision of $6 million to reflect this settlement during the first quarter of
1997. Under the terms of the settlement agreement, the Partnership paid $8
million to the El Paso estate in October 1997 and the remaining $8 million is
payable in June 1998.
Environmental
The Partnership's transportation and terminal operations are subject to
extensive regulation under federal, state and local environmental laws
concerning, among other things, the generation, handling, transportation and
disposal of hazardous materials and the Partnership is, from time to time,
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund" law) generally imposes joint and several liability for
cleanup and enforcement costs, without regard to fault or the legality of the
original conduct, on current or predecessor owners and operators of a site.
Along with several other respondents, the Partnership is presently involved in a
cleanup ordered by the United States Environmental Protection Agency related to
soil and groundwater contamination in the vicinity of the Partnership's storage
facilities and truck loading terminal at Sparks, Nevada. In addition, the
Partnership is presently involved in 15 other groundwater hydrocarbon
remediation efforts under administrative orders issued by the California
Regional Water Quality Control Board and three other state agencies and, from
time to time, may be involved in groundwater investigations or remediations at
the direction of other governmental agencies. The Partnership is also involved
in soil and groundwater remediation projects, at and adjacent to various other
terminal and pipeline locations, that have not been mandated by government
agencies but are conducted in the ordinary course of business. In a number of
remediation projects, the Partnership is participating with other entities
ranging from large integrated petroleum companies to certain less financially
sound parties.
The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
Partnership's environmental reserves are monitored on a regular basis by
management. Liabilities for environmental costs at a specific site are initially
recorded when the Partnership's liability for such
F-10
<PAGE>
costs is probable and a reasonable estimate of the associated costs can be made.
Adjustments to initial estimates are recorded, from time to time, to reflect
changing circumstances and estimates based upon additional information developed
in subsequent periods. Estimates of the Partnership's ultimate liabilities
associated with environmental costs are particularly difficult to make with
certainty due to the number of variables involved, including the early stage of
investigation at certain sites, the lengthy time frames required to complete
remediation at most locations, the number of parties involved, the number of
remediation alternatives available, the uncertainty of potential recoveries from
third parties and the evolving nature of environmental laws and regulations.
During 1995 and 1996, the Partnership, as a member of a defendant group, settled
all of the claims for penalties and damages that had been asserted by several
governmental agencies and property owners in lawsuits associated with the soil
and groundwater contamination present in the vicinity of the Sparks, Nevada
environmental site. The Partnership recorded provisions for environmental costs
aggregating $24 million during 1995 largely to reflect its share of all of these
settlement costs.
The Partnership's balance sheet at December 31, 1997 and 1996 includes reserves
for environmental costs aggregating $15.9 million and $25.1 million,
respectively, which reflect the estimated cost of completing all remediation
projects presently known to be required, either by government mandate or in the
ordinary course of business, and the cost of performing preliminary
environmental investigations at several locations, as well as environmental
damage claims, primarily associated with the Sparks environmental site.
Approximately $16.2 million in environmental costs were paid and charged against
these reserves during 1997. With respect to the costs accrued at December 31,
1997, the Partnership estimates that approximately $6.5 million, $3 million and
$2 million will be paid in 1998, 1999 and 2000, respectively, approximately $1
million will be paid per year over the following two years, and less than $1
million will be paid per year over the subsequent five years.
Based on the information presently available, it is the opinion of management
that the Partnership's environmental costs, to the extent they exceed recorded
liabilities, will not have a material adverse effect on the Partnership's
financial condition, liquidity or ability to maintain its quarterly cash
distribution at the current level; nevertheless, it is possible that the
Partnership's results of operations in particular quarterly or annual periods
could be materially affected as additional information becomes available.
Other Claims and Litigation
The Partnership is party to a number of other legal actions arising in the
ordinary course of business. While the final outcome of these other matters
cannot be predicted with certainty, it is the opinion of management that none of
these other legal actions, either individually or in the aggregate, when finally
resolved, will have a material adverse effect on the Partnership's annual
results of operations, financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level.
Lease Commitments
The Partnership and the General Partner lease space in office buildings and
certain computer equipment. Total lease commitments not subject to cancellation
at December 31, 1997 are as follows: $1,125,000 in 1998, $1,235,000 in 1999,
$1,230,000 in 2000, $1,360,000 in 2001, $1,555,000 in 2002 and $14,675,000
thereafter. The Partnership also leases certain rights-of-way and land under
agreements that can be canceled at any time should they not be required for
operations. Rental expense recorded for all operating leases was $8,300,000 in
1997, $8,975,000 in 1996 and $8,850,000 in 1995.
F-11
<PAGE>
Note 5 - Related Party Transactions
The Partnership has no employees and is managed by the General Partner. Under
certain partnership and management agreements, the General Partner, Santa Fe and
BNSF are entitled to reimbursement of all direct and indirect costs related to
the business activities of the Partnership. These expenses, which are included
in field operating and general and administrative expenses in the Partnership's
statement of income, totaled $51.4 million, $50.4 million and $45.8 million for
the years 1997, 1996 and 1995, respectively, and include compensation and
benefits payable to officers and employees of the General Partner, payroll
taxes, corporate office building rentals, general and administrative costs, tax
information and reporting costs and legal and other professional services fees.
Note 6 - Pension and Postretirement Plans
The General Partner is included with certain other affiliates in the Burlington
Northern Santa Fe Retirement Plan, a noncontributory defined benefit pension
plan established October 1, 1996 (the "Plan") to effect the consolidation of the
Santa Fe Pacific Retirement Plan and the Burlington Northern Inc. Pension Plan.
The Plan covers substantially all officers and employees of BNSF and its
subsidiaries not covered by collective bargaining agreements. Benefits payable
under the Plan are based on years of credited service and the highest five-year
average compensation levels. The General Partner's funding policy is to
contribute annually at a rate not less than the regulatory minimum, and not more
than the maximum amount deductible for income tax purposes. Since the General
Partner is included with certain other affiliates, detailed Plan information for
the General Partner is not available in all cases; however, as of September 30,
1997, the fair value of Plan assets allocated to employees associated with the
Partnership's operations was $58.2 million, and the actuarial present value of
projected Plan obligations, discounted at 7.75%, was $50.0 million. The expected
return on the market value of Plan assets was 9.5% and compensation levels were
assumed to increase at 4.0% per year. Primarily as a result of the excess of the
General Partner's plan assets over liabilities, pension income of $260,000,
$460,000 and $470,000 was recognized in 1997, 1996 and 1995, respectively.
Salaried employees who have rendered ten years of service after attaining age 45
are eligible for both medical benefits and life insurance coverage during
retirement. The retiree medical plan is contributory and provides benefits to
retirees, their covered dependents and beneficiaries. Retiree contributions are
adjusted annually. The plan also contains fixed deductibles, coinsurance and
out-of-pocket limitations. The life insurance plan is non-contributory and
covers retirees only.
Net periodic postretirement benefit cost was $700,000, $1,000,000 and $770,000
in 1997, 1996 and 1995, respectively, and included the following components:
Medical Plan Life Insurance Plan
---------------------- --------------------
(In thousands) 1997 1996 1995 1997 1996 1995
------ ------- ------- ------ ------ ------
Service cost......... $525 $610 $490 $ 30 $ 40 $ 25
Interest cost........ 700 735 710 195 215 205
Net amortization
and deferral..... (750) (620) (660) -- 20 --
------ ------- ------- ------ ------ ------
Net periodic post-
retirement benefit
cost................ $475 $725 $540 $225 $275 $230
====== ======= ======= ====== ====== ======
F-12
<PAGE>
The Partnership's policy is to fund benefits payable under the medical and life
insurance plans as they come due. The following table shows the reconciliation
of the plans' obligations, using a September 30 measurement date, to amounts
accrued at December 31, 1997 and 1996:
Medical Plan Life
Insurance Plan
--------------- ---------------
(In thousands) 1997 1996 1997 1996
------- ------- ------- -------
Accumulated postretirement
benefit obligation:
Retirees..................... $3,695 $3,435 $2,290 $2,205
Fully eligible active plan
participants................ 1,475 1,365 40 30
Other active plan
participants................ 5,000 5,030 540 665
------- ------- ------- -------
10,170 9,830 2,870 2,900
Unrecognized prior service
credit......................... 2,765 3,255 -- --
Unrecognized net gain (loss).... 2,845 2,260 (280) (525)
------- ------- ------- -------
Accrued postretirement liability $15,780 $15,345 $2,590 $2,375
======= ======= ======= =======
The unrecognized prior service credit will be amortized straight-line over the
average future service to full eligibility of the active population. For 1997,
the assumed health care cost trend rate for medical costs is 10% and is assumed
to decrease gradually to 5% by 2007 and remain constant thereafter. Increasing
the assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation for the medical
plan by $1.3 million and the combined service and interest components of net
periodic postretirement benefit cost recognized in 1997 by $200,000. For 1997
and 1996, the weighted-average discount rate assumed in determining the
accumulated postretirement benefit obligation was 7.5% and 7.75%, respectively,
and the assumed weighted-average salary increase was 4.0%.
Note 7 - Partners' Capital and Cash Distributions
Changes in partners' capital were as follows:
General Limited
(In thousands) Partner Partners Total
-------- -------- ---------
Partners' capital at December 31,
1994.............................. $1,676 $286,285 $287,961
1995 net income................... 1,346 39,021 40,367
1995 cash distributions........... (1,776) (56,487) (58,263)
-------- --------- ---------
Partners' capital at December 31,
1995............................. 1,246 268,819 270,065
1996 net income................... 1,743 50,532 52,275
1996 cash distributions........... (1,982) (57,443) (59,425)
-------- --------- ---------
Partners' capital at December 31,
1996............................. 1,007 261,908 262,915
1997 net income................... 2,315 67,132 69,447
1997 cash distributions........... (1,982) (57,443) (59,425)
-------- --------- ---------
Partners' capital at December 31,
1997.............................. $1,340 $271,597 $272,937
======== ========= =========
The Partnership makes quarterly cash distributions of substantially all of its
"available cash", which is generally defined as consolidated cash receipts less
consolidated cash expenditures and such retentions
F-13
<PAGE>
for working capital, anticipated capital expenditures and contingencies as the
General Partner deems appropriate or as are required by the terms of the Notes.
Distributions are made 98% to the common unitholders and 2% to the general
partner of the Trading Partnership and Operating Partnership, subject to the
payment of incentive distributions to the general partners that increase as
quarterly distributions to unitholders exceed certain specified target levels.
The incremental incentive distributions payable to the general partners are 8%,
18% and 28% of all quarterly distributions of available cash that exceed,
respectively, $0.60, $0.65 and $0.70 per unit. Such incentive distributions
aggregated $2,735,000 in 1997 and 1996 and $2,350,000 in 1995.
Cash distributions declared aggregated $3.00 per unit in each of the years 1997,
1996 and 1995. In January 1998, the Partnership announced a fourth quarter 1997
distribution of $0.75 per unit, payable in February 1998.
Note 8 - Summarized Quarterly Operating Results
and Common Unit Information (Unaudited)
Quarterly results of operations are summarized below:
First Second Third Fourth
(In thousands, except per Quarter Quarter Quarter Quarter
unit amounts) -------- -------- ------- -------
1997
Net revenues............... $56,090 $63,359 $63,172 $61,794
Operating income........... 18,657 29,677 29,857 28,119
Net income................. 10,237 20,602 20,906 17,702
Basic income per unit...... $ 0.52 $ 1.04 $ 1.06 $ 0.89
1996
Net revenues............... $56,596 $60,795 $62,323 $60,428
Operating income........... 24,666 29,148 20,755 13,552
Net income................. 15,448 19,833 11,579 5,415
Basic income per unit...... $ 0.78 $ 1.00 $ 0.58 $ 0.27
Notes: 1997 operating results included provisions for litigation costs of
$6.0 million in the first quarter and $2.0 million in the fourth quarter.
1996 operating results included provisions for litigation costs of $8.0
million in the third quarter and $15.0 million in the fourth quarter. The sum
of net income per unit for the four quarters of a year may not equal net
income per unit for the full year due to the effect of rounding differences.
F-14
<PAGE>
Santa Fe Pacific Pipeline Partners, L.P. common units are traded on the New York
Stock Exchange, under the symbol SFL. The quarterly price range per unit and
cash distributions declared per unit for 1997 and 1996 are summarized below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- ------- -------
1997
High unit price............ 39-1/4 38-7/8 40-3/4 51-3/4
Low unit price............. 37 34-3/8 37-7/8 38-5/8
Cash distributions declared $ 0.75 $ 0.75 $ 0.75 $ 0.75
1996
High unit price............ 38-5/8 38-1/8 36-5/8 38-1/8
Low unit price............. 36 34 34-1/2 35-1/2
Cash distributions declared $ 0.75 $ 0.75 $ 0.75 $ 0.75
As of January 31, 1998, there were approximately 16,000 unitholders.
Note 9 - Subsequent Event
On March 6, 1998, the unitholders of both the Trading Partnership and Kinder
Morgan Energy Partners, L.P. approved the terms of the Purchase Agreement
referred to in Note 1 to these financial statements, and the transactions
described therein were completed later that day.
F-15
<PAGE>
UNAUDITED KMEP PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements of KMEP have been
derived from the historical balance sheets and income statements of KMEP 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 Common Units of KMEP 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 Transaction, 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 Transaction had been consummated on January
1, 1997.
The purchase price 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.
Assuming all of the VREDs are tendered in the Exchange Offer, the Exchange
Offer will have no effect on the unaudited pro forma combined financial
statements as the Common 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 KMEP,
incorporated by reference herein, and of Santa Fe, included herein.
The unaudited pro forma combined financial statements may not be
indicative of the results that would have occurred if the Transaction had been
consummated on the date indicated or which will be obtained in the future.
PF-1
<PAGE>
<TABLE>
<CAPTION>
KMEP PRO FORMA COMBINED BALANCE SHEET
KMEP Santa Fe Pro Pro
---- -------- --- ---
Historical Historical Forma Forma
---------- ---------- ----- -----
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
Accounts receivable................. 8,569 34,307 (5,800)(e) 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
-------- --------- ------------ -----------
The accompanying notes are an integral part of these unaudited
proforma condensed financial statements.
</TABLE>
PF-2
<PAGE>
<TABLE>
<CAPTION>
KMEP PRO FORMA COMBINED STATEMENT OF INCOME
KMEP Santa Fe Pro Pro
---- -------- --- ---
Historical Historical Forma Forma
---------- ---------- ----- -----
Adjustments Combined
----------- --------
As of 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 16,997 69,447 (2,735) 83,709
extraordinary item..................
Income tax benefit.................... 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 $1.02 $1.80
partner unit........................ -------- --------- ----------- ---------
Number of units used in computation... 13,411 26,616 (a) 40,027
-------- --------- ----------- ---------
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
</TABLE>
PF-3
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
(In thousands except 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 KMEP Common 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 SF General Partner interest for $84,400 in cash, a cash
contribution by Kinder Morgan G.P., Inc. (the "KM General Partner") 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 Transaction
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 Common Units...................... $943,205
Cash for SF General Partner interest................. 84,400
Involuntary termination costs........................ 12,000
Transaction 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 Transaction estimated to total $12,000
(net of a $4,500 reimbursement by Santa Fe).
PF-4
<PAGE>
(d) Reflects borrowings totaling $108,923 calculated as follows:
Cash for SF General Partner Interest.................. $84,400
Transaction fees and other costs...................... 13,000
KM General Partner cash contribution.................. (9,623)
Less: utilization of cash resources................... (19,200)
---------
Total Borrowings associated with Transaction.......... 68,577
Purchase of interest in Shell CO2
Company............................................. 25,000
Refinancing of existing
debt................................................ 12,746
Credit facility fees.................................. 2,600
---------
Total................................................. $108,923
---------
KMEP 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 $12.746 million
make-whole premium on certain debt. The payment of such make-whole premium
and write-off of unamortized debt costs of $.895 million will result in an
extraordinary loss of approximately $13.641 million 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 Transaction 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) Given effect to the utilization of $5,800 of SF Operating Partnership cash
to redeem a .5101% Special LP Interest owned by the SF General Partner.
(f) To give effect to the removal of the SF General Partner as general partner
of Santa Fe.
(g) To account for the additional $9,623 cash contribution to 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 Transaction. KMEP 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
Transaction of $68,577 at a rate of 6.63% as discussed in (d) above.
PF-5
<PAGE>
(k) Gives effect to the redemption of the .5101% Special LP Interest in
connection with the Transaction. Pursuant to the Purchase Agreement, the SF
Operating Partnership will redeem a portion of the Special LP Interest from
the SF General Partner for $5,800. These amounts reduce Partners
Capital-KMEP Common Units by $5,020, Partners Capital-KM General Partner by
$50, and minority interest by $52. This leaves the SF General Partner with
a remaining minority Special LP Interest of .5% in the SF Operating
Partnership.
(l) Gives effect to the allocation of pro forma net income to the general
partner and the limited partners resulting from the utilization of KMEP
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 KM General
Partner's interest in net income includes incentive distributions the KM
General Partner would have received based on total distributions. These
incentive distributions are greater under the KMEP Partnership Agreement
than they would have been under the Santa Fe Partnership Agreement.
PF-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
KINDER MORGAN ENERGY PARTNERS, L.P.
By: Kinder Morgan G.P., Inc.,
Its general partner
By: /s/ Clare H. Doyle
Name: Clare H. Doyle
Title: Vice President
Date: April 13, 1998
S-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the Prospectuses
constituting part of the following Registration Statements of Kinder Morgan
Energy Partners, L.P.: Form S-3 (file no. 333-25995), Form S-3 (file no.
333-25997) and Form S-4 (file no. 333-46709) 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 Prospectuses.
/s/ Price Waterhouse LLP
Los Angeles, California
April 13, 1998
