SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report November 6, 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 5. Other Events
RISK FACTORS
Pending FERC and CPUC Proceedings Seek Substantial Refunds and Reductions in
Tariff Rates.
Some shippers have filed complaints with the Federal Energy Regulatory
Commission and the California Public Utilities Commission that seek substantial
refunds and reductions in the Pacific Operations' tariff rates. An adverse
decision could negatively impact revenues, results of operations, financial
condition, liquidity, and funds available for distribution to unitholders.
Additional challenges to tariff rates could be filed with the FERC or CPUC in
the future.
The complaints filed before the Federal Energy Regulatory Commission
allege that some pipeline tariff rates of our Pacific Operations are not
entitled to "grandfathered" status under the Energy Policy Act of 1992 because
"changed circumstances" may have occurred under the Act. An initial decision by
the FERC Administrative Law Judge was issued on September 25, 1997. The initial
decision determined that our Pacific Operations' East Line rates were not
grandfathered under the Energy Policy Act. The initial decision also included
rulings that were generally adverse to our Pacific Operations regarding certain
cost of service issues. If FERC affirms the initial decision in its current
form, we may have to pay damages and interest totaling the reserves that we have
recorded as of September 30, 1998. If FERC affirms the initial decision and also
applies it to the Sepulveda Line and the Watson station rates, our prospective
revenues would decline by approximately $8 million annually, the same rate at
which we are currently accruing our reserve.
The complaints filed before the California Public Utilities Commission
generally challenge the rates we charge for intrastate transportation of refined
petroleum through our pipeline system in California. On June 18, 1998, a CPUC
Administrative Law Judge issued a ruling in our favor and dismissed the
complaints. The shippers filed an application for rehearing, which is currently
pending before CPUC.
Additional information about these proceedings is in our reports filed
with the Securities and Exchange Commission.
Our Rapid Growth May Cause Difficulties Integrating New Operations
Part of our business strategy includes acquiring additional businesses
that will allow us to increase distributions to unitholders. During the period
from December 31, 1996 to September 30, 1998, we made several acquisitions that
increased our asset base almost 7 times and our net income over 5 1/2 times. We
believe that we can profitably combine the operations of acquired businesses
with our existing operations. However, unexpected costs or challenges may arise
whenever businesses with different operations and management are combined.
Successful business combinations require management and other personnel to
devote significant amounts of time to integrating the acquired business with
existing operations. These efforts may temporarily distract their attention from
day-to-day business, the development or acquisition of new properties and other
business opportunities. In addition, the management of the acquired business
will often not join our management team. The change in management may make it
more difficult to integrate an acquired business with our existing operations.
Debt Securities are Subordinated to SFPP Debt
Since SFPP, L.P. will not guarantee the Debt Securities, the Debt
Securities will be effectively subordinated to all debt of SFPP. If SFPP
defaults on its debt, the holders of the Senior Debt Securities would not
receive any money from SFPP until SFPP repaid its debt in full. SFPP is the
operating partnership that owns our Pacific Operations. See "Description of the
Debt Securities."
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Unitholders May Have Negative Tax Consequences if We Default on Our Debt or Sell
Assets
If we default on any of our debt, the lenders will have the right to sue
us for non-payment. Such an action could cause an investment loss and cause
negative tax consequences for unitholders through the realization of taxable
income by unitholders without a corresponding cash distribution. Likewise, if we
were to dispose of assets and realize a taxable gain while there is substantial
debt outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
Our Debt Instruments May Limit Our Financial Flexibility
The instruments governing our debt contain restrictive covenants that may
prevent us from engaging in certain beneficial transactions. Such provisions may
also limit or prohibit distributions to unitholders under certain circumstances.
The agreements governing our debt generally require us to comply with various
affirmative and negative covenants including the maintenance of certain
financial ratios and restrictions on:
o incurring additional debt;
o entering into mergers, consolidations and sales of assets;
o making investments; and
o granting liens.
Additionally, the agreements governing our debt generally prohibit us from:
o making cash distributions to unitholders more often than
quarterly;
o distributing amounts in excess of 100% of available cash for
the immediately preceding calendar quarter; and
o making any distribution to unitholders if an event of default exists or
would exist when such distribution is made.
The instruments governing any additional debt incurred to refinance the debt may
also contain similar restrictions.
Restrictions on Our Ability to Prepay SFPP's Debt May Limit Our
Financial Flexibility
SFPP is subject to certain restrictions with respect to its debt that may
limit our flexibility in structuring or refinancing existing or future debt.
These restrictions include the following:
o we may not prepay SFPP's First Mortgage Notes before
December 15, 1999;
o after December 15, 1999 and before December 15, 2002, we may prepay the SFPP
First Mortgage Notes with a make-whole prepayment premium; and
o we agreed as part of the acquisition of the Pacific Operations to not take
certain actions with respect to $190 million of the SFPP First Mortgage Notes
that would cause adverse tax consequences for the prior general partner of
SFPP.
Potential Change of Control if Kinder Morgan, Inc. Defaults on
Debt
Kinder Morgan, Inc. owns all of the outstanding capital stock of the
general partner. KMI has pledged this
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stock to secure some of its debt. Presently, KMI's only source of income to pay
such debt is dividends that KMI receives from the general partner. If KMI
defaults on its debt, the lenders could acquire control of the general partner.
Possible Increased Costs for Pipeline Easements
We generally do not own the land on which our pipelines are constructed.
Instead we obtain the right to construct and operate our pipelines on other
people's land for a period of time. If we were to lose these rights, our
business could be negatively affected.
Southern Pacific Transportation Company has allowed us to construct and
operate a significant portion of our Pacific Operations' pipeline under their
railroad tracks. Southern Pacific Transportation Company and its predecessors
were given the right to construct their railroad tracks under federal statutes
enacted in 1871 and 1875. The 1871 statute was thought to be an outright grant
of ownership that would continue until the land ceased to be used for railroad
purposes. Two United States Circuit Courts, however, ruled in 1979 and 1980 that
railroad rights-of-way granted under laws similar to the 1871 statute provide
only the right to use the surface of the land for railroad purposes without any
right to the underground portion. If a court were to rule that the 1871 statute
does not permit the use of the underground portion for the operation of a
pipeline, we may be required to obtain permission from the land owners in order
to continue to maintain the pipelines. We believe that we could obtain such
permission over time at a cost that would not have a material negative effect on
the partnership. We cannot, however, assure you of this.
We have been advised by counsel that we have the power of eminent domain
for the liquids pipelines in the states in which we operate (except for
Illinois) assuming that we meet certain requirements, which differ from state to
state. We believe that we meet these requirements. We believe that Shell CO2
Company does not have the power of eminent domain for its CO2 pipelines. Our
inability to exercise the power of eminent domain could have a material negative
effect on our business if we were to lose the right to use or occupy the
property on which our pipelines are located.
Distributions From Shell CO2 Company May be Limited
Under certain unlikely scenarios, we possibly would not receive any
distributions from Shell CO2 Company during 2002 and 2003 and we could be
required to return a portion of the distributions received during 1998-20001.
During 1998-2001, we will receive a fixed, quarterly distribution from Shell CO2
Company of approximately $3.6 million ($14.5 million per year). In 2002 and
2003, Shell CO2 Company will increase or decrease our cash distributions so that
our percentage of the total cash distribution during 1998-20003 will equal our
ownership percentage of Shell CO2 Company during that time (initially 20%).
These calculations will be done on a present value basis using a discount rate
of 10%. After 2003, we will participate in distributions according to our
partnership percentage.
Environmental Regulation Significantly Affects Our Business
Our business operations are subject to federal, state and local laws and
regulations relating to environmental practices. If an accidental leak or spill
of liquid petroleum products occurs in our pipeline or at a storage facility, we
may have to pay a significant amount to clean up the leak or spill. The
resulting costs and liabilities could negatively affect the level of cash
available for distributions to unitholders. Our costs could also increase
significantly if environmental laws and regulations become more strict. We
cannot predict the impact of Environmental Protection Agency standards or future
environmental measures. Because the costs of environmental regulation are
already significant, additional regulation could negatively affect the level of
cash available for distribution to unitholders.
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Competition
Competition could ultimately lead to lower levels of profits and lower
cash distributions to unitholders. Propane competes with electricity, fuel, oil
and natural gas in the residential and commercial heating market. In the engine
fuel market, propane competes with gasoline and diesel fuel. Butanes and natural
gasoline used in motor gasoline blending and isobutane used in premium fuel
production compete with alternative products. Natural Gas Liquids used as feed
stocks for refineries and petrochemical plants compete with alternative feed
stocks. The availability and prices of alternative energy sources and feed
stocks significantly affects demand for Natural Gas Liquids.
Pipelines are generally the lowest cost method for intermediate and
long-haul overland product movement. Accordingly, the most significant
competitors for our pipelines are:
o proprietary pipelines owned and operated by major oil
companies in the areas where our pipelines deliver products;
o refineries within the market areas served by our pipelines;
and
o trucks.
Additional pipelines may be constructed in the future to serve specific markets
now served by our pipelines. Trucks competitively deliver products in certain
markets. Recently, major oil companies have increasingly used trucking,
resulting in minor but notable reductions in product volumes delivered to
certain shorter-haul destinations, primarily Orange and Colton, California
served by the South, North and East lines of our Pacific Operations.
We cannot predict with certainty whether this trend towards increased
short-haul trucking will continue in the future. Demand for terminaling services
varies widely throughout our pipeline system. Certain major petroleum companies
and independent terminal operators directly compete with us at several terminal
locations. At those locations, pricing, service capabilities and available tank
capacity control market share.
Our ability to compete also depends upon general market conditions which
may change. We conduct our operations without the benefit of exclusive
franchises from government entities. We also provide common carrier
transportation services through our pipelines at posted tariffs and almost
always without long-term contracts for transportation service with our
customers. Demand for transportation services for refined petroleum products is
primarily a function of:
o total and per capita fuel consumption;
o prevailing economic and demographic conditions;
o alternate modes of transportation;
o alternate product sources; and
o price.
Limitations in Our Partnership Agreement and State Partnership Law
Limited Voting Rights and Control of Management. Unitholders have only
limited voting rights on matters affecting the partnership. The general partner
manages and controls partnership activities. Unitholders have no right to elect
the general partner on an annual or other ongoing basis. If the general partner
withdraws, however, its
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successor may be elected by the holders of a majority of the outstanding units
(excluding units owned by the departing general partner and its affiliates).
The limited partners may remove the general partner only if:
o the holders of 66 2/3% of the units vote to remove the
general partner. units owned by the general partner and its
affiliates are not counted;
o the same percentage of units approves a successor general
partner;
o the partnership continues to be taxed as a partnership for
federal income tax purposes; and
o the limited partners maintain their limited liability.
Persons Owning 20% or More of the Units Cannot Vote. Any
units held by a person that owns 20% or more of the units cannot
be voted. This limitation does not apply to the general partner
and its affiliates. This provision may:
o discourage a person or group from attempting to remove the
general partner or otherwise change management; and
o reduce the price at which the units will trade under certain
circumstances. For example, a third party will probably not attempt to remove
the general partner and take over our management by making a tender offer for
the units at a price above their trading market price without removing the
general partner and substituting an affiliate.
The General Partner's Liability to the Partnership and Unitholders May Be
Limited. The partnership agreement contains language limiting the liability of
the general partner to the partnership or the unitholders. For example, the
partnership agreement provides that:
o the general partner does not breach any duty to the partnership or the
unitholders by borrowing funds or approving any borrowing. The general
partner is protected even if the purpose or effect of the borrowing is to
increase incentive distributions to the general partner;
o the general partner does not breach any duty to the partnership or the
unitholders by taking any actions consistent with the standards of
reasonable discretion outlined in the definitions of available cash and
cash from operations contained in the partnership agreement; and
o the general partner does not breach any standard of care or duty by
resolving conflicts of interest unless the general partner acts in bad
faith.
The Partnership Agreement Modifies the Fiduciary Duties of the General
Partner Under Delaware Law. Such modifications of state law standards of
fiduciary duty may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners. Such
a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under the partnership agreement, the
general partner may exercise its broad discretion and authority in the
management of the partnership and the conductof its operations as long as the
general partner's actions are in the best interest of the partnership.
Unitholders May Have Liability To Repay Distributions. Unitholders will
not be liable for assessments in addition to their initial capital investment in
the units. Under certain circumstances, however, unitholders may have to repay
the partnership amounts wrongfully returned or distributed to them. Under
Delaware law, we may not make a distribution to you if the distribution causes
all liabilities of the Partnership to exceed the fair value of the
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partnership's assets. Liabilities to partners on account of their partnership
interests and non-recourse liabilities are not counted for purposes of
determining whether a distribution is permitted. The Delaware Act provides that
a limited partner who receives such a distribution and knew at the time of the
distribution that the distribution violated the Delaware Act will be liable to
the limited partnership for the distribution amount for three years from the
distribution date. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of the
assignor to make contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or she became a
limited partner if the liabilities could not be determined from the partnership
agreement.
Unitholders May be Liable if We Have Not Complied With State Partnership
Law. We conduct our business in a number of states. In some of those states the
limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established. The unitholders might be
held liable for the partnership's obligations as if they were a general partner
if:
o a court or government agency determined that we were conducting business
in the state but had not complied with the state's partnership statute; or
o unitholders rights to act together to remove or replace the general
partner or take other actions under the partnership agreement constitute
"control" of the partnership's business.
The General Partner May Buy Out Minority Unitholders if it Owns 80% of the
Units. If at any time the general partner and its affiliates own 80% or more of
the issued and outstanding limited partners' interests of any class of the
partnership, the general partner will have the right to purchase all of the
remaining interests in that class. Because of this right, a unitholder may have
to sell his interest against his will or for a less than desirable price. The
general partner may only purchase all of the limited partnership interests of
the class. The purchase price for such a purchase will be the greater of:
o the most recent 20-day average trading price; or
o the highest purchase price paid by the general partner or its affiliates
to acquire limited partner interests of such class during the prior 90
days.
The general partner can assign this right to its affiliates or to the
partnership.
We May Sell Additional Limited Partner Interests, Diluting Existing
Interests of Unitholders. The partnership agreement allows the general partner
to cause the partnership to issue additional limited partner interests and other
equity securities. When we issue additional equity securities, your
proportionate partnership interest will decrease. Such an issuance could
negatively affect the amount of cash distributed to unitholders and the market
price of units. Issuance of additional units will also diminish the relative
voting strength of the previously outstanding units. There is no limit on the
total number of units we may issue.
General Partner Can Protect Itself Against Dilution. Whenever the
partnership issues equity securities to any person other than the general
partner and its affiliates, the general partner has the right to purchase
additional limited partnership interests on the same terms. This allows the
general partner to maintain its partnership interest in the partnership. No
other unitholder has a similar right. Therefore, only the general partner may
protect itself against dilution caused by issuance of additional equity
securities.
Potential Conflicts of Interest Related to the Operation of the
Partnership
Certain conflicts of interest could arise among the general partner, KMI
and the partnership. Such conflicts may include, among others, the following
situations:
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o we do not have any employees and we rely solely on employees of the
general partner and its affiliates, including KMI;
o under the partnership agreement, we reimburse the general partner for the
costs of managing and operating the partnership;
o the amount of cash expenditures, borrowings and reserves in any quarter
may affect available cash to pay quarterly distributions to unitholders;
o the general partner tries to avoid being personally liable for partnership
obligations. The general partner is permitted to protect its assets in
this manner by the partnership agreement. Under the partnership agreement
the general partner does not breach its fiduciary duty even if the
partnership could have obtained more favorable terms without limitations
on the general partner's liability;
o under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable to the
partnership. The general partner may also enter into additional contracts
with any of its affiliates on behalf of the partnership. Agreements or
contracts between the partnership and the general partner (and its
affiliates) are not the result of arms length negotiations;
o the general partner does not breach the partnership agreement by
exercising its call rights to purchase limited partnership interests or by
assigning its call rights to one of its affiliates or to the partnership.
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ITEM 7(b) PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma combined income statement of the Partnership for
the nine month period ended September 30, 1998 has been prepared to give effect
to the acquisition of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe")
through the issuance of 1.39 Unit of the Partnership for each outstanding Santa
Fe common unit and the purchase of the general partner interest of Santa Fe for
$84.4 million in cash using the purchase method of accounting assuming the
acquisition had been consummated on January 1, 1997. The unaudited pro forma
combined income statement should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements and the Notes thereto filed by the
Partnership on Form 8-K on April 13, 1998.
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<TABLE>
<CAPTION>
PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1998
Partnership Santa Fe Pro Forma Pro Forma
Historical(1) Historical(2) Adjustments Combined
----------- ------------ ------------ -------------
(in thousands, except per Unit amounts)
<S> <C> <C> <C> <C>
Revenues........................$ 220,685 $ 39,247 $ ______ $ 259,932
Costs and expenses
Cost of products sold.......... 5,482 ______ ______ 5,482
Operations and maintenance..... 43,781 18,840 (438)(h) 62,183
Fuel and power................. 15,778 ______ 15,778
Depreciation and amortization.. 25,440 3,558 1,290(i) 30,288
General and administrative..... 25,946 ______ (1,313)(h) 24,633
Taxes, other than income taxes. 8,173 2,169 ______ 10,342
-------- -------- --------- ---------
124,600 24,567 (461) 148,706
-------- -------- --------- ---------
Operating income................ 96,085 14,680 461 111,226
Other income (expense)
Equity in earnings of
partnerships................... 16,417 16,417
Interest expense............... (28,986) (5,507) (758)(j) (35,251)
Interest income and other, net. (3,031) 348 (2,683)
Minority interest............... (924) (307) 163(l) (1,068)
-------- -------- --------- ---------
Income before income taxes and 79,561 9,214 (134) 88,641
extraordinary item.............
Income tax (expense) (168) ______ ______ (168)
======== ======== ========= =========
Net income before
extraordinary item.............$ 79,393 $ 9,214 $ (134) $ 88,473
======== ======== ========= =========
General Partner's interest
in net income before
extraordinary item.............$ 22,458 $ 307 $ 2,345(l) $ 25,110
Limited partners' interest
in net income before
extraordinary item............. 56,935 8,907 (2,479)(l) 63,363
-------- -------- --------- ---------
Net income before
extraordinary item.............$ 79,393 $ 9,214 $ (134) $ 88,473
======== ======== ========= =========
Allocation of net income before
extraordinary item per
limited partner unit........... 1.53 ______ $ 1.46
======== ======== ========= =========
Number of Units used in
computation..................... 37,180 ______ 19,222(a) 43,479
- - --------------
(1) Includes the Pacific Operations since March 6, 1998.
<FN>
(2) Covers the period between January 1, 1998 to March 6, 1998.
</FN>
The notes are an integral part of this
unaudited pro forma combined statement of income.
The Notes were filed by the Partnership on Form 8-K on
April 13, 1998 and are incorporated herein by reference.
</TABLE>
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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/ David G. Dehaemers, Jr.
Name: David G. Dehaemers, Jr.
Title: Vice President
Date: December 23, 1998
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