As filed with the Securities Exchange Commission on August 24, 1998
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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, Esq. David L.Ronn, Esq.
Morrison & Hecker L.L.P. Bracewell& Patterson, L.L.P.
2600 Grand Avenue 711 Louisiana Street, Suite 2900
Kansas City, Missouri 64108 Houston, TX 77002
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Approximate date of commencement of proposed sale to the public: From time to
time after 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.
[x]
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.
[ ]
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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.
[ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
========================================================================================================================
Title of securities Amount to be Proposed Maximum Proposed maximum Amount of registration
to be registered registered Offering price per unit(1) aggregate offering fee
price (1)
========================================================================================================================
Common Units 2,121,033 $34.125 $72,645,380.25 $21,353
========================================================================================================================
</TABLE>
(1) Pursuant to Rule 457(c) under the Securities Act, the offering price is
estimated, solely for the purpose of determining the registration fee, using the
average of the high and low prices reported on the New York Stock Exchange
Composite Transactions tape on August 21, 1998.
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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>
SUBJECT TO COMPLETION, DATED AUGUST 24, 1998
2,121,033 COMMON UNITS
Representing Limited Partner Interests
KINDER MORGAN ENERGY PARTNERS, L.P.
This Prospectus has been prepared for use in connection with the proposed
offering and sale of up to an aggregate of 2,121,033 Common Units (the "Common
Units") representing limited partner interests in Kinder Morgan Energy Partners,
L.P. ("Kinder Morgan" or the "Partnership") by or for the account of the holders
of Common Units referred to herein (the "Selling Unitholders"). See "Selling
Unitholders." The Common Units may be sold from time to time by or for the
account of the Selling Unitholders in the over-the-counter market, on the New
York Stock Exchange ("NYSE") or otherwise, at prices and on terms then
prevailing or at prices related to the then current market price, at fixed
prices that may be changed or in negotiated transactions at negotiated prices.
The Common Units may be sold by any one or more of the following methods: (a) a
block trade (which may involve crosses) in which the broker or dealer so engaged
will attempt to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) exchange distributions and/or secondary
distributions in accordance with the rules of the applicable exchange; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (e) privately negotiated transactions. See "Plan of
Distribution."
The Common Units are traded on the NYSE under the symbol "ENP." On August
21, 1998, the last reported sales price for the Common Units as reported on the
NYSE Composite Transactions tape was $34.25 per Common Unit.
The Partnership will receive no portion of the proceeds of the sale of the
Common Units. The Partnership will pay the costs and expenses of the
registration and offering of the Common Units (estimated to be approximately
$62,278) other than discounts and commissions and certain other expenses to be
paid by Selling Unitholders. Brokers or dealers participating in this offering
may be deemed to be "underwriters" and the compensation received by them may be
deemed to be underwriting commissions or discounts. The Partnership has agreed
to indemnify the Selling Unitholders and certain other persons, including their
agents or underwriters, against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and the Selling Unitholders may also
agree to indemnify such agents or underwriters against certain of such
liabilities. See "Selling Unitholders" and "Plan of Distribution."
See "Risk Factors" beginning on page 4 for a discussion of the material
risks relevant to an investment in the Common Units offered hereby.
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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.
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The date of this Prospectus is August ___, 1998
<PAGE>
IN CONNECTION WITH THIS OFFERING, UNDERWRITERS, BROKERS OR DEALERS
PARTICIPATING IN THE OFFERING MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON UNITS AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NYSE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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 and other information with the SEC. Such reports and
other information are available for inspection and copying at the SEC's public
reference facilities located at Room 1024, 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;
and at Seven World Trade Center, Suite 1300, New York, New York 10048, and
copies of such materials may be obtained from the SEC's Public Reference Section
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Common Units are traded on the NYSE, and such reports
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, 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 Common Units
("Unitholders" or each a "Unitholder") 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 Unitholder with tax information within 90 days after the close of
each taxable year of the Partnership.
INCORPORATION OF CERTAIN DOCUMENTS
The Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "Form 10-K"), the Partnership's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, the Partnership's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 and the Partnership's Current
Report on Form 8-K dated March 5, 1998, as amended, are hereby incorporated
herein by reference.
The description of the Common 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 hereby 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 and prior to
the termination of the Registration Statement of which this Prospectus is a part
with respect to registration of the Common Units, shall be deemed to be
incorporated by reference in this Prospectus and 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 part of this
Prospectus.
The Partnership undertakes to provide without charge to each person,
including any beneficial owner, 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.
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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 Kinder Morgan 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. Kinder
Morgan'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 Kinder Morgan's tariff rates set by the Federal Energy
Regulatory Commission ("FERC") and the California Public Utilities
Commission ("CPUC");
- Kinder Morgan's ability to integrate the acquired operations of Santa Fe
Pacific Pipeline Partners, L.P. ("Santa Fe") (and other future
acquisitions, including Hall-Buck and Plantation, as defined below) into
its existing operations;
- with respect to Kinder Morgan's coal terminals, the ability of railroads
to deliver coal to the terminals on a timely basis;
- Kinder Morgan's ability to successfully identify and close strategic
acquisitions and realize cost savings;
- the inability of computer systems and microcontrollers embedded in
equipment operated by Kinder Morgan or its customers or suppliers to
recognize the date sensitive information after the year 2000;
- the discontinuation of operations at major end-users of the products
transported by Kinder Morgan's liquids pipelines (such as refineries,
petrochemical plants, or military bases); and
- the condition of the capital markets and equity markets in the United
States.
In addition, the availability to Unitholders of the federal income tax
benefits of an investment in Kinder Morgan largely depends on the classification
of Kinder Morgan as a partnership for that purpose. Kinder Morgan has relied 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 4 of this Prospectus and "Risk
Factors" included in the Form 10-K. Kinder Morgan 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 Kinder Morgan's public filings or press
releases or in any oral statements made by Kinder Morgan or any of its officers
or other persons acting on its behalf.
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RISK FACTORS
An investment in the Common Units offered hereby is speculative and
involves a degree of risk. 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.
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 Kinder Morgan's Pacific
Operations. The FERC complaints allege that such rates are not entitled to
"grandfathered" status under the Energy Policy Act of 1992. The CPUC complaint
generally challenges rates charged by the Pacific Operations for intrastate
transportation of refined petroleum products in California and seeks prospective
rate reductions. An administrative law judge dismissed the CPUC complaints, and
the CPUC subsequently affirmed the dismissal. In separate proceedings, another
administrative law judge found that rates on certain of the Pacific Operations'
pipelines were entitled to "grandfathered" status, and rates on certain other
pipelines were not. The FERC decision is subject to further appeal and review
before the FERC, and the CPUC dismissal may be appealed before California
appellate courts. 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 Kinder Morgan's results of operations, financial
condition, liquidity and funds available for distributions.
Kinder Morgan May Experience Difficulties Integrating Operations and Realizing
Synergies. Kinder Morgan may incur costs or encounter other challenges not
currently anticipated in integrating the operations of acquired businesses into
Kinder Morgan, which may negatively affect its prospects. The integration of
operations will require the dedication of management and other personnel which
may temporarily distract their attention from the day-to-day business of Kinder
Morgan, the development or acquisition of new properties and the pursuit of
other business acquisition opportunities.
Possible Insufficient Cash to Pay Announced 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 announced distribution
of $2.52 per year on all of its outstanding Common 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 announced 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.
Risks Associated With Leverage. Substantially all of Kinder Morgan's assets are
pledged to secure its indebtedness. If Kinder Morgan defaults in the payment of
its indebtedness, Kinder Morgan's lenders will be able to sell Kinder Morgan's
assets to pay the debt. In addition, the agreements relating to Kinder Morgan's
debt contain restrictive covenants which may in the future prevent Kinder
Morgan's general partner, Kinder Morgan G.P., Inc. (the "General Partner"), from
taking actions that it believes are in the best interest of Kinder Morgan. The
agreements governing Kinder Morgan's indebtedness generally prohibit Kinder
Morgan from making cash distributions to holders of Common Units more frequently
than quarterly, from distributing amounts in excess of 100% of Available Cash
(as defined in the Partnership Agreement, defined below) for the immediately
preceding calendar quarter and from making any distribution to Unitholders if an
event of default exists or would exist upon making such distribution.
Possible Change of Control if KMI Defaults on its Debt. Kinder Morgan, Inc.
("KMI"), the sole shareholder of the General Partner, 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.
Kinder Morgan Could Have Significant Environmental Costs in the Future. Kinder
Morgan 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 Kinder Morgan.
Potential Effect of Year 2000 Problems. Many existing computer programs use only
the last two digits to refer to a year. These computer programs do not properly
recognize a year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous results. In
addition, equipment that is controlled by embedded microcontrollers may also
experience similar problems. The Partnership is assessing its internal computer
systems, software and equipment to ensure that its information technology
infrastructure will be Year 2000 capable. The Partnership estimates its total
costs to become Year 2000 capable will not have a material adverse effect on the
Partnership's financial position or results of operations. 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. However, it is
possible that the total costs related to Year 2000 issues, including updating
existing equipment and software and resolving problems caused by third parties'
failures to become Year 2000 capable, could have a material effect on the
Partnership's financial position and operations.
Loss of Easements for Liquids Pipelines. A significant portion of the six
refined products/liquids pipeline systems managed by Kinder Morgan (the "Liquids
Pipelines") is located on properties for which Kinder Morgan has been granted an
easement for the construction and
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operation of such pipelines. If any such easements were successfully challenged
(or if any non-perpetual easement were to expire), Kinder Morgan 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 Kinder Morgan, although no assurance
in this regard can be given. Kinder Morgan does not believe that the joint
venture with affiliates of Shell Oil Company, in which Kinder Morgan owns a 20%
interest ("Shell CO2 Company"), has the power of eminent domain with respect to
its CO2 pipelines. The inability of Kinder Morgan to exercise the power of
eminent domain could disrupt the Liquids Pipelines' operations in those
instances where Kinder Morgan 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 Kinder Morgan is unable to obtain
such rights.
Risks Associated with Shell CO2 Company. Kinder Morgan 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
Kinder Morgan's proportionate share of distributions during such period, Kinder
Morgan 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. Kinder Morgan is subject to competition from a variety of sources,
including competition from alternative energy sources (which affect the demand
for Kinder Morgan's services) and other sources of transportation.
Risks Associated with the Partnership Agreement and State Law. There are various
risks associated with Kinder Morgan'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 Kinder Morgan.
- - The vote of 66 2/3% of the Common 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 Common Units if at
any time the General Partner and its affiliates own 80% or more of the
outstanding limited partners interests. In addition, any Common Units held by
a person (other than the General Partner and its affiliates) that owns 20% or
more of the Common Units cannot be voted. The General Partner also has
preemptive rights with respect to new issuances of Common Units. These
provisions may make it more difficult for another entity to acquire control
of Kinder Morgan.
- - No limit exists on the number or type of additional limited partner
interests that Kinder Morgan may sell. A Unitholders' percentage interest in
Kinder Morgan 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 Common 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 Unitholders.
USE OF PROCEEDS
The Partnership will receive no portion of the proceeds of the sale of the
Common Units.
THE PARTNERSHIP
Kinder Morgan is a publicly traded master limited partnership ("MLP")
formed in August 1992. Kinder Morgan manages the Liquids Pipelines and 21 truck
loading terminals. Kinder Morgan also owns two coal terminals, a 20% interest in
Shell CO2 Company, and a 25% interest in a Y-grade fractionation facility.
Kinder Morgan is the largest pipeline MLP and has the second largest products
pipeline system in the United States in terms of volumes delivered.
Kinder Morgan's objective is to operate as a low-cost, growth-oriented MLP
by reducing operating expenses, better utilizing and expanding its asset base
and making selective, strategic acquisitions that are accretive to Unitholder
distributions. Kinder Morgan regularly evaluates potential acquisitions of
complementary assets and business. The incentive distributions to the MLP's
general partner provide it with a strong incentive to increase Unitholder
distributions through successful management and growth of Kinder Morgan's
business. The success of this strategy was demonstrated in 1997 and the first
two quarters of 1998. As a result of this strong financial performance, Kinder
Morgan was able to double its distribution to Unitholders from an annualized
rate of $1.26 per Common Unit at year-end 1996 to an annualized rate of $2.52
per Common Unit commencing in the second quarter of 1998.
On March 6, 1998, Kinder Morgan acquired substantially all of the assets
of Santa Fe, which assets currently comprise Kinder Morgan's Pacific Operations,
for an aggregate consideration of approximately $1.4 billion consisting of
approximately 26.6 million Common
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Units, $84.4 million in cash and the assumption of certain liabilities. On March
5, 1998, Kinder Morgan 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.
On June 9, 1998, Kinder Morgan signed a Stock Purchase Agreement with
Plantation Holdings LLC, an affiliate of Shell Oil Company, to acquire its 24%
interest in Plantation Pipeline Company ("Plantation"). Plantation owns and
operates a 3,100 mile pipeline system throughout the southeastern United States.
The closing of the Plantation transaction is subject to the satisfaction of
certain closing conditions and to rights of first refusal held by Plantation's
other shareholders.
Effective July 1, 1998, Kinder Morgan acquired all of the outstanding
capital stock of Hall-Buck Marine, Inc. ("Hall-Buck"). Hall-Buck operates twenty
terminals on the Mississippi River, Ohio River and Pacific Coast primarily
storing and loading petroleum coke, coal and other materials for major oil
companies and other industrial customers. In addition, Hall-Buck owns River
Consulting, Inc., a nationally recognized engineering consultant in the design
and construction of bulk material facilities and port related structures. After
the closing of the acquisition of Hall-Buck, Hall-Buck changed its name to
Kinder Morgan Bulk Terminals, Inc.
Kinder Morgan'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 the FERC and intrastate pipeline systems,
which are regulated by the CPUC in California. Products transported on the
Liquids Pipelines 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
totaling 2,300 miles 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.
Mid-Continent Operations. The Mid-Continent Operations consist of two
pipeline systems (the North System and the Cypress Pipeline), Kinder Morgan's
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 industrial consumers such as refineries and petrochemical plans in the
Chicago, Illinois area. 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.
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.
Shell CO2 Company owns interests in two CO2 domes, two CO2 trunklines, and a
distribution pipeline running throughout the Permian Basin.
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.
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 pump train-to-barge facility, a bottom dump
train-to-storage facility, a barge unloading facility and a coal blending
facility.
Gas Processing and Fractionation. The Gas Processing and Fractionation
segment consists of (i) Kinder Morgan's 25% interest in the Mont Belvieu
Fractionator and (ii) the Painter Gas Processing Plant. The Mont Belvieu
Fractionator is a full service fractionating facility with capacity of
approximately 200,000 barrels per day. The Painter Gas Processing Plant includes
a natural gas processing plant, a nitrogen rejection fractionation facility, and
a NGL terminal and interconnecting pipelines with truck and rail loading
facilities.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion is a summary of the material tax considerations
that may be relevant to a prospective Unitholder. 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
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consequences of the ownership and disposition of Common 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 Unitholder.
The discussion below is directed primarily to a Unitholder 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 to (i) a Unitholder in light of such
holder's particular circumstances, (ii) a Unitholder that is a partnership,
corporation, trust or estate (and their respective partners, shareholders and
beneficiaries), (iii) Unitholders 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 Common 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 Common Units held as "capital assets"
within the meaning of Section 1221 of the Code.
The federal income tax treatment of Unitholders 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 UNITHOLDER SHOULD CONSULT HIS OWN TAX ADVISORS
WHEN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF COMMON 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 Common 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 Common Units
pursuant to this offering and either has been admitted or is pending
admission to the Partnership as an additional limited partner or (ii)
acquired beneficial ownership of Common Units and whose Common 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 Common 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 Common Units and the operation of the Partnership with respect to
which Counsel is unable to opine:
1. Whether the appraised valuations of assets and allocation of such
amounts (the "BookTax 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 Unitholder's basis in their Common 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 Common Units--Allocations Between
Transferors and Transferees."
A more detailed discussion of these items is contained in the applicable
sections below.
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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
the Partnership 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 result
in a material reduction of the anticipated cash flow and after-tax return to the
Unitholders.
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 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 or handling NGL, C02 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 qualifying income test for each taxable
year and the Partnership anticipates that it will meet the test. If the
Partnership fails to meet the qualifying 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
Unitholders 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 Unitholders, and its net
income would be taxed at the entity level at
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corporate rates. In addition, any distribution made to a Unitholder 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 Unitholder's
basis in the Common Units) or taxable capital gain (after the Unitholder's basis
in the Common 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 and thus would
likely result in a substantial reduction of the value of the Common Units.
There can be no assurance that the law will not be changed so as to cause
the Partnership or its Operating Partnerships to be treated as associations
taxable as corporations 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;
(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;
(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 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 Unitholders. In
particular, if the Partnership is not a partnership, a Unitholder 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. Unitholders 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) Unitholders whose Common 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 Common Units will be treated as partners of the Partnership for federal
income tax purposes. There is no direct authority which addresses the status of
assignees of Common 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 of the Partnership would not appear
to be reportable by a Unitholder who is not a partner, and any cash
distributions received by such Unitholders would therefore be fully taxable as
ordinary income. These Unitholders 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 Common Units who does not execute
and deliver a Transfer Application may not receive
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certain federal income tax information or reports furnished to Unitholders of
record, unless the Common 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 Common Units.
A beneficial owner of Common Units whose Common 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 Common Units for federal income tax
purposes. See "--Disposition of Common Units--Treatment of Short Sales and
Deemed Sales."
Tax Consequences of Common Unit Ownership
Ratio of Taxable Income to Distributions. It is extremely difficult to
project with any precision the ratio of taxable income to cash distributions for
any particular Unitholder. The amount of taxable income recognized by any
particular Unitholder 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 Unitholders
depending on which asset(s) are sold; (c) the Section 743(b) basis adjustment
available to any particular Unitholder based upon its purchase price for a
Common Unit and the amount by which such price exceeded the proportionate share
of inside tax basis of the Partnership's assets attributable to such Common Unit
when such Common 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.
Flow-through of Taxable Income. No federal income tax will be paid by the
Partnership. Instead, each Unitholder will be required to report on such
Unitholder's income tax return such Unitholder's allocable share of the income,
gains, losses and deductions of the Partnership without regard to whether
corresponding cash distributions are received by such Unitholders. Consequently,
a Unitholder may be allocated income from the Partnership even if the Unitholder
has not received a cash distribution. Each Unitholder must include in income his
allocable share of Partnership income, gain, loss and deduction for the taxable
year of the Partnership ending with or within the taxable year of the
Unitholder.
Treatment of Partnership Distributions. Under Section 731 of the Code, a
partner will recognize gain as a result of a distribution from a partnership
only 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 Unitholder's basis generally will be considered
to be gain from the sale or exchange of the Common Units, taxable in accordance
with the rules described under "--Disposition of Common Units" below.
A decrease in a Unitholder's percentage interest in the Partnership,
because of the issuance by the Partnership of additional Common Units, or
otherwise, will decrease a Unitholder'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 Unitholder, regardless of such Unitholder's tax basis in Common
Units, if the distribution reduces such Unitholder'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 "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 Unitholder'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 Unitholder 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 Unitholder. 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 Unitholder's share
of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A Unitholder's initial tax basis for a Common Unit
will be the amount paid for the Common 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.
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 Common Units which he holds. A further "at risk" limitation may
operate to limit deductibility of losses in the case of an individual Unitholder
or a corporate Unitholder (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 Unitholder's basis in
the Common Units. A Unitholder must recapture losses deducted in previous years
to the extent that the Partnership distributions cause such Unitholder's at risk
amount to be less than zero at the end of any taxable year. Losses disallowed to
a Unitholder or recaptured as a result of theses limitations
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will carry forward and will be allowable to the extent that the Unitholder's
basis or at risk amount (whichever is the applicable limiting factor) is
increased. Upon the taxable dispositions of a Common Unit, a Unitholder may
offset any gain recognized by losses previously suspended by the at-risk
limitation. However, any loss suspended by the basis limitations is not
available to off set recognized gain. Any suspended loss, whether by reason of
the basis limitation or the at-risk limitation, which exceeds the gain is no
longer utilizable.
In general, a Unitholder will be "at risk" to the extent of the purchase
price of the Unitholder's Common Units but this may be less than the
Unitholder's basis for the Common Units in an amount equal to the Unitholder's
share of nonrecourse liabilities, if any, of the Partnership. A Unitholder's at
risk amount will increase or decrease as the basis of such Common Units held
increases or decreases (excluding any effect on basis resulting from changes in
the Unitholder'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
deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from such passive activities. The passive loss limitations are not
applicable to a widely held corporation. The passive loss limitations are
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
Unitholder's allocable share of income generated by the Partnership would be
deductible in the case of a fully taxable disposition of such Common 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.
Limitations on Interest Expense. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
such taxpayer's "net investment income." As noted, a Unitholder's net passive
income from the Partnership will be treated as investment income for this
purpose. In addition, the Unitholder's share of the Partnership's portfolio
income will be treated as investment income. Investment interest expense
includes (i) interest on indebtedness properly allocable to property held for
investment, (ii) the Partnership's interest expense attributed to portfolio
income, and (iii) the portion of interest expense incurred to purchase or carry
an interest in a passive activity to the extent attributable to portfolio
income. The computation of a Unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a Common Unit. Net investment income includes gross income
from property held for investment and amounts treated as portfolio income
pursuant to the passive loss rules less deductible expenses (other than
interest) directly connected with the production of investment income, but
generally does not include gains attributable to the disposition of property
held for investment.
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 Unitholders in the same proportion that available cash is
distributed (as between the General Partner and the Unitholders) 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 Unitholders in accordance with their respective
percentage interests 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 Unitholder recovering Unrecovered Capital, and a distributive
share of any additional value.
The Section 704 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 Unitholder 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
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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.
Except as discussed below, items of income, gain, loss and deduction
allocated to the Unitholders, in the aggregate, will be allocated among the
Unitholders in accordance with the number of Common Units held by such
Unitholder. As subsequently discussed, 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 Unitholders 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 Common Units. See "--Uniformity of Common 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 Common 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 Common 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
Unitholders 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 Unitholders so that the non-contributing Unitholders 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 Unitholders
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 ("Curative Allocations").
Such Curative Allocations of gross income and deductions to preserve the
uniformity of the income tax characteristics of Common Units will not have
economic effect, because they will not be reflected in the capital accounts of
the Unitholders. 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
Unitholder'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 Unitholders should be aware that some of the allocations
in the Partnership Agreement may be successfully challenged by the IRS. See
"--Tax Treatment of Operations--Section 754 Election--" and "--Uniformity of
Common Units" for a discussion of such allocations.
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
17-1/2 year period on a declining balance method. 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 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 would not be able to
amortize goodwill, if any, created as a result of any acquisition (which is a
nontaxable contribution under Section 721) for tax capital account or income tax
purposes because of the step-in-the shoes and anti-churning rules of Section
197. 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. However, see "--Section 754
Election" with respect to the amortization of Section 743 (b) adjustments
available to a purchase of Common Units. The IRS may challenge
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either the fair market values or the useful lives assigned to assets contributed
in the Santa Fe transaction or which are otherwise owned by the Partnership. If
any such challenge or characterization were successful, the deductions allocated
to a Unitholder 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 Common 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.
Valuation of Property of the Partnership. The federal income tax
consequences of the acquisition, ownership and disposition of Common 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 Unitholders might change, and Unitholders
might have additional tax liability for such prior periods.
Section 754 Election. The Partnership has previously made a Section 754
election and will make another Section 754 election after the Santa Fe
transaction for protective purposes. This election is irrevocable and may not be
revoked without the consent of the IRS. The election will generally permit a
purchaser of Common 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 Common Units. In the case of Common 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 Common 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
Common Units and is not added to the bases of the Partnership's assets
associated with Common Units held by other Unitholders. (For purposes of this
discussion, a Unitholder's inside basis in the Partnership's assets will be
considered to have two components: (1) the Unitholder's share of the
Partnership's actual basis in such assets ("Common Basis") and (2) the
Unitholder's Section 743(b) adjustment allocated to each such asset.)
A Section 754 election is advantageous if the transferee's basis in Common
Units is higher than the Partnership's aggregate Common Basis allocable to that
portion of its assets represented by such Common 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 Common Units is lower than the Partnership's aggregate Common Basis
allocable to that portion of its assets represented by such Common Units
immediately prior to the transfer. Thus, the amount that a Unitholder will be
able to obtain upon the sale of Common 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 Common
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 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 1.743-1(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 Common
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 Unitholders. See "--Uniformity of Common
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
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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 Partnership will not be successfully challenged by
the IRS and that the deductions attributable to them will not be disallowed or
reduced.
Corporate Subsidiaries. The Partnership owns an indirect interest in the
Mont Belvieu Fractionator. The Partnership also recently acquired all of the
capital stock of Hall-Buck Marine, Inc., a corporation. See "The Partnership."
As corporations, each of these entities 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 significant portion of the cash
distributions to the Partnership by either of such corporations will be treated
as taxable dividends.
Alternative Minimum Tax. Each Unitholder 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 Unitholder's AMT taxable income derived from
the Partnership may be higher than such holder's share of the Partnership's net
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Common Units on their liability for the
alternative minimum tax.
Disposition of Common Units
Recognition of Gain or Loss. A Unitholder will recognize gain or loss on a
sale of Common Units equal to the difference between the amount realized and a
Unitholder's tax basis for the Common Units sold. A Unitholder's amount realized
will be measured by the sum of the cash received or the fair market value of
other property received, plus such Unitholder's share of the Partnership's
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of the Partnership's nonrecourse liabilities, the gain recognized on the
sale of Common Units could result in a tax liability in excess of any cash
received from such sale.
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 Unitholders in the same proportion that
Available Cash is distributed (as between the General Partner and the
Unitholders) 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 a Unitholder 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 Common
Units. In effect, this amount would increase the gain recognized on sale of the
Common Unit(s). Under such circumstances, a gain could result even if the Common
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 Unitholders, the
aggregation of tax bases of a Unitholder effectively prohibits such holder from
choosing among Common 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
Unitholder's Common 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 Common Units and, accordingly, Counsel is unable to
opine as to the effect such ruling will have on a Unitholder. A Unitholder
considering the purchase of additional Common Units or a sale of Common 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 Common Units, a Unitholder
could realize more gain from the sale of its Common Units than if such
convention had been respected. In that case, the Unitholder 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).
Unitholders should consult
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with their tax advisers in the event they are considering entering into a short
sale transaction or any other risk arbitrage transaction involving Common Units.
A Unitholder whose Common Units are loaned to a "short seller" to cover a
short sale of Common Units will be considered as having transferred beneficial
ownership of those Common Units and will, thus, no longer be a partner with
respect to those Common 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 Common Units would appear not to be reportable by the
holders thereof, any cash distributions received by such Unitholders with
respect to those Common 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 Common Units to a "short seller" constitutes a taxable
exchange. If this contention were successfully made, a lending Unitholder may be
required to recognize gain or loss. Unitholders desiring to ensure their status
as partners should modify their brokerage account agreements, if any, to
prohibit their brokers from borrowing their Common Units.
Character of Gain or Loss. Generally, gain or loss recognized by a
Unitholder (other than a "dealer" in Common Units) on the sale or exchange of a
Common 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 before January 1,
1998 at a profit within 12 months of purchase would result in short term capital
gains taxed at ordinary income tax rates. For amounts properly taken into
account after January 1, 1998, the Internal Revenue Service Restructuring and
Reform Act of 1998 shortened the holding period for long term capital gain
treatment to 12 months. 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 the sale of a Common Unit and may be recognized even
if there is a net taxable loss realized on the sale of a Common Unit. Any loss
recognized on the sale of Common Units will generally be a capital loss. Thus, a
Unitholder may recognize both ordinary income and a capital loss upon a
disposition of Common 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 Unitholders
in proportion to the number of Common 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 Unitholders may dispose of their Common 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
Unitholders 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 Unitholder transferring Common 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 Common Units. If a monthly convention is not
allowed by the Treasury Regulation (or only applies to transfers of less than
all of the Unitholder's Common Units), taxable income or losses of the
Partnership might be reallocated among the Unitholders. 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 Unitholder who owns Common Units at any time during a quarter and who
disposes of such Common 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 Common Units
were owned but will not be entitled to receive such cash distribution.
Notification Requirements. A Unitholder who sells or exchanges Common
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 Common 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 Common 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 Unitholders. 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
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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 Unitholder 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 Unitholder or
the General Partner or former Unitholders, 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 Unitholder 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 Common Units and to 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 Common Units. The Partnership cannot trace the chain of
ownership of any particular Common Unit. Therefore, it is unable to track the
economic and tax characteristics related to particular Common Units from owner
to owner. Consequently, uniformity of the economic and tax characteristics of
the Common Units to a purchaser of Common 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 Common Units could differ. Any such
non-uniformity could have a negative impact on the value of Common 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)-l(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 Common 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 Unitholders 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 Unitholder.
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 Common Units that would not have a
material adverse effect on the Unitholders. 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 Common 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 Common 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 Common Units" and "--Allocations of Income, Gain,
Loss and Deduction."
Tax-Exempt Organizations and Certain Other Investors. Ownership of Common
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 Common Unit will be unrelated business taxable income and thus
will be taxable to such a Unitholder at the maximum corporate tax rate. Also, to
the extent that the Partnership holds debt financed property, the disposition of
a Common Unit could result in unrelated business taxable income.
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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 Common Units will be considered to be engaged in business in the United
States on account of ownership of Common 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 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 Common Units in street name
will withhold) at the rate of 39.6% on actual cash distributions made quarterly
to foreign Unitholders. Each foreign Unitholder 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 Common Units will be treated as
engaged in a United States trade or business, such a Unitholder 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 Unitholder is a "qualified resident." In addition, such a Unitholder
must comply with special reporting requirements under Section 6038C.
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 Common Units continue
to be regularly traded on an established securities market, a foreign Unitholder
who sells or otherwise disposes of a Common Unit and who has not held more than
5% in value of the Common Units, including Common 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 a
Unitholder 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 Unitholder (regardless of a foreign Unitholder's
percentage interest in the Partnership or whether Common Units are regularly
traded). A foreign Unitholder will be subject to federal income tax on gain
attributable to real property held by the Partnership if the Unitholder held
more than 5% in value of the Common Units, including Common Units held by
certain related individuals and entities, during the five-year period ending on
the date of the disposition or if the Common Units were not regularly traded on
an established securities market at the time of the disposition.
A foreign Unitholder will also be subject to withholding under Section
1445 of the Code if such Unitholder owns, including Common 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 Unitholder within 90 days after the close of each Partnership
taxable year, certain tax information, including a Schedule K-1, which sets
forth each Unitholder'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 Unitholder'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 Unitholder 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 Unitholder 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 Unitholders' returns and
may lead to audits of their returns and adjustments of items unrelated to the
Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder'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.
17
<PAGE>
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to the
Partnership items. The Tax Matters Partner may bind a Unitholder 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 Unitholders 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 Unitholders having in the aggregate at
least a 5% profits interest. However, only one action for judicial review will
go forward, and each Unitholder with an interest in the outcome may participate.
A Unitholder 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 Unitholder 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 Unitholders for the year in
which the adjustment takes effect, and the adjustments would not affect
prior-year returns of any Unitholder, except in the case of changes to any
Unitholder's distributive share. In lieu of passing through an adjustment to the
Unitholders, the Partnership may elect to pay the tax resulting from any audit
adjustment. The Partnership, and not the Unitholders, 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 Common 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 Common 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
Common 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 Unitholder 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 Unitholder, and a Unitholder who sells or otherwise transfers a
Common Unit in a subsequent transaction must furnish the registration number to
the transferee. The penalty for failure of the transferor of a Common Unit to
furnish such registration number to the transferee is $100 for each such
failure. The Unitholder 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 Unitholder 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.
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
18
<PAGE>
to include the Partnership. If any Partnership item of income, gain, loss,
deduction or credit included in the distributive shares of Unitholders 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 Unitholders 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
Unitholders 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. Unitholders 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, Colorado, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Missouri, Nebraska, Nevada, New Mexico, Oregon, Texas and Wyoming. In
addition, the Partnership may acquire other entities which are partnerships,
limited liability companies or other entities with pass-through taxation and
which do business in other states. A Unitholder 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 Unitholder that is not a resident of the state. Such amounts
withheld, if any, which may be greater or less than a particular Unitholder's
income tax liability to the state, generally do not relieve the non-resident
Unitholder from the obligation to file a state income tax return. Amounts
withheld, if any, will be treated as if distributed to Unitholders 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 Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states or localities, of
an investment in the Partnership. Further, it is the responsibility of each
Unitholder to file all state and local, as well as federal tax returns that may
be required of such Unitholder. Counsel has not rendered an opinion on the state
and local tax consequences of an investment in the Partnership.
19
<PAGE>
SELLING UNITHOLDERS
The following table sets forth certain information with respect to the
Selling Unitholders and their beneficial ownership of the Common Units as of
August 21, 1998. The 2,121,033 Common Units that may be offered and sold
pursuant to this Prospectus constitute approximately 4.3% of the outstanding
Common Units as of such date. 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 his, her or its
Common Units.
Percent Outstanding
Number of Common Units
Common Units Owned Owned
Unitholder Before Offering Before Offering
- ---------- --------------- ------------------
Hall-Buck Marine, Inc.Employee 566,512 1.1
Stock Ownership Plan
Hibernia National Bank, Trustee for 4,464 *
the IRA fbo Warren H. Boren
Harlan Hall 479,081 *
Madelaine Hall Arber 20,350 *
Stephen Hall 20,350 *
Annabelle Hall-Gout 20,350 *
Janet Pearce Hudson 20,350 *
Jacqueline Pearce Carter 20,350 *
Harlan Glenn Hall 20,350 *
C. Austin Buck 294,678 *
Leonard J. Buck II 94,152 *
Wendy Buck Brown 94,152 *
Belinda Buck Kielland 94,152 *
Gordon A. Millspaugh, Jr. 18,035 *
Edgar O. Crossman 6,011 *
Warren H. Boren 46,381 *
Thomas B. Stanley 59,066 *
Don W. Duff 38,473 *
Steven J. Daigle 59,066 *
Kermit P. Pitre 18,174 *
Constantino J. Santavicca 5,218 *
Clarke H. Williams 5,218 *
Dixon Betz 72,624 *
First National Bank of Commerce, 26,090 *
Trustee for Betz Children's Trust
Patrick C. Flower 2,087 *
Gregory DiFrank 2,087 *
Sheridan K. Bosch 1,913 *
Samuel T. Burguieres, Jr. 1,739 *
A. Kevin Fry 1,565 *
Karl W. Holloway 1,565 *
Robert J. Estave 1,391 *
Theodore K. Richardson 1,217 *
John J. Hickman, Jr. 869 *
Daniel L. Keller 869 *
H. Andrew Holtom 695 *
Jose C. Simosa 695 *
Karen J. Vezina 347 *
Kristine A. Lothes 347 *
- ---------------------
* indicates less than 1%
20
<PAGE>
The Selling Unitholders acquired their Common Units from the Partnership
pursuant to an Acquisition Agreement dated as of July 1, 1998. In connection
with such acquisition, the Selling Unitholders obtained rights to have such
Common Units registered under the Securities Act pursuant to a Registration
Rights Agreement dated August 13, 1998 with the Partnership, pursuant to which
the Partnership undertook to file the Registration Statement of which this
Prospectus is a part and take certain other actions to effect the registration
of the Common Units.
The Selling Unitholders may sell some, all or none of the Common Units
hereunder; consequently, the number and percentage of the Common Units to be
beneficially owned by the Selling Unitholders after the offering hereunder
cannot be determined, but the sale of all of the Common Units hereunder would
effect the disposition of all of the Common Units beneficially owned by the
Selling Unitholders as of August 21, 1998
PLAN OF DISTRIBUTION
The Partnership has been advised that the Common Units may be sold from
time to time by or for the account of the Selling Unitholders in the
over-the-counter market, on the NYSE or otherwise, at prices and on terms then
prevailing or at prices related to the then current market price, at fixed
prices that may be changed or in negotiated transactions at negotiated prices.
The Common Units may be sold by any one or more of the following methods: (a)
a block trade (which may involve crosses) in which the broker or dealer so
engaged will attempt to sell the securities as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) exchange distributions
and/or secondary distributions in accordance with the rules of the applicable
exchange; (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (e) privately negotiated transactions. In
effecting sales, brokers or dealers engaged by the Selling Unitholders may
arrange for other brokers or dealers to participate in the sales. In addition,
any Common Units covered by this Prospectus which qualify for sale pursuant to
Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus.
In connection with the distribution of the Common Units, the Selling
Unitholders may enter into hedging transactions with brokers or dealers. In
connection with such transactions, brokers or dealers may engage in short
sales of the Common Units in the course of hedging the positions they assume
with the Selling Unitholders. The Selling Unitholders may also enter into
option or other transactions with brokers or dealers which require the
delivery to the broker or dealer of the Common Units, which the broker or
dealer may resell or otherwise transfer pursuant to this Prospectus. The
Selling Unitholders may also loan or pledge the Common Units to a broker or
dealer, and the broker or dealer may sell the Common Units so loaned or, upon
a default, effect sales of the Common Units so pledged, pursuant to this
Prospectus.
The Selling Unitholders may effect such transactions by selling Common
Units through brokers or dealers, and such brokers or dealers may receive
compensation in the form of commissions, discounts or concessions from the
Selling Unitholders (which may or may not exceed those customary in the types
of transactions involved). The Selling Unitholders and any brokers or dealers
that participate in the distribution of the Common Units may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
such sales, and any profit on the sale of Common Units by it and any
commissions, discounts or concessions received by any such broker or dealer
may be deemed to be underwriting discounts and commissions under the
Securities Act.
The Partnership has agreed to indemnify the Selling Unitholders, their
officers, directors, controlling persons, and agents, and any person acting as
an underwriter in connection with the offering and sale of the Common Units,
against certain liabilities, including liabilities arising under the
Securities Act, and the Selling Unitholders have agreed to indemnify the
Partnership and its officers, directors, controlling persons and agents and
any underwriter against certain of such liabilities. The Partnership will pay
the costs and expenses of the registration and offering of the Common Units,
other than discounts and commissions, fees and disbursements of counsel and
accountants for the Selling Unitholders and certain other expenses that the
Selling Unitholders have agreed to pay.
LEGAL MATTERS
Certain matters with respect to the validity of the Common Units and
certain federal income tax considerations are being passed upon by Morrison &
Hecker L.L.P., 2600 Grand Avenue, Kansas City, Missouri
64108-4606, as counsel for the Partnership.
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 Partnership's
Annual Report on Form 10-K for the year ended December 31, 1997, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of the Partnership and its
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 fiscal year ended
December 31, 1997 and incorporated by reference in this Prospectus and
elsewhere in the
21
<PAGE>
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 accounting and auditing 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 on the report of PricewaterhouseCoopers 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,
incorporated by reference in the Registration Statement of which this
Prospectus is a part, has been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
22
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained In this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Partnership or the Selling Unitholders. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. The
delivery of this Prospectus at any time does not imply that the information
contained herein is correct as of any time subsequent its date.
------------------
TABLE OF CONTENTS
Page
----
Available Information..................................2
Incorporation of Certain Documents.....................2
Information Regarding Forward Looking Statements.......3
Risk Factors...........................................4
Use of Proceeds........................................5
The Partnership........................................5
Material Federal Income Tax Considerations.............6
Selling Unitholders...................................20
Plan of Distribution..................................21
Legal Matters.........................................21
Experts...............................................21
================================================================================
2,121,033 Common Units
Representing Limited Partner Interests
KINDER MORGAN
ENERGY PARTNERS, L.P.
-------------------------
PROSPECTUS
August ______, 1998
-------------------------
================================================================================
<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 of such costs will be borne by the Partnership.
Securities and Exchange Commission registration fee........$21,353
New York Stock Exchange Fee ..............................$ 7,425
Legal fees and expenses ...................................$15,000
Accounting fees and expenses ..............................$11,000
Miscellaneous..............................................$ 7,500
-------
Total..................................................$62,278
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 the 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 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
*3.1 Second Amended and Restated Partnership Agreement of Kinder Morgan
Energy Partners, L.P. dated January 14, 1998.
*4.1 Form of Certificate representing a Common Unit.
4.2 Registration Rights Agreement dated as of August 13, 1998, among the
Partnership and the Selling Unitholders.
5.1 Opinion of Morrison & Hecker L.L.P. as to the legality of the
securities registered hereby
8.1 Opinion of Morrison & Hecker L.L.P. as to certain tax matters
<PAGE>
23.1 Consent of Morrison & Hecker L.L.P. (included in Exhibits 5 and 8)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of PricewaterhouseCoopers 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).
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:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
i) To include any prospectus required by section 10(a)(3) of the Act;
ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
Provided, however, that paragraphs (1)(i) and 1(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
that are incorporated by reference into the Registration Statement;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the Common Units which remain unsold at the termination of the offering.
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.
II-2
<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 August 24, 1998.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., INC.
as General Partner
By: /s/ Richard D. Kinder
---------------------
Richard D. Kinder
Chairman of the Board and CEO
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard D. Kinder, William V. Morgan and Thomas
B. King 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 any or all amendments (including post-effective
amendments) to this Registration Statement and any and all other documents in
connection therewith, and to file the same, with all exhibits thereto, 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.
Name Title Signature Date
---- ----- --------- ----
Richard D. Kinder Chairman of the Board /s/ Richard D. Kinder August 24, 1998
and Chief Executive
Officer of Kinder
Morgan G.P., Inc.
William V. Morgan Director and Vice /s/ William V. Morgan August 24, 1998
Chairman of Kinder
Morgan G.P., Inc.
Alan L. Atterbury Director of Kinder /s/ Alan L. Atterbury August 24, 1998
Morgan G.P., Inc.
Edward O. Gaylord Director of Kinder /s/ Edward O. Gaylord August 24, 1998
Morgan G.P., Inc.
Thomas B. King Director, President /s/ Thomas B. King August 24, 1998
and Chief Operating
Officer of Kinder
Morgan G.P., Inc.
David G.
Dehaemers, Jr. Vice President, /s/ David G. Dahaemers, Jr.August 24, 1998
(Chief Financial Officer, and
Chief Accounting Officer)
Treasurer and Assistant Secretary
of Kinder Morgan G.P., Inc.
II-3
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
*3.1 Second Amended and Restated Partnership Agreement of Kinder
Morgan Energy Partners, L.P. dated January 14, 1998.
*4.1 Form of Certificate representing a Common Unit.
4.2 Registration Rights Agreement dated as of August 13, 1998 among
Kinder Morgan Energy Partners, L.P. and the Selling Unitholders.
5.1 Opinion of Morrison & Hecker L.L.P. as to the legality of the
securities registered hereby
8.1 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 and
8)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of PricewaterhouseCoopers 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).
II-4
Exhibit 5.1
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri
64108-4606
Telephone (816)
691-2600
Telefax (816)
474-4208
August 24, 1998
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street , Suite 3450
Houston, Texas 77010
Re: Common Units
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3, as amended, (Registration No. 333-_____)
(the "Registration Statement") filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"). The Registration
Statement covers 2,121,033 Common Units ("Common Units") representing limited
partner interests in the Partnership to be sold by the selling unitholders set
forth in the prospectus included as part of the Registration Statement (the
"Prospectus"). Capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Prospectus.
This Opinion Letter is governed by, and shall be interpreted in accordance
with the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only with
respect to the present status of the substantive laws of the State of Delaware.
We express no opinion as to any matter arising under the laws of any other
jurisdiction.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement, including the Prospectus; (2) the
Partnership's Second Amended and Restated Agreement of Limited Partnership dated
January 14, 1998 (the "Partnership Agreement"); and (3) such other documents,
materials, and authorities as we have deemed necessary in order to enable us to
render our opinions set forth below.
<PAGE>
Kinder Morgan Energy Partners, L.P.
August 24, 1998
Page Two
Based on and subject to the foregoing and other qualifications set forth
below, we are of the opinion that the Common Units to be sold by the selling
unitholders as contemplated by the Registration Statement and the Prospectus are
duly authorized and validly issued and, on the assumption that the limited
partners of the Partnership take no part in the control of the Partnership's
business and otherwise act in conformity with the provisions of the Partnership
Agreement (Articles VI and VII) regarding control and management of the
Partnership, such Common Units are fully paid and nonassessable.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference of this firm under the heading
"Legal Matters" in the Prospectus forming part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Morrison & Hecker L.L.P.
Exhibit 8.1
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri
64108-4606
Telephone (816)
691-2600
Telefax (816)
474-4208
August 24, 1998
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
Re: Kinder Morgan Energy Partners, L.P.: Form S-3 Registration Statement
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3, as amended, (Registration No. 333-______)
(the "Registration Statement") filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"). The Registration
Statement covers 2,121,033 Common Units ("Common Units") representing limited
partner interests in the Partnership to be sold by the selling unitholders set
forth in the prospectus attached to the registration statement (the
"Prospectus"). Capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Prospectus.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement and the attached Prospectus; (2)
the Partnership's Second Amended and Restated Agreement of Limited Partnership
dated January 14, 1998; and (3) such other documents, materials, and authorities
as we have deemed necessary in order to enable us to render our opinions set
forth below.
In addition, our opinions are based on the facts and circumstances set
forth in the Prospectus and on certain representations made by the Partnership,
Kinder Morgan G.P., Inc., the Partnership's general partner, and the selling
unitholders. We have not made an independent investigation of such facts. Our
opinion as to the matters set forth herein could change as a result of changes
in facts and circumstances, changes in the terms of the documents reviewed by
us, or changes in the law subsequent to the date hereof.
Our opinion is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), regulations under such Code, judicial authority
and current
<PAGE>
Kinder Morgan Energy Partners, L.P.
August 25, 1998
Page Two
administrative rulings and practice, all as of the date of this letter, and all
of which may change at any time.
Based upon and subject to the foregoing and assuming compliance with all
provisions of the documents referenced above, we are of the opinion that for
federal income tax purposes (i) the Partnership and its operating partnerships
are and will continue to be classified as partnerships and not as associations
taxable as corporations; and (ii) each purchaser of Common Units who acquires
beneficial ownership of the Partnership's Common Units, and either has been
admitted or is pending admission to the Partnership as an additional limited
partner, or if the Common Units are held by a nominee, each purchaser of such
Common Units (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.
Further, we are of the opinion that the discussion of federal income tax
consequences set forth in the Prospectus under the heading "Material Federal
Income Tax Consideration" is accurate in all material aspects as to
matters of law and legal conclusions.
This opinion may be relied upon by you, the purchasers of Common Units and
the Partnership. We hereby consent to the filing of this opinion as an Exhibit
to the Registration Statement and to all references to this firm under the
headings "Material Federal Income Tax Considerations" and "Legal Matters" in the
Prospectus forming part of the Registration Statement. This consent is not to be
construed as an admission that we are a person whose consent is required to be
filed with the Registration Statement under the provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Morrison & Hecker L.L.P.
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated February 21, 1997
included in Kinder Morgan Energy Partners, L.P.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, and to all references to our Firm
included in this Registration Statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1998
Exhibit 23.3
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
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 Partners,
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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
August 21, 1998
Exhibit 23.4
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 (file no. 333-____)
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.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
August 21, 1998
