As filed with the Securities Exchange Commission on April 17, 1998
Registration No. 333-25995
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Post-Effective
Amendment No. 1
to
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
Patrick J. Respeliers
Morrison & Hecker L.L.P.
2600 Grand Avenue
Kansas City, Missouri 64108
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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. [_]
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. [_]
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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.
EXPLANATORY NOTE
This is a Post-Effective Amendment to the Registration Statement on Form S-3
(Registration No. 333-25995) which the Securities and Exchange Commission
declared effective on June 26, 1997 and which related to the resale from time to
time by First Union Investors, Inc. and Kinder Morgan G.P., Inc. of up to
860,000 Units representing limited partnership interests ("Units") in Kinder
Morgan Energy Partners, L.P. (the "Partnership"). The 1,645,171 Units covered by
the Prospectus contained in this Registration Statement represent the 860,000
Units originally covered by the Registration Statement adjusted (in connection
with the two-for-one Unit split (the " Unit Split") authorized on September 2,
1997 by the Partnership's general partner, Kinder Morgan G.P., Inc.) to double
the number of undistributed Units covered by the Registration Statement less
74,829 Units sold after the effective date of the Unit Split. Pursuant to Rule
416(b) of the Securities Act of 1933, as amended, such additional Units referred
to by this Prospectus in connection with Unit Split are deemed covered by this
Registration Statement and no additional registration fee is due.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED APRIL 17, 1998
1,645,171 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 1,645,171 Units (the "Units")
representing limited partner interests in Kinder Morgan Energy Partners, L.P.
(the "Partnership") by or for the account of the Selling Unitholders referred to
herein (hereinafter the "Selling Unitholders") See "Selling Unitholders." The
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 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 Units are traded on the New York Stock Exchange ("NYSE") under the
symbol "ENP." On April 15, 1998, the last reported sales price for the Units as
reported on the New York Stock Exchange Composite Transactions tape was $36 1/2
per Unit.
The Partnership will receive no portion of the proceeds of the sale of the
Units. The Partnership will pay the costs and expenses of the registration and
offering of the Units (estimated to be approximately $72,000 other than
discounts and commissions). 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, 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 Units offered hereby.
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.
The Date of this Prospectus is __________________ ___, 1998
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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 Units at levels above those which
might otherwise prevail in the open market. Such transactions may be effected on
the New York Stock Exchange, 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 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 Units within 120 days
after the close of each calendar year, an annual report containing audited
financial statements and a report thereon by its independent public accountants.
The Partnership will also furnish each 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") and the Partnership's Current Report on Form
8-K dated March 5, 1998, as amended, are incorporated herein by reference.
The description of the Units which is contained in the Partnership's
registration statement on Form S-1 (File No. 33-48142) under the Exchange Act
filed on June 1, 1992, including any amendment or reports filed for the purpose
of updating such description, is incorporated herein by reference.
All documents filed by the Partnership pursuant to Section 13(e), 13(c),
14 or 15(d) of the Exchange Act, after the date of this Prospectus and prior to
the termination of the Registration Statement of which this Prospectus is a part
with respect to registration of the 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 the Partnership believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Such forward looking statements involve known and
unknown risks and uncertainties. Given these uncertainties, Unitholders are
cautioned not to rely on such forward looking statements. The Partnership's
actual actions or results may differ materially from those discussed in the
forward looking statements. Specific factors which could cause actual results to
differ from those in the forward looking statements, include, among others:
price trends and overall demand for natural gas liquids, refined
petroleum products, Carbon Dioxide, and coal in the United States (which
may be affected by general levels of economic activity, weather,
alternative energy sources, conservation and technological advances);
changes in the Partnership's tariff rates set by the
Federal Energy Regulatory Commission and the California
Public Utilities Commission;
the Partnership's ability to integrate the acquired
operations of Santa Fe Pacific Pipeline Partners, L.P.
("Santa Fe") (and other future acquisitions) into its
existing operations;
with respect to the Partnership's coal terminals, the
ability of railroads to deliver coal to the terminals on a
timely basis;
the Partnership's ability to successfully identify and
close strategic acquisitions and realize cost savings;
the discontinuation of operations at major end-users of the products
transported by the Partnership's liquids pipelines (such as refineries,
petrochemical plants, or military bases); and
the condition of the capital markets and equity markets
in the United States.
For additional information which could affect the forward looking statements,
see the "Risk Factors" listed on page 4 of this Prospectus and the "Risk
Factors" included in the Form 10-K, which is incorporated herein by reference.
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RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider each of the following risk factors, together with other
information set forth elsewhere in the Prospectus or incorporated herein by
reference. A more detailed description of each of these risks factors, as well
as other risk factors, is included in the Partnership's Form 10-K, which is
incorporated herein by reference.
Pending FERC and CPUC Proceedings Seek Substantial Refunds and
Reductions in Tariff Rates
Various shippers have filed complaints before the FERC and the CPUC
challenging certain pipeline tariff rates of the Partnership's Pacific
Operations alleging such rates are not entitled to "grandfathered" status under
the Energy Policy Act of 1992. Although the Partnership believes such rates are
entitled to "grandfathered" status, if such challenges are upheld they could
result in substantial rate refunds and prospective rate reductions, which could
result in a material adverse effect on the Partnership's results of operations,
financial condition, liquidity and funds available for distributions.
The Partnership May Experience Difficulties Integrating Santa
Fe's Operations and Realizing Synergies
The Partnership may incur costs or encounter other challenges not
currently anticipated in integrating the acquired operations of Santa Fe into
the Partnership, which may negatively affect its prospects. The integration of
operations following the acquisition will require the dedication of management
and other personnel which may temporarily distract their attention from the
day-to-day business of the Partnership, the development or acquisition of new
properties and the pursuit of other business acquisition opportunities.
Possible Insufficient Cash to Pay Current Level of Distributions
The pro forma historical combined cash flow of the Partnership and Santa
Fe for 1997 would not be sufficient to pay the Partnership's current annual
distribution on all of its outstanding Units. The Partnership must realize
anticipated cost savings resulting from the acquisition of Santa Fe and increase
revenues in certain sectors in accordance with the Partnership's 1998 business
plan, if it is to continue its current level of distributions. In addition,
adverse changes in the Partnership's business, including the disruption of
operations at major suppliers or end-users, may adversely affect distributions
to Unitholders.
Risks Associated With Leverage
Substantially all of the Partnership's assets are pledged to secure its
indebtedness. If the Partnership defaults in the payment of its indebtedness,
the Partnership's lenders will be able to sell the Partnership's assets to pay
the debt. In addition, the agreements relating to the Partnership's debt contain
restrictive covenants which may in the future prevent the General Partner from
taking actions that it believes are in the best interest of the Partnership. The
agreements governing the Partnership's indebtedness generally prohibit the
Partnership from making cash distributions to holders of Units more frequently
than quarterly, from distributing amounts in excess of 100% of Available Cash
(as defined in the Partnership Agreement) for the immediately preceding calendar
quarter and from making any distribution to holders of Units 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") has pledged all of the stock of the General
Partner to secure KMI's indebtedness. If KMI were to default in the payment of
such debt, the lenders could acquire control of the General Partner.
The Partnership Could Have Significant Environmental Costs in the Future
The Partnership could incur significant costs and liabilities in the event
of an accidental leak or spill in connection with liquid petroleum products
transportation and storage. In addition, it is possible that other developments,
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such as increasingly strict environmental laws and regulations, could result in
significant increased costs and liabilities to the Partnership.
Loss of Easements for Liquids Pipelines
A significant portion of the Liquids Pipelines are located on properties
for which the Partnership has been granted an easement for the construction and
operation of such pipelines. If any such easements were successfully challenged
(or if any non-perpetual easement were to expire), the Partnership should be
able to exercise the power of eminent domain to obtain a new easement at a cost
that would not have a material adverse effect on the Partnership, although no
assurance in this regard can be given. The Partnership does not believe that
Shell CO2 Company has the power of eminent domain with respect to its CO2
pipelines. The inability of the Partnership to exercise the power of eminent
domain could disrupt the Liquids Pipelines' operations in those instances where
the Partnership will not have the right through leases, easements,
rights-of-way, permits or licenses to use or occupy the property used for the
operation of the Liquids Pipelines and where the Partnership is unable to obtain
such rights.
Change in Management of Santa Fe Assets
As a result of the Partnership's acquisition of Santa Fe, the assets of
Santa Fe are under the ultimate control and management of different persons.
Risks Associated with Shell CO2 Company
The Partnership is entitled during the four year period ended December 31,
2002 to a fixed, quarterly distribution from Shell CO2 Company, to the extent
funds are available. If such amount exceeds the Partnership's proportionate
share of distributions during such period, the Partnership would receive less
than its proportionate share of distributions during the next two years (and
could be required to return a portion of the distributions received during the
first four years).
Competition
The Partnership is subject to competition from a variety of sources,
including competition from alternative energy sources (which affect the demand
for the Partnership's services) and other sources of transportation.
Risks Associated with the Partnership Agreement and State Law
There are various risks associated with the Partnership's Second Amended
and Restated Agreement of Limited Partnership (the "Partnership Agreement"),
including, among others:
Unitholders have limited voting rights. Unitholders do not have the ability
to elect the management of the Partnership.
The vote of 66 2/3% of the Units is required to remove the General Partner,
which means that it will be difficult to remove the General Partner if one or
more Unitholders disagree with the General Partner.
The General Partner has the right to purchase all of the Units if at any
time the General Partner and its affiliates own 80% or more of the
outstanding limited partners interests. In addition, any Units held by a
person (other than the General Partner and its affiliates) that owns 20% or
more of the Units cannot be voted. The General Partner also has preemptive
rights with respect to new issuances of Units. These provisions may make it
more difficult for another entity to acquire control of the Partnership.
No limit exists on the number or type of additional limited partner
interests that the Partnership may sell. A Unitholders' percentage interest
in the Partnership is therefore potentially subject to significant dilution.
The Partnership Agreement purports to limit the General Partner's liability
and fiduciary duties to the holders of Units.
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Unitholders may be required to return funds that they knew were wrongfully
distributed to them.
Conflicts of Interest
The General Partner may experience conflicts of interest with the
Partnership, which could result in the General Partner taking actions that are
not in the best interests of the Unit holders.
THE PARTNERSHIP
Kinder Morgan Energy Partners, L.P. ("the Partnership"), a Delaware
limited partnership, is a publicly traded master limited partnership ("MLP")
formed in August 1992. The Partnership manages a diversified portfolio of
midstream energy assets, including six refined products/liquids pipeline systems
containing over 5,000 miles of trunk pipeline (the "Liquids Pipelines") and 21
truck loading terminals. The Partnership also owns two coal terminals, a 20%
interest in a joint venture with affiliates of Shell Oil Company ("Shell")which
produces, markets and delivers CO2 for enhanced oil recovery ("Shell CO2
Company") and a 25% interest in a Y-grade fractionation facility. The
Partnership is the largest pipeline MLP and has the second largest products
pipeline system in the United States in terms of volumes delivered.
The Partnership's objective is to operate as a growth-oriented MLP by
reducing operating costs, better utilizing and expanding its asset base and
making selective, strategic acquisitions that are accretive to Unitholder
distributions. The Partnership regularly evaluates potential acquisitions of
complementary assets and businesses, although there are currently no agreements
or commitments with respect to any material acquisition. The General Partner's
incentive distributions provide it with a strong incentive to increase
Unitholder distributions through successful management and growth of the
Partnership's business. The success of this strategy was demonstrated in 1997 as
net income grew by 49% over 1996, including a 15% reduction in operating,
maintenance, general and administrative expenses. As a result of this strong
financial performance, the Partnership was able to increase its distribution to
Unitholders by 79% from an annualized rate of $1.26 at year-end 1996 to $2.25 at
year-end 1997.
On March 6, 1998, the Partnership acquired substantially all of the assets
of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"), which assets currently
comprise the Partnership's Pacific Operations, for an aggregate consideration of
approximately $1.4 billion consisting of approximately 26.6 million Units, $84.4
million in cash and the assumption of certain liabilities. On March 5, 1998, the
Partnership contributed its 157 mile Central Basin CO2 Pipeline and
approximately $25.0 million in cash for a 20% limited partner interest in Shell
CO2 Company.
The address of the Partnership's principal executive offices is 1301
McKinney Street, Suite 3450, Houston, Texas 77010 and its telephone number at
this address is (713) 844-9500.
The Partnership's operations are grouped into three reportable business
segments: Liquids Pipelines; Coal Transfer, Storage and Services; and Gas
Processing and Fractionation.
Liquids Pipelines
The Liquids Pipelines segment includes both interstate common carrier
pipelines regulated by FERC and intrastate pipeline systems, which are regulated
by the CPUC in California. Products transported on the Liquids Pipelines segment
include refined petroleum products, NGLs and CO2. The Liquids Pipelines segment
conducts operations through two geographic divisions: Kinder Morgan Pacific
Operations and Kinder Morgan Mid-Continent Operations.
Pacific Operations. The Pacific Operations include four pipeline systems
which transport approximately one million barrels per day of refined petroleum
products such as gasoline, diesel and jet fuel, and 13 truck loading terminals.
These operations serve approximately 44 customer-owned terminals, three
commercial airports and 12 military bases in six western states. Pipeline
transportation of gasoline and jet fuel has a direct correlation with changing
demographics, and the Partnership serves, directly or indirectly, some of the
fastest growing populations in the United States, such as the Los Angeles and
Orange, California, the Las Vegas, Nevada and the Tucson and Phoenix Arizona
areas. The Pacific Operations transport, directly or indirectly, virtually all
of the refined products
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utilized in Arizona and Nevada, together with the majority of refined products
utilized in California. The Partnership plans to extend its presence in these
rapidly growing markets in the western United States through accretive
acquisitions and incremental expansions of the Pacific Operations. In the near
term, the Partnership expects to realize $15-20 million per year in cost savings
through elimination of redundant general and administrative and other expenses
following the acquisition of Santa Fe.
Mid-Continent Operations. The Mid-Continent Operations consist of two
pipeline systems (the North System and the Cypress Pipeline), the Partnership's
indirect interest in Shell CO2 Company and a 50% interest in Heartland Pipeline
Company.
The North System includes a 1,600 mile NGL and refined products pipeline
which is a major transporter of products between the NGL hub in Bushton, Kansas
and Chicago, Illinois industrial area consumers, such as refineries and
petrochemical plants. In addition, the North System has eight truck loading
terminals, which primarily deliver propane throughout the upper midwest, and
approximately 3 million barrels of storage capacity. Since the North System
serves a relatively mature market, the Partnership intends to focus on
increasing throughput by remaining a reliable, cost-effective provider of
transportation services and by continuing to increase the range of products
transported and services offered.
The Cypress Pipeline is a 100 mile NGL pipeline originating in the NGL hub
in Mont Belvieu, Texas which serves a major petrochemical producer in Lake
Charles, Louisiana. The bulk of the capacity of this pipeline is under a long
term ship or pay contract with this producer.
Shell CO2 Company is a leader in the production, transportation and
marketing of CO2 and serves oil producers, primarily in the Permian Basin of
Texas and the Oklahoma panhandle, utilizing enhanced oil recovery programs. With
ownership interests in two CO2 domes, two CO2 trunklines, and a distribution
pipeline running throughout the Permian basin, Shell CO2 Company can deliver
over 1 billion cubic feet of CO2 per day. Within the Permian Basin, Shell CO2
Company offers its customers "one-stop shopping" for CO2 supply, transportation
and technical service. Outside the Permian Basin, Shell CO2 Company intends to
compete aggressively for new supply and transportation projects which the
Partnership believes will arise as other United States oil producing basins
mature and make the transition from primary production to enhanced recovery
methods.
The Heartland Pipeline Company transports refined petroleum products over
the North System from refineries in Kansas and Oklahoma to a Conoco terminal in
Lincoln, Nebraska and Heartland's terminal in Des Moines, Iowa. Demand for, and
supply of, refined petroleum products in the geographic regions served by
Heartland directly affect the volume of refined petroleum products it
transports.
Coal Transfer, Storage and Services
The Coal Transfer, Storage and Services segment consists of two coal
terminals with capacity to transload approximately 40 million tons of coal
annually. The Cora Terminal is a high-speed, rail-to-barge coal transfer and
storage facility located on the upper Mississippi River near Cora, Illinois. The
Grand Rivers Terminal, located on the Tennessee River near Paducah, Kentucky, is
a modern, high-speed coal handling terminal featuring a direct dump
train-to-barge facility, a bottom dump train-to-storage facility, a barge
unloading facility and a coal blending facility. A majority of the coal loaded
through these terminals is low sulfur western coal. The Partnership believes
demand for this coal should increase due to the provisions of the Clean Air Act
Amendments of 1990 mandating decreased sulfur emissions from power plants. This
low sulfur coal is often blended at the terminals with higher sulfur/higher Btu
Illinois Basin Coal. The Partnership's modern blending facilities and rail
access to low sulfur western coal enable it to offer higher margin services to
its customers. Through the Partnership's Red Lightning Energy Services unit, the
Partnership markets specialized coal services for both the Cora Terminal and the
Grand Rivers Terminal.
Gas Processing and Fractionation
The Gas Processing and Fractionation segment consists of (i) the Partnership's
25% indirect interest in the Mont Belvieu Fractionator and (ii) the Painter Gas
Processing Plant. The Mount Belvieu Fractionator is a full service fractionating
facility with capacity of approximately 200,000 barrels per day. Located in
proximity to major end-
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users of its products, the Mount Belvieu Fractionator has consistent access to
the largest domestic market for NGL products, as well as to deepwater port
loading facilities via the Port of Houston, allowing access to import and export
markets. The Painter Gas Processing Plant includes a natural gas processing
plant, a nitrogen rejection fractionation facility, an NGL terminal and
interconnecting pipelines with truck and rail loading facilities. Most of the
Painter facilities are leased to Amoco under a long term arrangement.
SELLING UNITHOLDERS
Of the 1,645,171 Units that may be offered and sold pursuant to this
Prospectus, 783,171 Units are held as of the date of this Prospectus by First
Union Investors, Inc. ("FUI"), a wholly-owned subsidiary of First Union
Corporation ("First Union") (which may also be deemed to be the beneficial owner
of such Units). Such Units constitute approximately 2.1% of the outstanding
Units as of April 17, 1998. These Units will be offered and sold hereunder by or
for the account of one or more of First Union, FUI and other subsidiaries of
First Union to which the Units may be transferred prior to sale (collectively,
the "First Union Selling Unitholders").
In addition to the 783,171 Units that may be offered and sold pursuant to
this Prospectus, FUI owns as of April 17, 1998 an additional 133,200 Units. As
of the date of this Prospectus, First Union, FUI, and other subsidiaries of
First Union do not beneficially own any other Units (except for Units held from
time to time by banking subsidiaries of First Union in fiduciary capacities in
the ordinary course of business, as to which beneficial ownership is
disclaimed).
FUI acquired the 783,171 Units that may be offered and sold pursuant to
this Prospectus from the General Partner pursuant to a Unit Purchase Agreement
dated February 14, 1997. In connection with such acquisition, FUI obtained
rights to have such Units registered under the Securities Act pursuant to a Unit
Registration Rights Agreement dated February 14, 1997 with the General Partner
and 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 Units. Under the Unit Registration
Rights Agreement and an Indemnity and Contribution Agreement between FUI and the
Partnership entered into pursuant thereto, the Partnership agreed to pay
substantially all of the costs and expenses of the registration and offering and
to indemnify First Union, FUI, First Union's subsidiaries, certain related
parties, and their agents and any persons acting as underwriters in connection
with this offering against certain liabilities, including liabilities under the
Securities Act. See "Plan of Distribution".
First Union is an equity investor in KMI (parent of the General Partner)
and owns 2,646 shares (24.9%) of KMI's outstanding common stock, of which 2,541
shares are nonvoting shares and 105 shares are voting shares (constituting 2% of
the voting shares outstanding).
First Union National Bank of North Carolina (FUNB"), a national bank and
wholly-owned (except for directors' qualifying shares) subsidiary of First
Union, extends credit to, and may from time to time have other banking
relationships with, the Partnership and its affiliates in the ordinary course of
its commercial banking business. In connection with such extensions of credit,
all of the Units held by the General Partner (862,000 Units) have been pledged
to FUNB, as agent for itself and other lenders, to secure indebtedness to FUNB
and the other lenders. FUNB does not have the power prior to default to vote or
dispose of, or direct the vote or disposition of, the pledged securities (and no
such default has been declared as of the date of this Prospectus).
The 862,000 Units held by the General Partner constitute the remainder of
the Units that may be offered and sold pursuant to this Prospectus. Such Units
constitute approximately 2.1% of the outstanding Units as of April 17, 1998.
These Units will be offered and sold hereunder by or for the account of the
General Partner. The General Partner and the First Union Selling Unitholders are
collectively referred to as the "Selling Unitholders". Pursuant to the
Partnership Agreement, the Partnership has agreed to pay substantially all of
the costs and expenses of registration and offering and to indemnify the General
Partner and its agents and any persons acting as underwriters in connection with
this offering against certain liabilities, including liabilities under the
Securities Act. See "Plan of Distribution".
The Selling Unitholders may sell some, all or none of the Units hereunder;
consequently, the number and percentage of the Units to be beneficially owned by
the Selling Unitholders after the offering hereunder cannot be determined.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion is a summary of material tax considerations that
may be relevant to a prospective Unit holder. To the extent set forth herein the
discussion is the opinion of Morrison & Hecker L.L.P. ("Counsel") as to the
material federal income tax consequences of the ownership and disposition of
Units. Counsel's opinion does not include portions of the discussion regarding
factual matters or portions of the discussion which specifically state that it
is unable to opine. There can be no assurance that the IRS will take a similar
view of such tax consequences. Moreover, the Partnership has not and will not
request a ruling from the IRS as to any matter addressed in this discussion.
The following discussion is based upon current provisions of the Code,
existing and proposed regulations thereunder and current administrative rulings
and court decisions, including modifications made by the Taxpayer Relief Act of
1997 (the "1997 Act"), all as in effect on the date hereof. Such discussion is
also based on the assumptions that the operation of the Partnership and its
operating partnerships (collectively, the "Operating Partnerships") will be in
accordance with the relevant partnership agreements. Such discussion is subject
both to the accuracy of such assumptions and the continued applicability of such
legislative, administrative and judicial authorities, all of which authorities
are subject to change, possibly retroactively. Subsequent changes in such
authorities may cause the tax consequences to vary substantially from the
consequences described below, and any such change may be retroactively applied
in a manner that could adversely affect a holder of Units.
The discussion below is directed primarily to a Unit Holder which is a
United States person (as determined for federal income tax purposes). Except as
specifically noted, the discussion does not address all of the federal income
tax consequences that may be relevant (i) to a holder in light of such holder's
particular circumstances, (ii) to a holder that is a partnership, corporation,
trust or estate (and their respective partners, shareholders and beneficiaries),
(iii) to holders subject to special rules, such as certain financial
institutions, tax-exempt entities, foreign corporations, non-resident alien
individuals, regulated investment companies, insurance companies, dealers in
securities, or traders in securities who elect to mark to market, and (iv)
persons holding Units as part of a "straddle," "synthetic security," "hedge" or
"conversion transaction" or other integrated investment. Moreover, the effect of
any applicable state, local or foreign tax laws is not discussed.
The discussion deals only with Units held as "capital assets" within the
meaning of Section 1221 of the Code.
The federal income tax treatment of holders of Units depends in some
instances on determinations of fact and interpretations of complex provisions of
federal income tax laws for which no clear precedent or authority may be
available. ACCORDINGLY, EACH PROSPECTIVE UNIT HOLDER SHOULD CONSULT HIS OWN TAX
ADVISORS WHEN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF UNITS.
Legal Opinions and Advice
The remainder of the discussion under this "Material Federal Income Tax
Considerations" section is the opinion of Counsel as to material federal income
tax consequences of the ownership and disposition of Units.
Counsel has rendered its opinion to the Partnership to the effect that:
(a) the Partnership and the Operating Partnerships are and will
continue to be classified as partnerships for federal income tax purposes
and will not be classified as associations taxable as corporations,
assuming that the factual representations set forth in "-General Features
of Partnership Taxation-Partnership Status" are adhered to by such
partnerships.
(b) Each person who (i) acquires beneficial ownership of Units
pursuant to the Offering and either has been admitted or is pending
admission to the Partnership as an additional limited partner or (ii)
acquired beneficial ownership of Units and whose Units are held by a
nominee (so long as such person has the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of such
Units) will be treated as a partner of the Partnership for federal income
tax purposes.
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The following are material federal income tax issues associated with the
ownership of Units and the operation of the Partnership with respect to
which Counsel is unable to opine:
1. Whether the appraised valuations of assets and allocation of such
amounts (the "Book-Tax Disparity") between and among tangible assets (and
the resulting net Curative Allocations) will be sustained if challenged by
the IRS.
2. Whether certain procedures utilized by the Partnership in
administering the Section 754 election and the resulting Section 743(b)
adjustments to any Unit holder's basis in their Units will be sustained if
challenged by the IRS. See "-Tax Treatment of Operations-Section 754
Election."
3. Whether the Partnership's monthly convention for allocations of
Partnership income, gain, loss, deduction or credit to Partners will be
respected. See "Disposition of Units--Allocations Between Transferors and
Transferees."
A more detailed discussion of these items is contained in the applicable
sections below.
The opinion of Counsel is based on certain representations of the
Partnership and the General Partner with respect to the nature of the income of
which is relevant to a determination of whether its income qualifies for the
Natural Resource Exception pursuant to Section 7704 of the Code. See "-General
Features of Partnership Taxation-Partnership Status." The opinion of Counsel is
based upon existing provisions of the Code and the Regulations, existing
administrative rulings and procedures of the IRS and existing court decisions.
There can be no assurances that any of such authorities will not be changed in
the future, which change could be retroactively applied. Such opinions represent
only Counsel's best legal judgment as to the particular issues and are not
binding on the IRS or the courts.
General Features of Partnership Taxation
Partnership Status. The applicability of the federal income tax
consequences described herein depends on the treatment of the Partnership and
the Operating Partnerships as partnerships for federal income tax purposes and
not as associations taxable as corporations. For federal income tax purposes, a
partnership is not a taxable entity, but rather a conduit through which all
items of partnership income, gain, loss, deduction and credit are passed through
to its partners. Thus, income and deductions resulting from partnership
operations are allocated to the partners and are taken into account by the
partners on their individual federal income tax returns. In addition, a
distribution of money from a partnership to a partner generally is not taxable
to the partner, unless the amount of the distribution exceeds the partner's tax
basis in the partner's interest in the partnership. If the Partnership or any of
the Operating Partnerships were classified for federal income tax purposes as an
association taxable as a corporation, the entity would be a separate taxable
entity. In such a case, the entity, rather than its members, would be taxed on
the income and gains and would be entitled to claim the losses and deduction
resulting from its operations. A distribution from the entity to a member would
be taxable to the member in the same manner as a distribution from a corporation
to a shareholder (i.e., as ordinary income to the extent of the current and
accumulated earnings and profits of the entity, then as a nontaxable reduction
of basis to the extent of the member's tax basis in the member's interest in the
entity and finally as gain from the sale or exchange of the member's interest in
the entity). Any such characterization of either the Partnership or one of the
Operating Partnerships as an association taxable as a corporation would likely
result in a material reduction of the anticipated cash flow and after-tax return
to the Unit holders.
Pursuant to Final Treasury Regulations 301.7701-1, 301.7701-2 and
301.7701-3, effective January 1, 1997 (the "Check-the-Box Regulations"), an
entity in existence on January 1, 1997, will generally retain its current
classification for federal income tax purposes. As of January 1, 1997, the
Partnership was classified and taxed as a partnership. Pursuant to the
Check-the-Box Regulations this prior classification will be respected for all
periods prior to January 1, 1997, if (1) the entity had a reasonable basis for
the claimed classification; (2) the entity recognized federal tax consequences
of any change in classification within five years prior to January 1, 1997; and
(3) the entity was not notified prior to May 8, 1996, that the entity
classification was under examination. Prior to the finalization of the
Check-the-Box Regulations, the classification of an entity as a partnership was
determined under a four factor test developed by a number of legal authorities.
Based on this four factor test, the Partnership had a reasonable basis for its
classification as a partnership. Moreover, the Partnership has not changed its
classification and it has not received any notification that its classification
was under examination.
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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 (through the Liquids Pipelines)
NGLs, CO2 and other hydrocarbons, dividends from the corporation that owns the
Mont Belvieu Fractionator and interest. Based upon that representation, Counsel
is of the opinion that the Partnership's gross income derived from these sources
will constitute "qualifying income."
If (a) a publicly traded partnership fails to meet the National Resource
Exception for any taxable year, (b) such failure is inadvertent, as determined
by the IRS, and (c) the partnership takes steps within a reasonable time to once
again meet the gross income test and agrees to make such adjustments and pay
such amounts (including, possibly, the amount of tax liability that would be
imposed on the partnership if it were treated as a corporation during the period
of inadvertent failure) as are required by the IRS, such failure will not cause
the partnership to be taxed as a corporation. The General Partner, as general
partner of the Partnership, will use its best efforts to assure that the
Partnership will continue to meet the gross income test for each taxable year
and the Partnership anticipates that it will meet the test. If the Partnership
fails to meet the gross income test with respect to any taxable year, the
General Partner, as general partner of the Partnership, will use its best
efforts to assure that the Partnership will qualify under the inadvertent
failure exception discussed above.
If the Partnership fails to meet the Natural Resource Exception (other
than a failure determined by the IRS to be inadvertent that is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly-formed
corporation (on the first day of the year in which it fails to meet the Natural
Resource Exception) in return for stock in such corporation, and then
distributed such stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to the holders
of Units and the Partnership, so long as the Partnership, at such time, does not
have liabilities in excess of the basis of its assets. Thereafter, the
Partnership would be treated as a corporation.
If the Partnership or any Operating Partnership were treated as an
association or otherwise taxable as a corporation in any taxable year, as a
result of a failure to meet the Natural Resource Exception or otherwise, its
items of income, gain, loss, deduction and credit would be reflected only on its
tax return rather than being passed through to the holders of Units, and its net
income would be taxed at the entity level at corporate rates. In addition, any
distribution made to a holder of Units would be treated as either taxable
dividend income (to the extent of the Partnership's current or accumulated
earnings and profits), or, in the absence of earnings and profits as a
nontaxable return of capital (to the extent of the holder's basis in the Units)
or taxable capital gain (after the holder's basis in the Units is reduced to
zero.) Accordingly, treatment of either the Partnership or any of the Operating
Partnerships as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax economic return on
an investment in the Partnership.
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity-level taxation for federal income tax purposes, certain provisions of
the Partnership Agreement relating to the General Partner's incentive
distributions will be subject to change.
Under current law, the Partnership and the Operating Partnerships will be
classified and taxed as partnerships for federal income tax purposes and will
not be classified as associations taxable as corporations. This conclusion is
based upon certain factual representations and covenants made by the General
Partner including:
(a) the Partnership and the Operating Partnerships will be operated
strictly in accordance with (i) all applicable partnership statutes, and
(ii) the Partnership Agreements, and (iii) the description thereof in this
Prospectus;
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(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
IRS imposed certain procedural requirements for years prior to 1997 to be met
before it would issue a ruling to the effect that a limited partnership with a
sole corporate general partner would be classified as a partnership for federal
income tax purposes. These procedural requirements were not rules of substantive
law to be applied on audit, but served more as a "safe-harbor" for purposes of
obtaining a ruling. The General Partner believes that the Partnership and the
Operating Partnerships did not satisfy all such procedural requirements. The
conclusion described above as to the partnership status of the Partnership for
years before January 1, 1997 does not depend upon the ability of the Partnership
to meet the criteria set forth in such procedural requirements.
The following discussion assumes that the Partnership and the Operating
Partnerships are, and will continue to be, treated as partnerships for federal
income tax purposes. If either assumption proves incorrect, most, if not all, of
the tax consequences described herein would not be applicable to Unit holders.
In particular, if the Partnership is not a partnership, a Unit holder may be
treated for federal income tax purposes (i) as recognizing ordinary income, as
the result of any payments to him in respect of partnership distributions and
(ii) as not being entitled to allocations of partnership income, gain, loss and
deduction.
Limited Partner Status. Holders of Units who have been admitted as limited
partners will be treated as partners of the Partnership for federal income tax
purposes. Moreover, the IRS has ruled that assignees of partnership interests
who have not been admitted to a partnership as partners, but who have the
capacity to exercise substantial dominion and control over the assigned
partnership interests, will be treated as partners for federal income tax
purposes. On the basis of this ruling, except as otherwise described herein, (a)
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners and (b) holders of Units whose Units are
held in street name or by a nominee and who have the right to direct the nominee
in the exercise of all substantive rights attendant to the ownership of their
Units will be treated as partners of the Partnership for federal income tax
purposes. As this ruling does not extend, on its facts, to assignees of Units
who are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver Transfer Applications, Counsel cannot opine as to the status of these
persons as partners of the Partnership. Income, gain, deductions, losses or
credits would not appear to be reportable by such a holder of Units, and any
cash distributions received by such holders
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of Units would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in the Partnership for federal income tax purposes. A purchaser or other
transferee of Units who does not execute and deliver a Transfer Application may
not receive certain federal income tax information or reports furnished to
record holders of Units, unless the Units are held in a nominee or street name
account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose the status as a partner
with respect to such Units for federal income tax purposes. See "-Disposition of
Units-Treatment of Short Sales."
Tax Consequences of Unit Ownership
Basis of Units. A Unitholder's initial tax basis for a Unit will be the
amount paid for the Unit plus his share, if any, of nonrecourse liabilities of
the Partnership. A partner also includes in the tax basis for such partnership
interest any capital contributions that such partner actually makes to the
Partnership and such partner's allocable share of all Partnership income and
gains, less the amount of all distributions that such partner receives from the
Partnership and such partner's allocable share of all Partnership losses. For
purposes of these rules, if a partner's share of Partnership liabilities is
reduced for any reason, the partner is deemed to have received a cash
distribution equal to the amount of such reduction. The partner will recognize
gain as a result of this deemed cash distribution if, and to the extent that,
the deemed cash distribution exceeds the partner's adjusted tax basis for his
partnership interest.
Flow-through of Taxable Income. No federal income tax will be paid by the
Partnership. Instead, each holder of Units will be required to report on such
holder's income tax return such holder's allocable share of the income, gains,
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losses and deductions without regard to whether corresponding cash distributions
are received by such Unitholders. Consequently, a holder of Units may be
allocated income from the Partnership even though the holder has not received a
cash distribution in respect of such income.
Treatment of Partnership Distributions. Under Section 731 of the Code, a
partner will recognize gain as a result of a distribution from a partnership if
the partnership distributes an amount of money to the partner which exceeds such
partner's adjusted tax basis in the partnership interest prior to the
distribution. The amount of gain is limited to this excess. Cash distributions
in excess of such Unit holder's basis generally will be considered to be gain
from the sale or exchange of the Units, taxable in accordance with the rules
described under "-Disposition of Units."
A decrease in a Unit holder's percentage interest in the Partnership,
because of the issuance by the Partnership of additional Units, or otherwise,
will decrease a Unit holder's share of nonrecourse liabilities of the
Partnership, if any, and thus will result in a corresponding deemed distribution
of cash. The Partnership does not currently have, and the General Partner does
not anticipate that it will have, any material amounts of nonrecourse
liabilities.
A non-pro rata distribution of money or property may result in ordinary
income to a holder of Units, regardless of such holder's tax basis in Units, if
the distribution reduces such holder's share of the Partnership's "Section 751
Assets." "Section 751 Assets" are defined by the Code to include assets giving
rise to depreciation recapture or other "unrealized receivables" or
"substantially appreciated inventory". For this purpose, inventory is
substantially appreciated if its value exceeds 120% of its adjusted basis. In
addition to depreciation recapture, "unrealized receivables" include rights to
payment for goods (other than capital assets) or services to the extent not
previously includable in income under a partnership's method of accounting. To
the extent that such a reduction in a Unit holder's share of Section 751 Assets
occurs, the Partnership will be deemed to have distributed a proportionate share
of the Section 751 Assets to the Unit holders followed by a deemed exchange of
such assets with the Partnership in return for the non-pro rata portion of the
actual distribution made to such holder. This deemed exchange will generally
result in the realization of ordinary income under Section 751(b) by the
Unitholder. Such income will equal the excess of (1) the non-pro rata portion of
such distribution over (2) the Unitholder's tax basis in such holder's share of
Section 751 Assets deemed relinquished in the exchange.
Limitations on Deductibility of Losses. Generally, a Unitholder may deduct
his share of losses incurred by the Partnership only to the extent of his tax
basis in the Units which he holds. A further "at risk" limitation may operate to
limit deductibility of losses in the case of an individual holder of Units or a
corporate holder of Units (if more than 50% in the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations) if the "at risk" amount is less than the holder's basis in the
Units. A holder of Units must recapture losses deducted in previous years to the
extent that the Partnership distributions cause such Unit holder's at risk
amount to be less than zero at the end of any taxable year. Losses disallowed to
a holder of Units or recaptured as a result of theses limitations will carry
forward and will be allowable to the extent that the Unit holder's basis or at
risk amount (whichever is the applicable limiting factor) is increased.
In general, a holder of Units will be "at risk" to the extent of the
purchase price of the holder's Units but this may be less than the Unit holder's
basis for the Units in an amount equal to the Unit holder's share of nonrecourse
liabilities, if any, of the Partnership. A Unit holder's at risk amount will
increase or decrease as the basis of such Units held increases or decreases
(exclusive of any effect on basis attributable to changes in the Unit holder's
share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely-held corporations and personal service corporations can
only deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) that are not in excess of the
taxpayer's income from such passive activities or investments. The passive loss
limitations are not applicable to a widely held corporation. The passive loss
limitations are to be applied separately with respect to each publicly traded
partnership. Consequently, the losses generated by the Partnership, if any, will
only be available to offset future income generated by the Partnership and will
not be available to offset income from other passive activities or investments
(including other publicly traded partnerships) or salary or active business
income. Passive losses that are not deductible, because they exceed the Unit
holder's allocable share of income generated by the Partnership would be
deductible in the case of a fully taxable disposition of such Units to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
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The IRS has announced that Treasury Regulations will be issued that
characterize net passive income from a publicly traded partnership as investment
income for purposes of the limitations on the deductibility of investment
interest.
Allocation of Income, Gain, Loss and Deduction. In general, the
Partnership's items of income, gain, loss and deduction will be allocated, for
book and tax purposes, among the General Partner, in its capacity as general
partner, and the holders of Units in the same proportion that Available Cash is
distributed (as between the General Partner and the holders of Units) in respect
of such taxable year. If distributions of Available Cash are not made in respect
of a particular taxable year, such items will be allocated among the partners in
accordance with their respective percentage interests. If the Partnership has a
net loss, items of income, gain, loss and deduction will be allocated, first, to
the General Partner and the Unit holders to the extent of their positive book
capital accounts, and second, to the General Partner. On a liquidating sale of
assets, the Partnership Agreement provides separate gain and loss allocations,
designed to the extent possible, (i) to eliminate a deficit in any partner's
book capital account and (ii) to produce book capital accounts which, when
followed on liquidation, will result in each holder of Units recovering
Unrecovered Capital, and a distributive share of any additional value.
Under Section 704(b), a partnership's allocation of any item of income,
gain, loss or deduction to a partner will not be given effect for federal income
tax purposes, unless it has "substantial economic effect," or is otherwise
allocated in accordance with the partner's interest in the partnership. If the
allocation does not satisfy this standard, it will be reallocated among the
partners on the basis of their respective interests in the partnership, taking
into account all facts and circumstances.
Regulations under Section 704(b) delineate the circumstances under which
the IRS will view partnership allocations as having an "economic effect" that is
"substantial." Generally, for an allocation to have "economic effect" under the
Regulations (a) the allocation must be reflected as an appropriate increase or
decrease in a capital account maintained for each partner in accordance with
specific rules set forth in the Regulations, (b) liquidating distributions
(including complete redemptions of a partner's interest in the partnership)
must, throughout the term of the partnership, be made in accordance with the
partner's positive capital account balances and (c) any partner with a deficit
balance in such partner's capital account following a liquidating distribution
must be unconditionally obligated (either by contract or state law) to restore
the amount of such deficit to the partnership within a limited period of time.
If the first two of these requirements are met, but the partner to whom an
allocation of loss or deduction is made is not obligated to restore the full
amount of any deficit balance in such partner's capital account upon liquidation
of the partnership, an allocation of loss or deduction may still have economic
effect, if (1) the agreement contains a "qualified income offset" provision, and
(2) the allocation either does not (i) cause a deficit balance in a partner's
capital account (reduced by certain anticipated adjustments, allocations and
distributions specified in the Regulations) as of the end of the partnership
taxable year to which the allocation relates or (ii) increase any such deficit
balance in this specially adjusted capital account by more than the partner's
unpaid obligation to contribute additional capital to the partnership. A
qualified income offset provision requires that in the event of any unexpected
distribution (or specified adjustments or allocations) there must be an
allocation of income or gain to the distributees that eliminates the resulting
capital account deficit as quickly as possible. (This rule is referred to herein
as the "Alternate Economic Effect Rule.")
The Regulations require that capital accounts be (1) credited with the
fair market value of property contributed to the partnership (net of liabilities
encumbering the contributed property that the partnership is considered to
assume or take subject to pursuant to Section 752) ("Contributed Property"), (2)
credited with the amount of cash contributed to the partnership and (3) adjusted
by items of depreciation, amortization, gain and loss attributable to
partnership properties that have been computed by taking into account the book
value (rather than tax basis) of such properties. (As a result, such capital
accounts are often referred to as "book" capital accounts.) A partner's capital
account must also be reduced by (i) the amount of money distributed to such
partner by the partnership, (ii) the fair market value of property distributed
to such partner by the partnership (net of liabilities encumbering the
distributed property that such holder is considered to assume or take subject to
pursuant to Section 752) and (iii) a distributive share of certain partnership
expenses that are neither deductible nor amortizable.
The "Book-Tax Disparities" created by crediting capital accounts with the
value of Contributed Properties are eliminated through tax allocations that
cause the partner whose book capital account reflects unrealized gain or loss to
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bear the corresponding tax benefit or burden associated with the recognition of
such unrealized gain or loss in accordance with the principles of Section
704(c). The allocations of these tax items that differ in amount from their
correlative book items do not have economic effect, because they are not
reflected in the partners' capital accounts. However, the allocations of such
items will be deemed to be in accordance with the partners' interests in the
partnership if they are made in accordance with the Section 704(c) Regulations.
In addition, the Regulations permit the partners' capital accounts to be
increased or decreased to reflect the revaluation of partnership property (at
fair market value) if the adjustments are made for a substantial non-tax
business purpose in connection with a contribution or distribution of money or
other property in consideration for the acquisition or relinquishment of an
interest in the partnership. These adjustments may also create Book-Tax
Disparities, which the Regulations require to be eliminated through tax
allocations in accordance with Section 704(c) principles.
An allocation must not only have economic effect to be respected, but that
economic effect must also be "substantial." The economic effect of an allocation
is substantial if there is a reasonable possibility that the allocation will
affect substantially the dollar amounts to be received by the partners from the
partnership, independent of tax consequences. As a general matter, however, the
economic effect of an allocation is not substantial if, at the time the
allocation is adopted, the after-tax economic consequences of at least one
partner may, in present value terms, be enhanced by such allocation, but there
is a strong likelihood that the after-tax economic consequences of no other
partner will, in present value terms, be substantially diminished by such
allocation.
The Partnership Agreement provides that a capital account be maintained
for each partner, that the capital accounts generally be maintained in
accordance with the applicable tax accounting principles set forth in the
Regulations, and that all allocations to a partner be reflected by an
appropriate increase or decrease in the partner's capital account. In addition,
distributions upon liquidation of the Partnership are to be made in accordance
with positive capital account balances. The limited partners are not required to
contribute capital to the Partnership to restore deficit balances in their
capital accounts upon liquidation of the Partnership. However, the Partnership
Agreement contains qualified income offset and minimum gain chargeback
provisions, which under the Section 704(b) Regulations comply with the Alternate
Economic Effect Rule and will obviate the requirement to restore negative
capital accounts. The Partnership Agreement provides that any losses or
deductions otherwise allocable to a holder of Units that have the effect of
creating a deficit balance in such holder's capital account (as specially
adjusted) will be reallocated to the General Partner.
Except as discussed below, items of income, gain, loss and deduction
allocated to the holders of Units, in the aggregate, will be allocated among the
holders of Units in accordance with the number of Units held by such Unit
holder. Special tax (but not book) allocations will be made to reflect Book-Tax
Disparities with respect to Contributed Properties. The Partnership Agreement
also provides for certain special allocations of income and gain as required by
the qualified income offset and minimum gain chargeback provisions. In addition,
the General Partner is empowered by the Partnership Agreement to allocate
various Partnership items other than in accordance with the percentage interests
of the General Partner and the holders of Units when, in its judgment, such
special allocations are necessary to comply with applicable provisions of the
Code and the Regulations and to achieve uniformity of Units.
See "-Uniformity of Units."
With respect to Contributed Property, the Partnership Agreement provides
that, for federal income tax purposes, items of income, gain, loss and deduction
shall first be allocated among the partners in a manner consistent with Section
704(c). In addition, the Partnership Agreement provides that items of income,
gain, loss and deduction attributable to any properties when, upon the
subsequent issuance of any Units, the Partnership has adjusted the book value of
such properties to reflect unrealized appreciation or depreciation in value from
the later of the Partnership's acquisition date for such properties or the
latest date of a prior issuance of Units ("Adjusted Property") shall be
allocated for federal income tax purposes in accordance with Section 704(c)
principles. Thus, deductions for the depreciation of Contributed Property and
Adjusted Property will be specially allocated to the non-contributing Unit
holders and gain or loss from the disposition of such property attributable to
the Book-Tax Disparity (the "Section 704(c) Gain") will be allocated to the
contributing Unit holders so that the non-contributing Unit holders will be
allowed, to the extent possible, cost recovery and depreciation deductions and
will be allocated gain or loss from the sale of assets generally as if they had
purchased a direct interest in the Partnership's assets.
The Partnership Agreement also requires gain from the sale of properties
that is characterized as recapture income to be allocated among the holders of
Units and the General Partner (or its successors) in the same manner in which
such partners were allocated the deductions giving rise to such recapture
income. Final Treasury Regulations
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under Section 1245 provide that depreciation recapture will be specially
allocated based on the allocation of the deductions giving rise to such
recapture income, as provided for in the Partnership Agreement.
Items of gross income and deduction will be allocated in a manner intended
to eliminate Book-Tax Disparities, if any, that are not eliminated by Section
704(c) allocations as a result of the application of the Ceiling Rule with
respect to Contributed Property or Adjusted Property. Such Curative Allocations
of gross income and deductions to preserve the uniformity of the income tax
characteristics of Units will not have economic effect, because they will not be
reflected in the capital accounts of the holders of Units. However, such
allocations will eliminate Book-Tax Disparities and are thus consistent with the
Regulations under Section 704(c). With the exception of certain conventions
adopted by the Partnership with respect to administration of the Section 754
election and the attendant Section 743(b) basis adjustments discussed at "-Tax
Treatment of Operations-Section 754 Election"; and allocation of the effect of
unamortizable Section 197 Book-Up amounts and common inside basis, allocations
under the Partnership Agreement will be given effect for federal income tax
purposes in determining a holder's distributive share of an item of income,
gain, loss or deduction. There are, however, uncertainties in the Regulations
relating to allocations of partnership income, and Unit holders should be aware
that some of the allocations in the Partnership Agreement may be successfully
challenged by the IRS. 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
171/2 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 Partnership allocated the capital account value among the
Partnership's assets after the acquisition of Santa Fe based upon their relative
fair market values established by an independent appraisal. Any amount in excess
of the fair market values of specific tangible assets may constitute
non-amortizable intangible assets (including goodwill).
The tax basis of goodwill and most other intangible assets used in a trade
or business acquired after August 10, 1993 (or prior to that time in certain
events), may be amortized over 15 years. The Partnership will not amortize the
goodwill, if any, created as a result of the acquisition of Santa Fe for tax
capital account or income tax purposes because of the Step-in-the Shoes and
Anti-Churning rules. However, see "-Section 754 Election" with respect to the
amortization of Section 743(b) adjustments available to purchase of Units. The
IRS may challenge either the fair market values or the useful lives assigned to
such assets. If any such challenge or characterization were successful, the
deductions allocated to a holder of Units in respect of such assets would be
reduced and a Unitholder's share of taxable income from the Partnership would be
increased accordingly. Any such increase could be material.
If the Partnership disposes of depreciable property by sale, foreclosure
or otherwise, all or a portion of any gain (determined by reference to the
amount of depreciation previously deducted and the nature of the property) may
be subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner that has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions upon a sale of such partner's interest in the
Partnership. See "-Allocation of Partnership Income, Gain, Loss and Deduction"
and "-Disposition of Common Units-Recognition of Gain or Loss."
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Costs incurred in organizing a partnership may be amortized over any
period selected by the partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units, including underwriting commissions
and discounts, must be capitalized and cannot be deducted currently, ratably or
upon termination of the Partnership. There are uncertainties regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses which may not be amortized.
Section 754 Election. The Partnership has previously made a Section 754
election and will make another Section 754 election for protective purposes.
This election is irrevocable without the consent of the IRS. The election will
generally permit a purchaser of Units to adjust such purchaser's share of the
basis in the Partnership's properties ("Common Basis") pursuant to Section
743(b) to reflect the purchase price paid for such Units. In the case of Units
purchased in the market, the Section 743(b) adjustment acts in concert with
Section 704(c) allocations (and Curative Allocations, if respected) in providing
the purchaser of such Units with the equivalent of a fair market value Common
Basis. See " -Allocation of Partnership Income, Gain, Loss and Deduction." The
Section 743(b) adjustment is attributed solely to a purchaser of Units and is
not added to the bases of the Partnership's assets associated with Units held by
other Unit holders. (For purposes of this discussion, a Unit holder's inside
basis in the Partnership's assets will be considered to have two components: (1)
the Unit holder's share of the Partnership's actual basis in such assets
("Common Basis") and (2) the Unit holder's Section 743(b) adjustment allocated
to each such asset.)
A Section 754 election is advantageous if the transferee's basis in Units
is higher than the Partnership's aggregate Common Basis allocable to that
portion of its assets represented by such Units immediately prior to the
transfer. In such case, pursuant to the election, the transferee would take a
new and higher basis in the transferee's share of the Partnership's assets for
purposes of calculating, among other items, depreciation deductions and the
applicable share of any gain or loss on a sale of the Partnership's assets.
Conversely, a Section 754 election is disadvantageous if the transferee's basis
in such Units is lower than the Partnership's aggregate Common Basis allocable
to that portion of its assets represented by such Units immediately prior to the
transfer. Thus, the amount that a holder of Units will be able to obtain upon
the sale of Units may be affected either favorably or adversely by the election.
A constructive termination of the Partnership will also cause a Section 708
termination of the Operating Partnerships. Such a termination could also result
in penalties or loss of basis adjustments under Section 754, if the General
Partner were unable to determine that the termination had occurred and,
therefore, did not timely file a tax return or make appropriate Section 754
elections for the "new" Partnership.
Proposed Treasury Regulation Section 1.743-1(j)(4)(B) generally requires
the Section 743(b) adjustment attributable to recovery property to be
depreciated as if the total amount of such adjustment were attributable to
newly-acquired recovery property placed in service when the purchase of a Unit
occurs. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
rather than cost recovery deductions under Section 168 is generally required to
be depreciated using either the straight-line method or the 150% declining
balance method. Although Counsel is unable to opine as to the validity of such
an approach, the Partnership intends to depreciate the portion of a Section
743(b) adjustment attributable to unrealized appreciation in the value of the
Partnership property (to the extent of any unamortized Book-Tax Disparity) using
a rate of depreciation derived from the depreciation method and useful life
applied to the Common Basis of such property, despite its inconsistency with
Proposed Treasury Regulation Section 1.743(j)(4)(B) and Treasury Regulation
Section 1.167(c)-1(a)(6). If an asset is not subject to depreciation or
amortization, no Section 743(b) adjustment would be available to that extent. If
the General Partner determines that such position cannot reasonably be taken, it
may adopt a depreciation convention under which all purchasers acquiring Units
in the same month would receive depreciation, whether attributable to Common
Basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. Such an aggregate
approach, or any other method required as a result of an IRS examination, may
result in lower annual depreciation deductions than would otherwise be allowable
to certain holders of Units.
See "-Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060. Based on these principles, the IRS may seek
to reallocate some or all of any Section 743(b) adjustment not so allocated by
the Partnership to intangible assets which have a longer 15 year amortization
period and which are not eligible for accelerated depreciation methods generally
applicable to other assets of the Partnership.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of the Partnership assets and other matters. There is no assurance that the
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determinations made by the General Partner will not be successfully challenged
by the IRS and that the deductions attributable to them will not be disallowed
or reduced.
Valuation of Property of the Partnership. The federal income tax
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the General Partner of the relative fair market values,
and determinations of the tax basis, of the assets of the Partnership. Although
the General Partner may from time to time consult with professional appraisers
with respect to valuation matters, many of the relative fair market value
estimates will be made solely by the General Partner. These estimates are
subject to challenge and will not be binding on the IRS or the courts. In the
event the determinations of fair market value are subsequently found to be
incorrect, the character and amount of items of income, gain, loss, deductions
or credits previously reported by Unit holders might change, and Unit holders
might have additional tax liability for such prior periods.
Mont Belvieu Fractionator. OLP-A owns all of the capital stock of a
corporation that owns an indirect interest in the Mont Belvieu Fractionator. As
a corporation, it will be subject to entity-level taxation for federal and state
income tax purposes. The Partnership, as its shareholder, will include in its
income any amounts distributed to it by such corporation to the extent of such
corporation's current and accumulated earnings and profits. The General Partner
estimates that a portion of the cash distributions to the Partnership by such
corporation will be treated as taxable dividends. It is anticipated, however,
that such corporation will be liquidated in 1998.
Alternative Minimum Tax. Each holder of Units will be required to take
into account such holder's distributive share of any items of the Partnership's
income, gain or loss for purposes of the alternative minimum tax
("AMT")-currently a tax of 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income of individuals. Alternative minimum taxable
income is calculated using the 150% declining balance method of depreciation
with respect to personal property and 40-year straight-line depreciation for
real property. These depreciation methods are not as favorable as the
alternative straight line and accelerated methods provided for under Section 168
which the Partnership will use in computing its income for regular federal
income tax purposes. Accordingly, a Unit holder's AMT taxable income derived
from the Partnership may be higher than such holder's share of the Partnership's
net income. Prospective holders of Units should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
Disposition of Units
Recognition of Gain or Loss. A Unit holder will recognize gain or loss on
a sale of Units equal to the difference between the amount realized and a
holder's tax basis for the Units sold. A holder's amount realized will be
measured by the sum of the cash received or the fair market value of other
property received, plus such holder's share of the Partnership's nonrecourse
liabilities. Because the amount realized includes a Unit holder's share of the
Partnership's nonrecourse liabilities, the gain recognized on the sale of Units
could result in a tax liability in excess of any cash received from such sale.
In general, the Partnership's items of income, gain, loss and deduction will be
allocated, for book and tax purposes, among the General Partner, in its capacity
as general partner, and the holders of Units in the same proportion that
Available Cash is distributed (as between the General Partner and the holders of
Units) in respect of such taxable year. If distributions of Available Cash are
not made in respect of a particular taxable year, such items will be allocated
among the partners in accordance with their respective percentage interests.
Moreover, if a Unit holder has received distributions from the Partnership which
exceed the cumulative net taxable income allocated to him, his basis will
decrease to an amount less than his original purchase price for the Units. In
effect, this amount would increase the gain recognized on sale of the Unit(s).
Under such circumstances, a gain could result even if the Unit(s) are sold at a
price less than their original cost.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of such aggregate tax basis must
be allocated to the interests sold on the basis of some equitable apportionment
method. The ruling is unclear as to how the holding period is affected by this
aggregation concept. If this ruling is applicable to the holders of Units, the
aggregation of tax bases of a holder of Units effectively prohibits such holder
from choosing among Units with varying amounts of unrealized gain or loss as
would be possible in a stock transaction. Thus, the ruling may result in an
acceleration of gain or deferral of loss on a sale of a portion of a
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holder's Units. It is not clear whether the ruling applies to publicly traded
partnerships, such as the Partnership, the interests in which are evidenced by
separate Units and, accordingly, Counsel is unable to opine as to the effect
such ruling will have on a holder of Units. A holder of Units considering the
purchase of additional Units or a sale of Units purchased at differing prices
should consult a tax advisor as to the possible consequences of such ruling.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"-Tax Treatment of Operations-Section 754 Election") attributable to an
Amortizable Section 197 Intangible after a sale of Units, a holder of Units
could realize more gain from the sale of its Units than if such convention had
been respected. In that case, the holder of Units may have been entitled to
additional deductions against income in prior years, but may be unable to claim
them, with the result of greater overall taxable income than appropriate.
Counsel is unable to opine as to the validity of the convention because of the
lack of specific regulatory authority for its use.
Treatment of Short Sales and Deemed Sales Under the 1997 Act, a taxpayer
is treated as having sold an "appreciated" partnership interest (one in which
gain would be recognized if such interest were sold), if such taxpayer or
related persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the appreciated
financial position (including selling "short against the box" transactions).
Holders of Units should consult with their tax advisers in the event they are
considering entering into a short sale transaction or any other risk arbitrage
transaction involving Units.
A holder whose Units are loaned to a "short seller" to cover a short sale
of Units will be considered as having transferred beneficial ownership of those
Units and will, thus, no longer be a partner with respect to those Units during
the period of the loan. As a result, during this period, any the Partnership
income, gain, deductions, losses or credits with respect to those Units would
appear not to be reportable by the holders thereof, any cash distributions
received by such holders with respect to those Units would be fully taxable and
all of such distributions would appear to be treated as ordinary income. The IRS
may also contend that a loan of Units to a "short seller" constitutes a taxable
exchange. If this contention were successfully made, a lending holder of Units
may be required to recognize gain or loss. Holders of Units desiring to assure
their status as partners should modify their brokerage account agreements, if
any, to prohibit their brokers from borrowing their Units.
Character of Gain or Loss. Generally, gain or loss recognized by a Unit
holder (other than a "dealer" in Units) on the sale or exchange of a Unit will
be taxable as capital gain or loss. For transactions after July 29, 1997, the
1997 Act lengthens the holding period required for long-term capital gain
treatment to 18 months in order to qualify a gain for an effective maximum tax
rate of 20%. The 1997 Act also creates a mid-term capital gain concept for
assets held for more than 12 months, but not more than 18 months, for which the
maximum tax rate is 28%. Capital assets sold at a profit within 12 months of
purchase would result in short term capital gains taxed at ordinary income tax
rates. Any gain or loss, however, will be separately computed and taxed as
ordinary income or loss under Section 751 to the extent attributable to assets
giving rise to depreciation recapture or other "unrealized receivables" or to
"inventory" owned by the Partnership. The 1997 Act provides for a maximum 25%
tax rate for depreciation recapture attributable to "unrecaptured Section 1250
gain". Section 1250 generally applies to depreciation recognized in excess of
straight line depreciation on real property (other than Section 1245 property)
which is of a character subject to depreciation. The term "unrealized
receivables" also includes potential recapture items other than depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory and
depreciation recapture may exceed net taxable gain realized upon the sale of a
Unit and may be recognized even if there is a net taxable loss realized on the
sale of a Unit. Any loss recognized on the sale of Units will generally be a
capital loss. Thus, a holder of Units may recognize both ordinary income and a
capital loss upon a disposition of Units. Net capital loss may offset no more
than $3,000 of ordinary income in the case of individuals and may only be used
to offset capital gain in the case of a corporation.
Allocations between Transferors and Transferees. In general, the
Partnership's taxable income and losses will be determined annually and will be
prorated on a monthly basis and subsequently apportioned among the holders in
proportion to the number of Units owned by them as of the opening of the first
business day of the month to which the income and losses relate even though Unit
holders may dispose of their Units during the month in question. Gain or loss
realized on a sale or other disposition of Partnership assets other than in the
ordinary course of business will be allocated among the Unit holders of record
as of the opening of the NYSE on the first business day of the month in which
such gain or loss is recognized. As a result of this monthly allocation, a
holder of Units transferring Units in the open market may be allocated income,
gain, loss, deduction, and credit accrued after the transfer.
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The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between a
transferor and a transferee of Units. If a monthly convention is not allowed by
the Treasury Regulation (or only applies to transfers of less than all of the
holder's Units), taxable income or losses of the Partnership might be
reallocated among the holders of Units. The General Partner is authorized to
review the Partnership's method of allocation between transferors and
transferees (as well as among partners whose interests otherwise vary during a
taxable period) to conform to a method permitted by future Treasury Regulations.
A holder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a distribution with respect to such
quarter will be allocated items of Partnership income and gain attributable to
such quarter for the months during which such Units were owned but will not be
entitled to receive such cash distribution.
Notification Requirements. A Unitholder who sells or exchanges Units is
required to notify the Partnership in writing of such sale or exchange within 30
days of the sale or exchange and in any event by no later than January 15 of the
year following the calendar year in which the sale or exchange occurred. The
Partnership is required to notify the IRS of such transaction and to furnish
certain information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker.
Additionally, a transferor and a transferee of a Unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, which set forth the amount
of the consideration received for such Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination. The Partnership and the Operating Partnerships
will be considered to have been terminated if there is a sale or exchange of 50%
or more of the total interests in partnership capital and profits within a
12-month period. A constructive termination results in the closing of a
partnership's taxable year for all partners and the "old" Partnership (before
termination) is deemed to have contributed its assets to the "new" Partnership
and distributed interests in the "new" Partnership to the holders of Units. The
"new" Partnership is then treated as a new partnership for tax purposes. A
constructive termination of the Partnership will also cause a Section 708
termination of the Operating Partnerships. Such a termination could also result
in penalties or loss of basis adjustments under Section 754, if the Partnership
were unable to determine that the termination had occurred and, therefore, did
not timely file a tax return and make the appropriate Section 754 elections for
the "new" Partnership.
In the case of a holder of Units reporting on a fiscal year other than a
calendar year, the closing of a tax year of the Partnership may result in more
than 12 months' taxable income or loss of the Partnership being includable in
its taxable income for the year of termination. New tax elections required to be
made by the Partnership, including a new election under Section 754, must be
made subsequent to the constructive termination. A constructive termination
would also result in a deferral of the Partnership deductions for depreciation
and amortization. In addition, a termination might either accelerate the
application of or subject the Partnership to any tax legislation enacted with
effective dates after the date of the termination.
Entity-Level Collections. If the Partnership is required under applicable
law to pay any federal, state or local income tax on behalf of any holder of
Units or the General Partner or former holders of Units, the General Partner is
authorized to pay such taxes from Partnership funds. Such payments, if made,
will be deemed current distributions of cash to such Unit holder or the General
Partner as the case may be. The General Partner is authorized to amend the
Partnership Agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of Units and to adjust subsequent distributions so
that after giving effect to such deemed distributions, the priority and
characterization of distributions otherwise applicable under the Partnership
Agreement is maintained as nearly as is practicable. Payments by the Partnership
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event, the partner could file a claim for credit or
refund.
Uniformity of Units. The Partnership cannot trace the chain of ownership
of any particular Unit. Therefore, it is unable to track the economic and tax
characteristics related to particular Units from owner to owner. Consequently,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units must be maintained. In order to achieve uniformity, compliance with a
number of federal income tax requirements, both statutory and regulatory, could
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be substantially diminished. For example, a lack of uniformity can result from a
literal application of Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and
Treasury Regulation Section 1.167(c)-1(a)(6) and from the effect of the Ceiling
Rule on the Partnership's ability to make allocations to eliminate Book-Tax
Disparities attributable to Contributed Properties and partnership property that
has been revalued and reflected in the partners' capital accounts. If the IRS
were to challenge such conventions intended to achieve uniformity and such
challenge were successful, the tax consequences of holding particular Units
could differ. Any such non-uniformity could have a negative impact on the value
of Units.
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation derived from the depreciation method and
useful life applied to the Common Basis of such property, despite its
inconsistency with Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and
Treasury Regulation Section 1.167(c)-1(a)(6). See "Tax Treatment of
Operations-Section 754 Election." If the Partnership determines that such a
position cannot reasonably be taken, the Partnership may adopt a depreciation
convention under which all purchasers acquiring Units in the same month would
receive depreciation, whether attributable to Common Basis or Section 743(b)
basis, based upon the same applicable rate as if they had purchased a direct
interest in the Partnership's property. If such an aggregate approach is
adopted, it may result in lower annual depreciation deductions than would
otherwise be allowable to certain holders of Units and risk the loss of
depreciation deductions not taken in the year that such deductions are otherwise
allowable. This convention will not be adopted if the Partnership determines
that the loss of depreciation deductions would have a material adverse effect on
a holder of Units. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation convention to
preserve the uniformity of the intrinsic tax characteristics of Units that would
not have a material adverse effect on the holders of Units. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were to be sustained, the uniformity of
Units might be affected.
Items of income and deduction, including the effects of any unamortizable
intangibles under the Proposed Treasury Regulation Section 197-2(g)(1), will be
specially allocated in a manner that is intended to preserve the uniformity of
intrinsic tax characteristics among all Units, despite the application of the
Ceiling Rule to Contributed Properties and Adjusted Properties. Such special
allocations will be made solely for federal income tax purposes. See "-Tax
Consequences of Ownership of Units" and "-Allocations of Income, Gain, Loss and
Deduction."
Tax-Exempt Organizations and Certain Other Investors. Ownership of Units
by certain tax-exempt entities, regulated investment companies and foreign
persons raises issues unique to such persons and, as described below, may have
substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs and other retirement plans) are subject to federal
income tax on unrelated business taxable income in excess of $1,000, and each
such entity must file a tax return for each year in which it has more than
$1,000 of gross income included in computing unrelated business taxable income.
Substantially all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a holder of Units at the maximum corporate tax rate. Also, to
the extent that the Partnership holds debt financed property, the disposition of
a Unit could result in unrelated business taxable income.
A regulated investment company is required to derive 90% or more of its
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not anticipated
that any significant amount of the Partnership's gross income will include those
categories of income.
Non-resident aliens and foreign corporations, trusts or estates which
acquire Units will be considered to be engaged in business in the United States
on account of ownership of Units. As a result, they will be required to file
federal tax returns in respect of their distributive shares of Partnership
income, gain, loss, deduction or credit and pay federal income tax at regular
tax rates on such income. Generally, a partnership is required to pay a
withholding tax on the portion of the partnership income which is effectively
connected with the conduct of a United States trade or business and which is
allocable to the foreign partners, regardless of whether any actual
distributions have been made to such partners. However, under procedural
guidelines applicable to publicly traded partnerships, the Partnership has
elected instead to withhold (or a broker holding Units in street name will
withhold) at the rate of 39.6% on actual cash distributions made quarterly to
foreign holders of Units. Each foreign holder of Units must obtain a taxpayer
identification number from the IRS and submit that number to the Transfer Agent
on a Form W-8 in order to obtain
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credit for the taxes withheld. Subsequent adoption of Treasury Regulations or
the issuance of other administrative pronouncements may require the Partnership
to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a holder may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate holder
of Units is a "qualified resident."
An interest in the Partnership may also constitute a "United States Real
Property Interest" ("USRPI") under Section 897(c) of the Code. For this purpose,
Treasury Regulation Section 1.897-1(c)(2)(iv) treats a publicly traded
partnership the same as a corporation. Assuming that the Units continue to be
regularly traded on an established securities market, a foreign holder of Units
who sells or otherwise disposes of a Unit and who has not held more than 5% in
value of the Units, including Units held by certain related individuals and
entities at any time during the five-year period ending on the date of the
disposition, will qualify for an exclusion from USRPI treatment and will not be
subject to federal income tax on gain realized on the disposition that is
attributable to real property held by the Partnership. However, such holder may
be subject to federal income tax on any gain realized on the disposition that is
treated as effectively connected with a United States trade or business of the
foreign holder of Units (regardless of a foreign Unit holder's percentage
interest in the Partnership or whether Units are regularly traded). A foreign
holder of Units will be subject to federal income tax on gain attributable to
real property held by the Partnership if the holder held more than 5% in value
of the Units, including Units held by certain related individuals and entities,
during the five-year period ending on the date of the disposition or if the
Units were not regularly traded on an established securities market at the time
of the disposition.
A foreign holder of Units will also be subject to withholding under
Section 1445 of the Code if such holder owns, including Units held by certain
related individuals and entities, more than a 5% interest in the Partnership.
Under Section 1445 a transferee of a USRPI is required to deduct and withhold a
tax equal to 10% of the amount realized on the disposition of a USRPI if the
transferor is a foreign person.
Administrative Matters
Information Returns and Audit Procedures. The Partnership intends to
furnish to each holder of Units within 90 days after the close of each
Partnership taxable year, certain tax information, including a Schedule K-1,
which sets forth each holder's allocable share of the Partnership's income,
gain, loss, deduction and credit. In preparing this information, which will
generally not be reviewed by counsel, the General Partner will use various
accounting and reporting conventions, some of which have been mentioned in the
previous discussion, to determine the respective Unit holder's allocable share
of income, gain, loss, deduction and credits. There is no assurance that any
such conventions will yield a result which conforms to the requirements of the
Code, the Regulations or administrative interpretations of the IRS. The General
Partner cannot assure a current or prospective holder of Units that the IRS will
not successfully contend in court that such accounting and reporting conventions
are impermissible.
No assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made. The rights of a holder of Units
owning less than a 1% profits interest in the Partnership to participate in the
income tax audit process have been substantially reduced. Further, any
adjustments in the Partnership's returns will lead to adjustments in Unit
holder's returns and may lead to audits of their returns and adjustments of
items unrelated to the Partnership. Each Unit holder would bear the cost of any
expenses incurred in connection with an examination of such holder's personal
tax return.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. Under the 1997 Act, any penalty relating to an adjustment to a
partnership item is determined at the partnership level. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner.
23
<PAGE>
The Tax Matters Partner will make certain elections on behalf of the
Partnership and holders of Units and can extend the statute of limitations for
assessment of tax deficiencies against holders of Units with respect to the
Partnership items. The Tax Matters Partner may bind a holder of Units with less
than a 1% profits interest in the Partnership to a settlement with the IRS,
unless such holder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review (to which all the holders of Units are bound) of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any holder having at least a 1% interest in
the profits of the Partnership or by holders of Units having in the aggregate at
least a 5% profits interest. However, only one action for judicial review will
go forward, and each holder of Units with an interest in the outcome may
participate.
A holder of Units must file a statement with the IRS identifying the
treatment of any item on its federal income tax return that is not consistent
with the treatment of the item on the Partnership's return to avoid the
requirement that all items be treated consistently on both returns. Intentional
or negligent disregard of the consistency requirement may subject a holder of
Units to substantial penalties.
Electing Large Partnerships. The 1997 Act provides that certain
partnerships with at least 100 partners may elect to be treated as an electing
large partnership ("ELP") for tax years ending after December 31, 1997. If
further revisions are made to the law, it is possible that at some future date
the Partnership will make this election to be taxed as an electing large
partnership, however, based on current law it is not contemplated that such an
election will be made for 1998 or any subsequent year.
Under the reporting provisions of the 1997 Act, each partner of an ELP
will take into account separately such partner's share of several designated
items, determined at the partnership level. The ELP procedures provide that any
tax adjustments generally would flow through to the holders of Units for the
year in which the adjustment takes effect, and the adjustments would not affect
prior-year returns of any holder, except in the case of changes to any holder's
distributive share. In lieu of passing through an adjustment to the holders of
Units, the Partnership may elect to pay an imputed underpayment. The
Partnership, and not the holders of Units, would be liable for any interest and
penalties resulting from a tax adjustment.
Nominee Reporting. Persons who hold an interest in the Partnership as a
nominee for another person are required to furnish to the Partnership (a) the
name, address and taxpayer identification number of the beneficial owners and
the nominee; (b) whether the beneficial owner is (i) a person that is not a
United States person, (ii) a foreign government, an international organization
or any wholly-owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity; (c) the amount and description of Units held,
acquired or transferred for the beneficial owners; and (d) certain information
including the dates of acquisitions and transfers, means of acquisitions and
transfers, and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are required to furnish
additional information, including whether they are a United States person and
certain information on Units they acquire, hold or transfer for their own
account. A penalty of $50 per failure (up to a maximum of $100,000 per calendar
year) is imposed by the Code for failure to report such information to the
Partnership. The nominee is required to supply the beneficial owner of the Units
with the information furnished to the Partnership.
Registration as a Tax Shelter. The Code requires that "tax shelters" be
registered with the Secretary of the Treasury. The Treasury Regulations
interpreting the tax shelter registration provisions of the Code are extremely
broad. It is arguable that the Partnership is not subject to the registration
requirement on the basis that (i) it does not constitute a tax shelter, or (ii)
it constitutes a projected income investment exempt from registration. However,
the General Partner registered the Partnership as a tax shelter with the IRS
when it was originally formed in the absence of assurance that the Partnership
would not be subject to tax shelter registration and in light of the substantial
penalties which might be imposed if registration was required and not
undertaken. The Partnership's tax shelter registration number with the IRS is
9228900496. This number will be provided to every Unit holder with year-end tax
information. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the registration
number to the holder of Units, and a holder of Units who sells or otherwise
transfers a Unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a Unit to
furnish such registration number to the transferee is $100 for each such
failure. The holder of Units must disclose the tax shelter registration number
of the Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss, credit or other benefit generated by the Partnership is claimed
or income of the Partnership
24
<PAGE>
is included. A holder of Units who fails to disclose the tax shelter
registration number on such holder's tax return, without reasonable cause for
such failure, will be subject to a $250 penalty for each such failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
Accuracy-Related Penalties. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Code. No penalty will be
imposed, however, with respect to any portion of an underpayment if it is shown
that there was a reasonable cause for such portion and that the taxpayer acted
in good faith with respect to such portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion (i) is attributable to an item with respect to which
there is, or was, "substantial authority" for the position taken on the return
or (ii) is attributable to an item for which there was a reasonable basis for
the tax treatment of the items and as to which the pertinent facts are disclosed
on the return. Certain more stringent rules apply to "tax shelters," which term
includes a partnership if a significant purpose of such entity is the avoidance
or evasion of income tax. This term does not appear to include the Partnership.
If any Partnership item of income, gain, loss, deduction or credit included in
the distributive shares of Unit holders might result in such an "understatement"
of income for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the Partnership will
make a reasonable effort to furnish sufficient information for holders of Units
to make adequate disclosure on their returns to avoid liability for this
penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement is in excess of $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
State, Local and Other Taxes
Holders of Units may be subject to other taxes, such as state and local
taxes, unincorporated business taxes, and estate, inheritance or intangible
taxes that may be imposed by the various jurisdictions in which the Partnership
does business or owns property. Unit holders should consider state and local tax
consequences of an investment in the Partnership. The Partnership owns an
interest in the Operating Partnerships, which own property or conduct business
in Arizona, California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Missouri, Nebraska, Nevada, New Mexico, Oregon, Texas and Wyoming. A holder of
Units will likely be required to file state income tax returns and/or to pay
such taxes in most of such states and may be subject to penalties for failure to
do so. Some of the states may require the Partnership to withhold a percentage
of income from amounts that are to be distributed to a holder of Units that is
not a resident of the state. Such amounts withheld, if any, which may be greater
or less than a particular holder's income tax liability to the state, generally
do not relieve the non-resident Unit holder from the obligation to file a state
income tax return. Amounts withheld, if any, will be treated as if distributed
to holders of Units for purposes of determining the amounts distributed by the
Partnership. Based on current law and its estimate of future partnership
operations, the General Partner anticipates that any amounts required to be
withheld will not be material. In addition, an obligation to file tax returns or
to pay taxes may arise in other states.
It is the responsibility of each prospective holder of Units to
investigate the legal and tax consequences, under the laws of pertinent states
or localities, of such investment in the Partnership. Further, it is the
responsibility of each holder of Units to file all state and local, as well as
federal tax returns that may be required of such holder. Counsel has not
rendered an opinion on the state and local tax consequences of an investment in
the Partnership.
USE OF PROCEEDS
The Partnership will receive no portion of the proceeds of the sale of the
Units.
25
<PAGE>
PLAN OF DISTRIBUTION
The 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 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 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 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 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
Units, which the broker or dealer may resell or otherwise transfer pursuant to
this Prospectus. The Selling Unitholders may also loan or pledge the Units to a
broker or dealer, and the broker or dealer may sell the Units so loaned or, upon
a default, effect sales of the Units so pledged, pursuant to this Prospectus.
The Selling Unitholders may effect such transactions by selling 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 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 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 Units, against
certain liabilities, including liabilities arising under the Securities Act, and
the Selling Unitholders also may agree to indemnify any such agent or
underwriter against certain of such liabilities. The Partnership will pay all
costs and expenses of the registration and offering of the Units, other than
discounts and commissions, and other than costs incurred after six months from
the effectiveness of the registration of the Units that are required to maintain
the effectiveness of such registration beyond such six months.
VALIDITY OF THE UNITS
The validity of the Units is 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 Annual Report on
Form 10-K for the year ended December 31, 1997, have been so incorporated in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of the Partnership and subsidiaries
and the financial statements of Mont Belvieu Associates as of December 31, 1996
and for the two years ended December 31, 1996 included in the
26
<PAGE>
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated by reference in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Santa Fe as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
incorporated in this Prospectus by reference to the Partnership's Current Report
on Form 8-K dated March 5, 1998, as amended, have been so incorporated in
reliance upon the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The balance sheet of the General Partner as of December 31, 1997, included
in the Registration Statement of which this Prospectus is a part, has been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
27
<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 repre-
sentation 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 Pro-
spectus at any time does not imply that the 1,645,171 Common Units
information contained herein is correct Representing Limited Partner
as of any time subsequent its date. Interests
-----------------------
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION............................2
INCORPORATION OF CERTAIN DOCUMENTS...............2
INFORMATION REGARDING FORWARD LOOKING STATEMENTS.3
RISK FACTORS.....................................4
THE PARTNERSHIP..................................6
SELLING UNITHOLDERS..............................8 KINDER MORGAN
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.......9 ENERGY PERTNERS, L.P.
USE OF PROCEEDS.................................25
PLAN OF DISTRIBUTION............................26
VALIDITY OF THE UNITS...........................26
EXPERTS.........................................26
-------------------------
PROSPECTUS
_________________ ___, 1998
-------------------------
============================================== =========================
<PAGE>
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....$12,037.40
Printing...............................................$15,000.00
Legal fees and expenses ...............................$25,000.00
Accounting fees and expenses ..........................$10,000.00
Miscellaneous..........................................$10,000.00
---------
Total..............................................$72,037.40
---------
---------
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 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 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. ("KMI") and are entitled to similar indemnification from KMI
pursuant to KMI's certificate of incorporation and bylaws.
II-2
<PAGE>
Item 16. Exhibits
***2.1 Purchase Agreement dated October 18, 1997 between
Kinder Morgan Energy Partners, L.P., Kinder Morgan
G.P., Inc., Santa Fe Pacific Pipeline Partners, L.P.,
Santa Fe Pacific Pipelines, Inc. and SFP Pipeline
Holdings, Inc. (Exhibit 2 to Amendment No. 1 to the
Partnership's Registration Statement on Form S-4 (File
No. 333-44519) filed February 4, 1998 ("Santa Fe S-4")).
***3.1 Second Amendment to Amended and Restated Agreement of Limited
Partnership dated as of February 14, 1997 (Exhibit 3.1 to Santa Fe
S-4).
***4.1 Specimen Certificate representing Common Units
(Exhibit 4.1 to Santa Fe S-4).
*4.2 Common Unit Registration Rights Agreement dated as of February 14,
1997, between Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners,
L.P. and First Union Investors, Inc.
*4.3 Indemnity and Contribution Agreement dated as of April 28, 1997,
between Kinder Morgan Energy Partners, L.P. and First Union Investors,
Inc.
**5 Opinion of Morrison & Hecker L.L.P. as to the legality of the
securities registered hereby
**8 Opinion of Morrison & Hecker L.L.P. as to 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 Price Waterhouse LLP
**23.4 Consent of Price Waterhouse LLP
*24.1 Power of Attorney (included on the signature page to Form S-3 filed
on April 28, 1997)
***99 Balance Sheet of Kinder Morgan G.P., Inc. as of December 31, 1997
(Exhibit 99.1 to Amendment No. 1 to the Partnership's Registration
Statement on Form S-4 (File No. 333-46709) filed April 14, 1998).
- ------------------------
* Previously filed.
** Filed herewith.
*** Incorporated by reference.
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.
II-2
<PAGE>
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on April 17, 1998.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: KINDER MORGAN G.P., INC.
as General Partner
By: /s/ William V. Morgan
----------------------------------
William V. Morgan
Vice Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Name Title Date
--------*----------- Chairman of the Board and Chief April 17, 1998
Richard D. Kinder Executive Officer of Kinder
Morgan G.P., Inc.
/s/ William V. Morgan Director and Vice Chairman of April 17, 1998
--------------------- Kinder Morgan G.P., Inc.
William V. Morgan
--------*------------ Director of Kinder Morgan G.P., April 17, 1998
Alan L. Atterbury Inc.
--------*------------ Director of Kinder Morgan G.P., April 17, 1998
Edward O. Gaylord Inc.
--------*------------ Director, President and Chief April 17, 1998
Thomas B. King Operating Officer of Kinder
Morgan G.P., Inc.
--------*------------ Vice President (Chief Financial April 17, 1998
David G. Dehaemers, Jr. Officer and Chief Accounting
Officer) of Kinder Morgan G.P.,
Inc.
*By: /s/William V. Morgan
----------------------
William V. Morgan
Attorney-in-fact
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
***2.1 Purchase Agreement dated October 18, 1997 between
Kinder Morgan Energy Partners, L.P., Kinder Morgan
G.P., Inc., Santa Fe Pacific Pipeline Partners, L.P.,
Santa Fe Pacific Pipelines, Inc. and SFP Pipeline
Holdings, Inc. (Exhibit 2 to Amendment No. 1 to the
Partnership's Registration Statement on Form S-4 (File
No. 333-44519) filed February 4, 1998 ("Santa Fe S-4")).
***3.1 Second Amendment to Amended and Restated Agreement of Limited
Partnership dated as of February 14, 1997 (Exhibit 3.1 to Santa Fe
S-4).
***4.1 Specimen Certificate representing Common Units
(Exhibit 4.1 to Santa Fe S-4).
*4.2 Common Unit Registration Rights Agreement dated as of
February 14, 1997, between Kinder Morgan G.P., Inc.,
Kinder Morgan Energy Partners, L.P. and First Union
Investors, Inc.
*4.3 Indemnity and Contribution Agreement dated as of April 28, 1997,
between Kinder Morgan Energy Partners, L.P.
and First Union Investors, Inc.
**5 Opinion of Morrison & Hecker L.L.P. as to the legality
of the securities registered hereby
**8 Opinion of Morrison & Hecker L.L.P. as to 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 Price Waterhouse LLP
**23.4 Consent of Price Waterhouse LLP
*24.1 Power of Attorney (included on the signature page to Form S-3
filed on April 28, 1997)
***99 Balance Sheet of Kinder Morgan G.P., Inc. as of December 31, 1997
(Exhibit 99.1 to Amendment No. 1 to the Partnership's Registration
Statement on Form S-4 (File No. 333-46709) filed April 14, 1998).
- ------------------------
* Previously filed.
** Filed herewith.
*** Incorporated by reference.
II-5
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri 64108-4606
Telephone (816)
691-2600
Telefax (816) 474-4208
April 17, 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 to the date hereof, (Registration
No. 333-25995) (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 Common Units ("Common Units")
representing limited partner interests in Kinder Morgan Energy Partners, L.P.
(the "Partnership") to be sold by First Union Investors, Inc., First Union
Corporation ("First Union"), or subsidiaries of First Union and/or Kinder Morgan
G.P., Inc.
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 and the Prospectus; and
(2) 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.
April 17, 1998
Page 2
Based on and subject to the foregoing and other qualifications set
forth below, we are of the opinion that the Partnership has, pursuant to its
Second Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"), duly issued the Common Units to be registered under the
Registration Statement, 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
regarding control and management of the Partnership (Articles VI and VII), 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,
/s/MORRISON & HECKER L.L.P.
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri 64108-4606
Telephone (816)
691-2600
Telefax (816) 474-4208
April 17, 1998
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
Re: Form S-3 Registration Statement
Ladies and Gentlemen:
We have acted as counsel to Kinder Morgan Energy Partners, L.P., a Delaware
limited partnership (the "Partnership"), and Kinder Morgan G.P., Inc., a
Delaware corporation and the general partner of the Partnership (the "KM General
Partner"), in connection with the preparation of the Registration Statement on
Form S-3, as amended, (Registration No. 333-25995) (the "Registration
Statement") filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 (the "Act"). The Registration Statement covers Common
Units ("Common Units") representing limited partner interests in the Partnership
to be sold by First Union Investors, Inc., First Union Corporation ("First
Union"), subsidiaries of First Union and/or Kinder Morgan G.P., Inc.
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,
the KM 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 administrative rulings and practice, all as of the date of this
letter, and all of which may change at any time.
<PAGE>
Kinder Morgan Energy Partners, L.P.
April 17, 1998
Page 2
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, such purchaser of Common
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 Considerations" is accurate in all material respects 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,
/s/ MORRISON & HECKER L.L.P.
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
April 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3 (file no. 333-25995) of Kinder Morgan Energy Partners,
L.P. of our report dated January 30, 1998 appearing on page F-1 of Kinder Morgan
Energy Partners, L.P.'s Current Report on Form 8-K dated March 5, 1998, as
amended. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Los Angeles, California
April 13, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Amendment 1 to Form S-3 (No.
333-25995) of Kinder Morgan Energy Partners, L.P. of our report dated March 6,
1998 relating to the consolidated financial statements of Kinder Morgan Energy
Partners, L.P. appearing on page F-2 and of our report dated March 6, 1998
relating to the financial statements of Mont Belvieu Associates appearing on
page F-20 of Kinder Morgan Energy Partners, L.P.'s Annual Report on Form 10-K
for the year ended December 31, 1997. We also hereby consent to the
incorporation by reference in Exhibit 99.1 of this Registration Statement on
Amendment 1 to Form S-3 (No. 333-25995) 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/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
April 13, 1998
