SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report November 6, 1998
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-11234 76-0380342
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification)
1301 McKinney Street, Ste. 3450, Houston, Texas 77010
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-844-9500
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Item 5. Other Events
RISK FACTORS
Pending FERC and CPUC Proceedings Seek Substantial Refunds and Reductions in
Tariff Rates.
Some shippers have filed complaints before the Federal Energy Regulatory
Commission challenging the pipeline tariff rates of our Pacific Operations' East
Line, West Line, Sepulveda Line and the Watson Station. The shippers allege that
such rates are not entitled to "grandfathered" status under the Energy Policy
Act of 1992 because "changed circumstances" may have occurred under the Act.
Some of their complaints allege that our acquisition of the Pacific Operations
and our potential cost savings from the combination of our business with the
Pacific Operations may constitute "changed circumstances." We believe that our
rates are "grandfathered" and that "changed circumstances" do not exist.
An initial decision by the FERC Administrative Law Judge was issued on
September 25, 1997 (the "Initial Decision"). The Initial Decision upheld our
Pacific Operations' position that "changed circumstances" were not shown to
exist on the West Line, thereby retaining the just and reasonable status of all
West Line rates that were "grandfathered" under the Energy Policy Act of 1992.
In addition, the Initial Decision determined that our Pacific Operations' East
Line rates were not grandfathered under the Energy Policy Act. The Initial
Decision also included rulings that were generally adverse to our Pacific
Operations regarding certain cost of service issues.
If the Initial Decision is affirmed in current form by FERC, we estimate
that the total reparations and interest that would be payable approximate the
reserves that we have recorded as of September 30, 1998. We also estimate that
the Initial Decision, in its current form, and if also applied to the Sepulveda
Line and the Watson station rates, would reduce prospective revenues by
approximately $8 million annually, the same rate at which we are currently
accruing our reserve.
Some shippers have filed complaints before the California Public Utilities
Commission. The complaints generally challenge the rates charged by us for
intrastate transportation of refined petroleum through our pipeline system in
the State of California. On June 18, 1998, a CPUC Administrative Law Judge
issued a proposed decision, finding that the evidence did not support the
shippers' claim that rates charged for service within California by our Pacific
Operations are unjust or unreasonable under the California Public Utilities
Code. In light of his findings, the Judge dismissed the complaints filed against
our Pacific Operations. On August 6, 1998, we announced that the CPUC affirmed
the proposed decision and dismissed the complaints. On October 6, 1998, the
shippers filed an application for rehearing with the CPUC. We responded to the
rehearing application. The rulings are pending before the CPUC for disposition.
Additional challenges to tariff rates could be filed with the FERC or CPUC
in the future. Any changes to tariff rates could impact revenues, results of
operations, financial condition, liquidity, and funds available for distribution
to Unitholders. Additional information about these proceedings is in our reports
filed with the Securities and Exchange Commission.
We May Experience Difficulties Integrating New Operations
Part of our business strategy includes acquiring additional businesses
that will allow us to increase distributions to Unitholders. We believe that we
can profitably combine the operations of acquired businesses with our existing
operations. However, unexpected costs or challenges may arise whenever
businesses with different operations and management are combined. Successful
business combinations require management and other
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personnel to devote significant amounts of time to integrating the acquired
business with existing operations. These efforts may temporarily distract their
attention from day-to-day business, the development or acquisition of new
properties and other business opportunities. In addition, the management of the
acquired business will often not join our management team. The change in
management may make it more difficult to integrate an acquired business with our
existing operations.
Cash Distribution Will Fluctuate With Performance; No Minimum Distribution
General. Although the general partner will distribute 100% of our
available cash, we cannot assure you that we will generate any specific amount
of available cash. Additionally, our Partnership Agreement does not have a
guaranteed minimum quarterly distribution. Our profitability and distribution
potential depends largely upon volumes of NGLs and refined petroleum products
that our liquids pipelines transport and to a lesser extent upon the volume of
products transloaded and stored by our bulk terminals and volumes of NGLs for
fractionation. In general, lower volumes will decrease our profits and,
consequently, the amount of cash available for distribution to Unitholders.
Fluctuations in the price of NGLs and bulk products transportation, resulting
from changes in regulation or competition, can also affect profits. Because the
demand for such products is subject to many factors outside of our control, we
cannot assure you of any specific future volumes, profits or distributions.
Factors Effecting Transportation Volumes. Transportation volumes for NGLs
and refined petroleum products are affected primarily by the market demand for
products in the geographic regions served by our liquids pipelines. Coal
terminal volumes depend on:
o the market demand for Western and Illinois coal;
o economic and available rail transportation from sources of supply; and
o economic barge transportation to delivery points.
Market demand for NGLs, refined petroleum products and coal may be affected by:
o future economic conditions;
o weather;
o fuel conservation measures;
o alternate fuel requirements;
o governmental and environmental regulation;
o demographic changes; or
o technological advances in fuel economy and energy generation devices.
We cannot predict the effect of such factors on the demand for the
transportation of NGLs and refined petroleum products in the liquids pipelines
and the handling and storage of coal.
Profitability Depends on Certain Major Customers. Major end users of NGLs
and refined petroleum products transported by our liquids pipelines include:
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o wholesalers and retailers of refined petroleum products in the areas that
our liquids pipelines serve;
o refinery facilities in the Chicago area;
o a world-scale petrochemical plant near Lake Charles, Louisiana; and
o United States military bases.
Major suppliers of refined petroleum products transported on our liquids
pipelines include refineries located in:
o Los Angeles, San Francisco and Bakersfield, California;
o Chicago, Illinois;
o Houston and El Paso, Texas; and
o Seattle, Washington.
Additionally, four major customers ship approximately 90% of all coal
loaded through our coal terminals. A disruption of operations at any of these
facilities could reduce the volumes of NGLs, refined petroleum products, and
coal that we handle. Should we lose any of our major customers, our
profitability and our distributions to Unitholders could decrease.
Establishment of Reserves May Affect Distributions. Under the Partnership
Agreement, the general partner can establish reserves for future business uses.
Any amounts set aside for reserves will decrease the amount of cash available
for distributions.
Risks Associated With Debt
Impact on Ability to Make Cash Distributions. We have significant debt.
Our debt service obligations may reduce the cash available for distribution to
Unitholders. Our ability to meet our debt service obligations depends primarily
on our future performance. Our future performance depends upon prevailing
economic conditions and financial, business and other factors (including
regulation), many of which are beyond our control. We may borrow more money to
finance future acquisitions or for general business purposes.
We Have Pledged Assets to Secure Our Debt. SFPP, L.P., the operating
partnership that owns our Pacific Operations, has granted liens on substantially
all of its properties to secure its debt. If an event of default occurs, lenders
will have the right to foreclose upon the collateral. Foreclosure could cause an
investment loss and cause negative tax consequences for Unitholders through the
realization of taxable income by Unitholders without a corresponding cash
distribution. Likewise, if we were to dispose of assets and realize a taxable
gain while there is substantial debt outstanding and proceeds of the sale were
applied to the debt, Unitholders could have increased taxable income without a
corresponding cash distribution.
Instruments Governing Debt Contain Restrictive Covenants. The instruments
governing our debt contain restrictive covenants that may prevent us from
engaging in certain beneficial transactions. Such provisions may also limit or
prohibit distributions to Unitholders under certain circumstances. The
agreements governing our debt generally require us to comply with various
affirmative and negative covenants including the maintenance of certain
financial ratios and restrictions on:
o incurring additional debt;
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o entering into mergers, consolidations and sales of assets;
o making investments; and
o granting liens.
Additionally, the agreements governing our debt generally prohibit us from:
o making cash distributions to Unitholders more often than quarterly;
o distributing amounts in excess of 100% of available cash for the
immediately preceding calendar quarter; and
o making any distribution to Unitholders if an event of default exists or
would exist when such distribution is made.
The instruments governing any additional debt incurred to refinance the debt may
also contain similar restrictions.
SFPP's First Mortgage Notes Generally May Not Be Prepaid at Any Time
Before December 15, 1999. After December 15, 1999 and before December 15, 2002,
we may prepay the SFPP First Mortgage Notes with a make-whole prepayment
premium. On or after December 15, 2002 and before December 15, 2003, we may
repay the SFPP First Mortgage Notes in whole or in part without a prepayment
premium. SFPP may not take certain actions with respect to $190 million of the
SFPP First Mortgage Notes. Such restrictions may limit our flexibility in
structuring or refinancing existing or future debt.
Potential Change of Control if Kinder Morgan, Inc. Defaults on Debt
Kinder Morgan, Inc. ("KMI") owns all of the outstanding capital stock of
the general partner. KMI has pledged this stock to secure some of its debt.
Presently, KMI's only source of income to pay such debt is dividends that KMI
receives from the general partner. If KMI defaults on its debt, the lenders
could acquire control of the general partner.
Risks Associated with Pipeline Easements
Southern Pacific Transportation Company granted us easements for the
construction and operation of a significant portion of the South, North and East
lines of our Pacific Operations. Southern Pacific Transportation Company or its
predecessors in interest acquired some of these rights-of-way under federal
statutes enacted in 1871 and 1875. The rights-of-way granted under the 1871
statute were thought to be an outright ownership interest that would continue
until the rights-of-way ceased to be used for railroad purposes. Southern
Pacific Transportation Company and its predecessors in interest have used the
rights-of-way for railroad purposes since the railroad was constructed. Since
the construction of the South, North, and East lines in the 1950's, only one
lawsuit, which was dismissed, has challenged the validity of these easements on
and beneath the land.
Two United States Circuit Courts, however, ruled in 1979 and 1980 that
railroad rights-of-way granted under laws similar to the 1871 statute provide
only a surface easement for railroad purposes without any right to the
underground portion. If a court were to rule that the 1871 statute also
prohibits the use of the underground portion by the railroad or its assignees
for the operation of a pipeline, we may be required to obtain easements from the
land owners in order to continue to maintain the South, North and East lines. We
believe that we could obtain such easements over time at a cost that would not
have a material negative effect on the partnership. We cannot, however, assure
you of this.
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We have been advised by counsel that we have the power of eminent domain
for the liquids pipelines in the states in which we operate (except for
Illinois) assuming that we meet certain requirements, which differ from state to
state. We believe that we meet these requirements. We believe that Shell CO2
Company does not have the power of eminent domain for its CO2 pipelines. Our
inability to exercise the power of eminent domain could have a material negative
effect on our business where we do not have the right through leases, easements,
rights-of-way, permits or licenses to use or occupy the property used for the
operation of liquids pipelines.
Risks Associated with the Shell CO2 Company
The limited partnership agreement forming the Shell CO2 Company provides
us a fixed, quarterly distribution of approximately $3.6 million ($14.5 million
per year) during the four year period ended December 31, 2001. In 2002 and 2003,
Shell CO2 Company will increase or decrease our cash distributions so that our
total cash distribution during the first six years of Shell CO2 Company's
existence will equal our percentage of the cumulative cash distributions of
Shell CO2 Company during such period (initially 20%) on a present value basis.
We will calculate the present value using a discount rate of 10%. Under certain
unlikely scenarios, we possibly would not receive any distributions from Shell
CO2 Company during 2002 and 2003 and we could be required to return a portion of
the distributions received during the first four years. After 2003, we will
participate in distributions according to our partnership percentage.
Costs of Environmental Regulation
Our business operations are subject to federal, state and local laws and
regulations relating to environmental practices. If an accidental leak or spill
of liquid petroleum products occurs in our pipeline or at a storage facility, we
may have to pay a significant amount to clean up the leak or spill. The
resulting costs and liabilities could negatively affect the level of cash
available for distributions to Unitholders. Our costs could also increase
significantly if environmental laws and regulations become more strict. We
cannot predict the impact of Environmental Protection Agency standards or future
environmental measures. Because the costs of environmental regulation are
already significant, additional regulation could negatively affect the level of
cash available for distribution to Unitholders.
Competition
The petroleum products transported by our pipelines compete with various
other products. Propane competes with electricity, fuel, oil and natural gas in
the residential and commercial heating market. In the engine fuel market,
propane competes with gasoline and diesel fuel. Butanes and natural gasoline
used in motor gasoline blending and isobutane used in alkylation compete with
alternative products. NGL's used as feed stocks for refineries and petrochemical
plants compete with alternative feed stocks. The availability and prices of
alternative energy sources and feed stocks significantly affects NGL demand.
Such competition could ultimately lead to lower levels of profits and lower cash
distributions to Unitholders.
Pipelines are generally the lowest cost method for intermediate and
long-haul overland product movement. Accordingly, the most significant
competitors for our pipelines are:
o proprietary pipelines owned and operated by major oil companies in the
areas where our pipelines deliver products;
o refineries within the market areas served by our pipelines; and
o trucks.
Additional pipelines may be constructed in the future to serve specific markets
now served by our pipelines. Trucks competitively deliver products in certain
markets. Recently, major oil companies have increasingly used trucking,
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resulting in minor but notable reductions in product volumes delivered to
certain shorter-haul destinations, primarily Orange and Colton, California
served by the South, North and East lines of our Pacific Operations.
We cannot predict with certainty whether this trend towards increased
short-haul trucking will continue in the future. Demand for terminaling services
varies widely throughout our pipeline system. Certain major petroleum companies
and independent terminal operators directly compete with us at several terminal
locations. At those locations, pricing, service capabilities and available
tankage control market share.
Our ability to compete also depends upon general market conditions. We
conduct our operations without the benefit of exclusive franchises from
government entities. We also provide common carrier transportation services
through our pipelines at posted tariffs and almost always without long-term
contracts for transportation service with our customers. Demand for
transportation services for refined petroleum products is primarily a function
of:
o total and per capita fuel consumption;
o prevailing economic and demographic conditions;
o alternate modes of transportation;
o alternate product sources; and
o price.
Risks Associated with the Partnership Agreement and State Partnership Law
Limited Voting Rights, Management and Control. Unitholders have only
limited voting rights on matters affecting the partnership. The general partner
manages and controls partnership activities. Unitholders have no right to elect
the general partner on an annual or other ongoing basis. If the general partner
withdraws, however, its successor may be elected by the holders of a majority of
the outstanding Units (excluding Units owned by the departing general partner
and its affiliates).
The limited partners may remove the general partner only if:
o the holders of 66 2/3% of the Units vote to remove the general partner.
Units owned by the general partner and its affiliates are not counted;
o the same percentage of units approves a successor general partner;
o the partnership continues to be taxed as a partnership for federal income
tax purposes; and
o the limited partners maintain their limited liability.
Persons Owning 20% or More of the Units Cannot Vote. Any Units held by a
person (other than the general partner and its affiliates) that owns 20% or more
of the Units cannot be voted.
The General Partner's Liability to the Partnership and Unitholders May Be
Limited. Certain provisions of the partnership agreement contain language
limiting the liability of the general partner to the partnership or the
Unitholders. For example, the partnership agreement provides that:
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o the general partner does not breach any duty to the partnership or the
Unitholders by borrowing funds or approving any borrowing. The general
partner is protected even if the purpose or effect of the borrowing is to
increase incentive distributions to the general partner;
o the general partner does not breach any duty to the partnership or the
Unitholders by taking any actions consistent with the standards of
reasonable discretion outlined in the definitions of available cash and
cash from operations contained in the partnership agreement; and
o the general partner does not breach any standard of care or duty by
resolving conflicts of interest unless the general partner acts in bad
faith.
The Partnership Agreement Limits the Liability and Modifies the Fiduciary
Duties of the General Partner Under Delaware Law. The partnership agreement
seeks to limit the liability of the general partner to the partnership and
Unitholders. The partnership agreement also seeks to modify the fiduciary
standards required of a general partner under Delaware law. These standards
include the highest duties of good faith, fairness and loyalty to the limited
partners. Such a duty of loyalty would generally prohibit a general partner of a
Delaware limited partnership from taking any action or engaging in any
transaction for which it has a conflict of interest. Under the partnership
agreement, the general partner may exercise its broad discretion and authority
in the management of the partnership and the conduct of its operations as long
as the general partner's actions are in the best interest of the partnership.
Such modifications of state law standards of fiduciary duty may significantly
limit the ability of Unitholders to successfully challenge the actions of the
general partner as being a breach of what would otherwise have been a fiduciary
duty.
The Unitholders May Have Liability To Repay Distributions. Unitholders
will not be liable for assessments in addition to their initial capital
investment in the Units. Under certain circumstances, however, Unitholders may
have to repay the partnership amounts wrongfully returned or distributed to
them. Under Delaware law, we may not make a distribution to you if the
distribution causes all liabilities of the Partnership to exceed the fair value
of the partnership's assets. Liabilities to partners on account of their
partnership interests and non-recourse liabilities are not counted for purposes
of determining whether a distribution is permitted. The Delaware Act provides
that a limited partner who receives such a distribution and knew at the time of
the distribution that the distribution violated the Delaware Act will be liable
to the limited partnership for the distribution amount for three years from the
distribution date. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of the
assignor to make contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or she became a
limited partner if the liabilities could not be determined from the partnership
agreement.
Unitholders May Be Liable If We Have Not Complied With State Partnership
Law. We conduct our business in a number of states. In some of those states the
limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established. The Unitholders might be
held liable for the partnership's obligations as if they were a general partner
if:
o a court or government agency determined that we were conducting business
in the state but had not complied with the state's partnership statute; or
o Unitholders rights to act together to remove or replace the general
partner or take other actions under the partnership agreement constitute
"control" of the partnership's business.
The General Partner May Exercise Its Limited Call Right. If at any time
the general partner and its affiliates own 80% or more of the issued and
outstanding limited partners' interests of any class of the partnership, the
general partner will have the right to purchase all of the remaining interests
in that class. The general partner
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may only purchase all of the limited partnership interests of the class. The
purchase price for such a purchase will be the greater of:
o the most recent 20-day average trading price; or
o the highest purchase price paid by the general partner or its affiliates
to acquire limited partner interests of such class during the prior 90
days.
The general partner can assign this right to its affiliates or to the
partnership. Because of this right, a Unitholder may have to sell his interest
against his will or for a less than desirable price.
We May Sell Additional Limited Partner Interests, Diluting Existing
Interests of Unitholders. The partnership agreement allows the general partner
to cause the partnership to issue additional limited partner interests and other
equity securities. There is no limit on the total number of Units we may issue.
If the partnership issues additional Units or other equity securities, a
Unitholder's proportionate ownership interest in the partnership will decrease.
Such an issuance could negatively affect the amount of cash distributed to
Unitholders and the market price of Units. Issuance of additional Units will
also diminish the relative voting strength of the previously outstanding Units.
Effects of Anti Takeover Provisions. The partnership agreement provides
that any person or group that acquires beneficial ownership of 20% or more of
the Units will lose its voting rights for its Units. This limitation does not
apply to the general partner and its affiliates. This provision may discourage a
person or group from attempting to remove the general partner or otherwise
change management. This provision may also reduce the price at which the Units
will trade under certain circumstances. For example, a third party will probably
not attempt to remove the general partner and take over our management by making
a tender offer for the Units at a price above their trading market price without
removing the general partner and substituting an affiliate.
Pre-Emptive Rights of the General Partner. Whenever the partnership issues
equity securities to any person other than the general partner and its
affiliates, the general partner has the right to purchase additional limited
partnership interests on the same terms. This allows the general partner to
maintain its partnership interest in the partnership. No other unitholder has a
similar right. Therefore, only the general partner may protect itself against
dilution caused by issuance of additional equity securities.
Potential Conflicts of Interest Related to the Operation of the Partnership
Certain conflicts of interest could arise among the general partner, KMI
and the partnership. Such conflicts may include, among others, the following
situations:
o we do not have any employees and we rely solely on employees of the
general partner and its affiliates, including KMI;
o under the partnership agreement, we reimburse the general partner for the
costs of managing and operating the partnership;
o the amount of cash expenditures, borrowings and reserves in any quarter
may affect available cash to pay quarterly distributions to Unitholders;
o the general partner tries to avoid being personally liable for partnership
obligations. The general partner is permitted to protect its assets in
this manner by the partnership agreement. Under the partnership agreement
the general partner does not breach its fiduciary duty even if the
partnership could have obtained more favorable terms without limitations
on the general partner's liability;
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o under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable to the
partnership. The general partner may also enter into additional contracts
with any of its affiliates on behalf of the partnership. Agreements or
contracts between the partnership and the general partner (and its
affiliates) are not the result of arms length negotiations;
o the general partner does not breach the partnership agreement by
exercising its call rights to purchase limited partnership interests or by
assigning its call rights to one of its affiliates or to the partnership.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
KINDER MORGAN ENERGY PARTNERS, L.P.
By: Kinder Morgan G.P., Inc.,
Its general partner
By: /s/ David G. Dehaemers, Jr.
Name: David G. Dehaemers, Jr.
Title: Vice President
Date: November 6, 1998
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