<PAGE> 1
AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-50431
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0380342
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
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:
<TABLE>
<S> <C>
GEORGE E. RIDER MICHAEL ROSENWASSER
PATRICK J. RESPELIERS WILLIAM N. FINNEGAN, IV
MORRISON & HECKER L.L.P. ANDREWS & KURTH L.L.P.
2600 GRAND AVENUE 425 LEXINGTON AVENUE
KANSAS CITY, MISSOURI 64108 NEW YORK, NY 10017
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following 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. [ ]
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. [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 JUNE 8, 1998
6,500,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
LOGO
---------------------------
Of the 6,500,000 common units ("Units") representing limited partner
interests in Kinder Morgan Energy Partners, L.P. (the "Partnership") offered
hereby, 5,570,578 Units are being sold by the Partnership and 929,422 Units are
being sold by the Selling Unitholders (as defined herein), each of whom acquired
such Units pursuant to the VRED Exchange (as defined herein). See "Selling
Unitholders." The Partnership will not receive any of the proceeds from the sale
of the Units being sold by the Selling Unitholders.
The last reported sales price of the Units on June 5, 1998, as reported on
the New York Stock Exchange ("NYSE") Composite Transactions tape, was $36 15/16
per Unit. See "Price Range of Units and Distribution Policy."
FOR A DISCUSSION OF THE MATERIAL RISKS REGARDING AN INVESTMENT IN THE UNITS
AND THE BUSINESS AND OPERATIONS OF THE PARTNERSHIP THAT SHOULD BE EVALUATED
BEFORE INVESTING IN THE UNITS, SEE "RISK FACTORS" COMMENCING ON PAGE 7.
---------------------------
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.
---------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) PARTNERSHIP(2) UNITHOLDERS(2)
-------------- ------------ -------------- -------------------
<S> <C> <C> <C> <C>
Per Unit.......................... $ $ $ $
Total(3).......................... $ $ $ $
</TABLE>
- ---------------
(1) The Partnership and the Selling Unitholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Partnership
and $ payable by the Selling Unitholders.
(3) The Partnership has granted to the Underwriters an option for 30 days to
purchase up to an additional 975,000 Units at the initial offering price per
Unit, less the underwriting discounts, solely to cover over-allotments, if
any. If such option is exercised in full, the total initial public offering
price, underwriting discounts and proceeds to the Partnership will be
$ , $ and $ , respectively. See "Underwriting."
---------------------------
The Units offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the Units will be ready for delivery in New York, New York on or about
, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN
RAUSCHER INCORPORATED
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
WHEAT FIRST UNION
---------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
[MAP OF PARTNERSHIP PROPERTIES]
[AERIAL PHOTOGRAPH OF KINDER MORGAN PHOENIX TERMINAL]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, INCLUDING
OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES,
AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
ii
<PAGE> 4
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, proxy and information statements and other information
with the SEC. Such reports, statements and other information are available for
inspection at, and copies of such materials may be obtained upon payment of the
fees prescribed therefor by the rules and regulations of the SEC from, the
Public Reference Section of the SEC at its principal offices located at
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 60661-2511; and at Seven World Trade Center, 13th
Floor, New York, New York 10048. In addition, the Units are traded on the NYSE,
and such reports, statements 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, proxy and 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 following documents filed with the Commission by the Partnership (File
No. 1-11234) pursuant to the Exchange Act are hereby incorporated herein by
reference:
1. The Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "Form 10-K");
2. The Partnership's Quarterly Report on Form 10-Q for the three
months ended March 31, 1998; and
3. The Partnership's Current Report on Form 8-K dated March 5, 1998,
as amended.
The description of the Units which is contained in the Partnership's
registration statement on Form S-1 (File No. 33-48142) under the Securities Act
filed on June 1, 1992, including any amendment or reports filed for the purpose
of updating such description, is 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 shall be deemed
to be incorporated by reference in this Prospectus and to 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 a part of this Prospectus.
The Partnership undertakes to provide without charge to each person 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
iii
<PAGE> 5
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.
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 "anticipates," "estimates," "expects," "plans," "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,
prospective investors 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 ("NGLs"),
refined petroleum products, carbon dioxide ("CO(2)") 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 ("FERC") and the California Public Utilities
Commission ("CPUC");
- 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.
In addition, the availability to a Unitholder of the federal income tax
benefits of an investment in the Partnership largely depends on the
classification of the Partnership as a partnership for that purpose. The
Partnership will rely on an opinion of counsel, and not a ruling from the
Internal Revenue Service, on that issue and others relevant to a Unitholder.
For additional information which could affect the forward looking
statements, see "Risk Factors" listed on page 7 of this Prospectus and "Risk
Factors" included in the Partnership's Annual Report on Form 10-K, which is
incorporated herein by reference. The Partnership disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward looking statements included or incorporated by reference
herein to reflect future events or developments.
The information referred to above should be considered by potential
investors when reviewing any forward looking statements contained in this
Prospectus, in any documents incorporated herein by reference, in any of the
Partnership's public filings or press releases or in any oral statements made by
the Partnership or any of its officers or other persons acting on its behalf.
iv
<PAGE> 6
SUMMARY
The following is only a summary of certain information contained elsewhere
in this Prospectus and does not purport to be complete. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
contained elsewhere in this Prospectus or incorporated herein by reference. As
used in this Prospectus, the "Partnership" refers to Kinder Morgan Energy
Partners, L.P., and, except where the context otherwise requires, its
subsidiaries. Unless specifically stated otherwise, all information provided on
a per Unit basis has been restated to give effect to the Partnership's 2-for-1
Unit split, which was effective October 1, 1997. Unless otherwise defined
herein, capitalized terms used in this Summary have the meanings described
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety.
THE PARTNERSHIP
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership (the
"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 CO(2) for enhanced oil recovery ("Shell
CO(2) 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 low-cost, growth-oriented
MLP by reducing operating expenses, better utilizing and expanding its asset
base and making selective, strategic acquisitions that are accretive to
Unitholder distributions. 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 the
first quarter of 1998 and in 1997 as net income (before extraordinary items)
grew by 307% and 49%, respectively, over the first quarter of 1997 and the 1996
fiscal year, respectively. As a result of this strong financial performance, the
Partnership was able to increase its distribution to Unitholders by 90% from an
annualized rate of $1.26 per Unit at year-end 1996 to an annualized rate of
$2.40 per Unit commencing in the second quarter of 1998, as announced on May 13,
1998.
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 CO(2) Pipeline and
approximately $25.0 million in cash for a 20% limited partner interest in Shell
CO(2) Company.
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 include
refined petroleum products, NGLs and CO(2). The Liquids Pipelines segment
conducts operations through two geographic divisions: Kinder Morgan Pacific
Operations and Kinder Morgan Mid-Continent Operations.
1
<PAGE> 7
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 Los Angeles and
Orange, California, Las Vegas, Nevada and Tucson and Phoenix, Arizona. The
Pacific Operations transport, directly or indirectly, virtually all of the
refined products utilized in Arizona and Nevada, together with the majority of
refined products utilized in California. The Partnership plans to expand 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
interest in Shell CO(2) Company and a 50% interest in Heartland Pipeline
Company.
The North System includes a 1,600 mile NGL and refined products pipeline
which is a major transporter of products between the NGL hub in Bushton, Kansas
and industrial consumers such as refineries and petrochemical plants in the
Chicago, Illinois area. In addition, the North System has eight truck loading
terminals, which primarily deliver propane throughout the upper midwest, and
approximately 3 million barrels of storage capacity. 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 CO(2) Company is a leader in the production, transportation and
marketing of CO(2) 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 CO(2) domes, two CO(2) trunklines, and a distribution
pipeline running throughout the Permian Basin, Shell CO(2) Company can deliver
over 1 billion cubic feet of CO(2) per day. Within the Permian Basin, Shell
CO(2) Company offers its customers "one-stop shopping" for CO(2) supply,
transportation and technical service. Outside the Permian Basin, Shell CO(2)
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.
2
<PAGE> 8
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 as compared to margins achieved for non-blending, transloading
facilities. 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% interest in the Mont Belvieu Fractionator and (ii) the Painter
Gas Processing Plant. The Mont Belvieu Fractionator is a full service
fractionating facility with capacity of approximately 200,000 barrels per day.
Located in proximity to major end-users of its products, the Mont 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.
THE OFFERING
Units offered by the Partnership.... 5,570,578 Units(1)
Units offered by the Selling
Unitholders......................... 929,422 Units
Units to be outstanding after the
offering............................ 46,231,275 Units(1)(2)
Use of proceeds..................... Repayment of outstanding indebtedness
under the Credit Facility (as defined).
Amounts repaid under the Credit
Facility may be reborrowed for any
proper partnership purpose, including
the financing of future acquisitions.
See "Use of Proceeds."
NYSE symbol......................... ENP
- ---------------
(1) Assumes the Underwriters' overallotment option is not exercised. See
"Underwriters."
(2) Excludes 134,500 Units issuable, subject to vesting, upon the exercise of
outstanding options granted by the Partnership.
3
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND HISTORICAL OPERATING DATA
The following tables set forth, for the periods and at the dates indicated,
summary historical financial and operating data for the Partnership and Santa Fe
and pro forma financial data for the Partnership after giving effect to the
acquisition of Santa Fe, the formation of Shell CO(2) Company and the
refinancing of certain indebtedness. The data in the tables is derived from and
should be read in conjunction with the historical financial statements,
including the notes thereto, of the Partnership and Santa Fe incorporated by
reference, and the selected historical financial and operating information
included elsewhere in this Prospectus. The pro forma financial data give effect
to the acquisition of the assets of Santa Fe and the formation of Shell CO(2)
Company as if they had taken place at December 31, 1997 for balance sheet
purposes and as of January 1, 1997 for the twelve month income statement period
ended December 31, 1997 and the three month income statement period ended March
31, 1998, and should be read in conjunction with the unaudited pro forma
financial statements of the Partnership set forth in and incorporated by
reference in this Prospectus.
THE PARTNERSHIP
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------------------ ------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31, YEAR ENDED THREE MONTHS
------------------------------ --------------------- DECEMBER 31, ENDED MARCH 31,
1995 1996 1997 1997 1998(7) 1997 1998
-------- -------- -------- -------- ---------- ------------ ---------------
(IN THOUSANDS, EXCEPT PER UNIT AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues.................. $ 64,304 $ 71,250 $ 73,932 $ 19,132 $ 36,741 $ 318,347 $ 75,988
Cost of product sold...... 8,020 7,874 7,154 2,161 853 7,154 853
Operating and maintenance.. 15,928 22,347 17,982 4,739 7,839 76,942 28,410
Environmental and
litigation costs........ -- -- -- -- -- 8,000 --
Fuel and power............ 3,934 4,916 5,636 1,705 3,145 26,310 3,145
Depreciation and
amortization............ 9,548 9,908 10,067 2,555 4,719 41,379 9,567
General and
administrative.......... 8,739 9,132 8,862 2,045 5,094 27,482 3,782
-------- -------- -------- -------- ---------- ---------- --------
Operating income.......... 18,135 17,073 24,231 5,927 15,091 131,080 $ 30,231
Equity in earnings of
partnerships............ 5,755 5,675 5,724 839 5,282 5,724 5,282
Interest expense.......... (12,455) (12,634) (12,605) (3,283) (5,903) (53,074) (12,168)
Other income (expense).... 1,311 3,129 (353) 120 (506) (21) (240)
Income tax (provision)
benefit................. (1,432) (1,343) 740 (175) -- 740 --
Extraordinary charge on
early extinguishment of
debt.................... -- -- -- -- (13,611) -- (13,611)
-------- -------- -------- -------- ---------- ---------- --------
Net income................ $ 11,314 $ 11,900 $ 17,737 $ 3,428 $ 353 $ 84,449 $ 9,494
======== ======== ======== ======== ========== ========== ========
Net income per Unit(1).... $ .85 $ .90 $ 1.02 $ 0.26 $ (0.12) $ 1.80 $ .10
======== ======== ======== ======== ========== ========== ========
Cash distributions paid
per Unit................ $ 1.26 $ 1.26 $ 1.63 $ .315 $ .5625
======== ======== ======== ======== ==========
Additions to property,
plant and
equipment(2)............ $ 7,826 $ 8,575 $ 6,884 $ 713 $ 4,359
BALANCE SHEET DATA (AT
PERIOD END):
Net property, plant and
equipment............... $236,854 $235,994 $244,967 $234,260 $1,664,214 $1,597,559
Total assets.............. 303,664 303,603 312,906 302,822 1,911,177 1,821,000
Long-term debt............ 156,938 160,211 146,824 160,214 636,652 610,747
Partners' capital......... 123,116 118,344 150,224 121,772 1,083,636 1,074,856
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998(7)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Liquids pipelines transportation volumes -- thousand
barrels ("MBbls")...................................... 41,613 46,601 46,309 11,967 11,816
NGL fractionation volumes (MBbls)(3)..................... 59,546 59,912 71,686 17,280 18,105
Gas processing volumes -- million cubic feet per day
("MMcf/d")(4).......................................... 34 14 -- -- --
NGL revenue volumes (MBbls)(5)........................... 477 1,638 395 397 --
CO(2) transportation volumes -- billion cubic feet
("Bcf")................................................ 44 63 76 17 24
Coal transport volumes -- thousand tons ("Mtons")(6)..... 6,486 6,090 9,087 1,712 2,964
</TABLE>
- ---------------
(1) Represents net income per Unit adjusted for the 2-for-1 split of Units
effective on October 1, 1997. Allocation of net income per Unit was computed
by dividing the interest of the holders of Units in net income by the
weighted average number of Units outstanding during the period.
(2) Additions to property, plant and equipment for 1997 excludes the $11,688 of
assets acquired in the September 1997 Grand Rivers Terminal acquisitions.
(3) Represents total volumes for the Mont Belvieu Fractionator and the Painter
Plant.
(4) Represents the volumes of the gas processing portion of the Painter Plant,
which has been operationally idle since June 1996.
(5) Represents the volumes of the Bushton facility (beginning in October 1995).
(6) Represents the volumes of the Cora Terminal, excluding ship or pay volumes
of 252 Mtons for 1996 and the Grand Rivers Terminal from September 1997.
(7) Includes results of operations for the Pacific Operations from March 6,
1998.
5
<PAGE> 11
SANTA FE
<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT
AND OPERATING DATA)
<S> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Total revenues........................................ $233,677 $240,142 $244,415
Operating expenses.................................... 54,019 56,619 61,585
Provisions for environmental and litigation costs..... 34,000 23,000 8,000
Fuel and power........................................ 21,715 21,062 20,674
General and administrative............................ 27,462 30,260 26,495
Depreciation and amortization......................... 20,500 21,080 21,351
-------- -------- --------
Operating income...................................... 75,981 88,121 106,310
Interest expense...................................... 37,247 36,518 35,922
Other income (expense), net........................... 1,633 672 (941)
-------- -------- --------
Net income............................................ $ 40,367 $ 52,275 $ 69,447
======== ======== ========
PER UNIT DATA:
Net income............................................ $ 2.04 $ 2.64 $ 3.51
======== ======== ========
Cash distributions paid............................... $ 2.95 $ 3.00 $ 3.00
======== ======== ========
CAPITAL EXPENDITURES:................................... $ 31,431 $ 27,686 $ 24,934
BALANCE SHEET DATA (AT PERIOD END):
Properties, plant and equipment, net.................. $623,318 $628,694 $629,365
Total assets.......................................... 720,854 725,818 726,722
Long-term debt........................................ 355,000 355,000 355,000
Total partners' capital............................... $270,065 $262,915 $272,937
OPERATING DATA:
Delivered (MBbls)..................................... 354,324 365,377 369,845
Barrel miles (millions)............................... 50,010 51,827 53,046
Total revenue per barrel.............................. $ 0.66 $ 0.66 $ 0.66
</TABLE>
6
<PAGE> 12
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 this Prospectus or incorporated herein by
reference. A more detailed description of each of these risk factors, as well as
other risk factors, is included in the Partnership's Annual Report on 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. The FERC complaints allege that such rates are not entitled to
"grandfathered" status under the Energy Policy Act of 1992. The CPUC complaint
generally challenges rates charged by the Pacific Operations for intrastate
transportation of refined petroleum products in California and seeks prospective
rate reductions. If such challenges before the FERC or the CPUC 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 ANNOUNCED LEVEL OF DISTRIBUTIONS
The pro forma historical combined cash flow of the Partnership and Santa Fe
for 1997 would not be sufficient to pay the Partnership's current announced
distribution of $2.40 per year 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 announced level of
distributions. In addition, adverse changes in the Partnership's business,
including the disruption of operations at major suppliers or end-users, may
adversely affect distributions to Unitholders.
ISSUANCE OF UNITS TO HOLDERS OF VREDS MIGHT ADVERSELY AFFECT MARKET PRICE
After giving effect to the sale of the Units offered hereby, the
approximately 11,259,000 Units to be delivered in the VRED Exchange (as defined)
will represent approximately 24.3% of the total outstanding Units, assuming
underwriter overallotment option not exercised. Selling Unitholders who have
exchanged VREDs (as defined) pursuant to the VRED Exchange may determine, for
tax and other reasons, not to hold the Units on a long-term basis. The
Partnership can make no predictions as to the effect, if any, that sales of such
Units or the availability of such Units for sale might have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Units received in exchange for the VREDs could adversely affect prevailing
market prices of the Units. This offering is being made, in part, to attempt to
provide for an orderly distribution of such Units. However, as the holders of
only approximately 8.2% of the Units delivered in the VRED Exchange are
participating in the offering as Selling Unitholders, there can be no assurance
that this offering will achieve its objective of providing for an orderly
distribution of the Units to be received in the VRED Exchange. See "Selling
Unitholders."
7
<PAGE> 13
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 Unitholders 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 Unitholders if an event of default
exists or would exist upon making such distribution.
POSSIBLE CHANGE OF CONTROL IF KMI DEFAULTS ON ITS DEBT
Kinder Morgan, Inc. ("KMI"), the parent of the General Partner, has pledged
all of the stock of the General Partner to secure KMI's indebtedness. If KMI
were to default in the payment of such debt, the lenders could acquire control
of the General Partner.
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,
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 believes it
will 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 CO(2) Company has the power of eminent domain with respect to
its CO(2) 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 CO(2) COMPANY
The Partnership is entitled during the four year period ended December 31,
2002 to a fixed, quarterly distribution from Shell CO(2) 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.
8
<PAGE> 14
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 Unitholders.
- Unitholders may be required to return funds that they knew were
wrongfully distributed to them.
CONFLICTS OF INTEREST
The General Partner may experience conflicts of interest with the
Partnership, which could result in the General Partner taking actions that are
not in the best interests of the Unitholders.
USE OF PROCEEDS
The Partnership will receive no portion of the proceeds from the sale of
the Units sold by the Selling Unitholders hereunder. The Partnership will use
the proceeds from the sale of the Units sold by it in the offering to repay a
portion of the borrowings under its $325 million revolving credit facility with
Goldman Sachs Credit Partners L.P., as Syndication Agent, First Union National
Bank, as Administrative Agent, and the other lenders that are a party to the
facility (the "Credit Facility").
Interest on loans under the Credit Facility accrues at the Partnership's
option at a floating rate equal to either First Union National Bank's base rate
(but not less than the Federal Funds Rate plus .5% per annum) or LIBOR plus a
margin that will vary from .75% to 1.5% per annum depending upon the ratio of
the Partnership's Funded Indebtedness to Cash Flow. Interest on advances is
generally payable quarterly. Commencing in May 2000, the amount available under
the Credit Facility reduces on a quarterly basis, with the final installment due
in February 2005. Any borrowings under the Credit Facility repaid with the net
proceeds from the sale of the Units sold by the Partnership in this offering may
be reborrowed by the Partnership for any proper partnership purpose, including
the financing of future acquisitions.
As of May 26, 1998, the Partnership had borrowed under the Credit Facility
a total of $257 million consisting of (i) approximately $142 million borrowed to
refinance its First Mortgage Notes (as defined), including a make whole
prepayment premium thereunder, and the bank credit facilities of Kinder Morgan
Operating L.P. "A" ("OLP-A") and Kinder Morgan Operating L.P. "B" ("OLP-B") (the
"Refinanced Indebtedness"); (ii) approximately $25 million borrowed to fund its
cash investment in Shell CO(2) Company; and (iii) approximately $90 million
borrowed to fund its
9
<PAGE> 15
acquisition of the general partner interest in Santa Fe and a portion of the
transaction costs associated with the acquisition of Santa Fe.
The Partnership's First Mortgage Notes were incurred in connection with the
original formation of the Partnership. The remainder of the Refinanced
Indebtedness was incurred for working capital and general partnership purposes.
The Partnership's First Mortgage Notes bore interest at a fixed rate of 8.79%
per annum. The remaining Refinanced Indebtedness bore interest at varying rates
(a weighted average rate of approximately 7.65% per annum as of December 31,
1997). The Partnership's First Mortgage Notes were payable in 10 equal annual
installments of $11 million commencing in June 1998. The remaining Refinanced
Indebtedness was scheduled to mature in 1999.
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY
PRICE RANGE OF UNITS
The following table sets forth certain information as to the sale prices
per Unit as quoted on the NYSE, and distributions declared with respect to each
calendar quarter, for each calendar year since the end of 1995, adjusted to give
effect to the 2-for-1 split of Units effective October 1, 1997.
<TABLE>
<CAPTION>
SALES PRICES
-------------------
CALENDAR YEAR HIGH LOW DISTRIBUTIONS
------------- -------- -------- -------------
<S> <C> <C> <C>
1996
First Quarter............................................ $13.1875 $12.1875 $.3150
Second Quarter........................................... 13.0000 12.4375 .3150
Third Quarter............................................ 14.0625 12.6875 .3150
Fourth Quarter........................................... 14.5625 12.8125 .3150
1997
First Quarter............................................ $21.3750 $13.6875 $.3150
Second Quarter........................................... 24.0625 19.2500 .5000
Third Quarter............................................ 36.8750 23.9375 .5000
Fourth Quarter........................................... 41.2500 32.0000 .5625
1998
First Quarter............................................ $37.8750 $30.1250 $.5625
Second Quarter (through June 5, 1998).................... 38.1250 35.3750 .6000(1)
</TABLE>
- ---------------
(1) On May 13, 1998, the Partnership announced an increase in its quarterly
distributions to $.60 per Unit beginning with distributions for the second
quarter of 1998, which will be payable in August 1998.
On June 5, 1998, the closing price for a Unit as reported on the NYSE
Composite Transaction Tape was $36.9375.
DISTRIBUTION POLICY
The Partnership Agreement requires the Partnership to distribute 100% of
"Available Cash" (as defined in the Partnership Agreement) to the Partners
within 45 days following the end of each calendar quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Partnership Distributions." On
May 13, 1998, the Partnership announced an increase in its quarterly
distributions to $.60 per Unit beginning with the distribution for the second
quarter of 1998. The Partnership currently expects that it will continue to pay
comparable cash distributions in the future assuming no adverse change in the
Partnership's operations, economic conditions and other factors. See "Risk
Factors -- Possible Insufficient Cash to Pay Announced Level of Distributions."
As of March 6, 1998, there were approximately 3,000 record holders of the
Partnership's Units and there were an estimated 23,000 beneficial owners of
Units, including Units held in street name.
10
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
March 31, 1998 and as adjusted to give effect to the sale of 5,570,578 Units
offered by the Partnership hereby, assuming a public offering price of $36.00
(the last reported sales price for the Units on May 26, 1998) and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Partnership. See "Use of Proceeds." In each
case, the table assumes that the Underwriters' over-allotment option is not
exercised. The table should be read in conjunction with the historical financial
statements and notes incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt.............................................. $ 636,652 ($191,878) $ 444,774
Minority Interest........................................... 16,234 1,938 18,172
---------- --------- -----------
Partners' Capital
Common Units, 40,727,126 Units issued and outstanding,
historical;
5,570,578 Units issued pursuant to this offering,
adjustment;
46,297,704 Units issued and outstanding, after this
offering as adjusted(1)................................. 1,079,370 189,940 1,269,310
General Partner Interest.................................. 4,266 -- 4,266
---------- --------- -----------
Total Partners' Capital............................. 1,083,636 189,940 1,273,576
---------- --------- -----------
Total Capitalization................................ $1,736,522 -- $ 1,736,522
========== ========= ===========
</TABLE>
- ---------------
(1) Does not include an aggregate of 123,000 Units issuable, subject to vesting,
upon exercise of options outstanding on March 31, 1998, granted by the
Partnership. Includes 66,429 Units to be cancelled in connection with the
VRED Exchange.
11
<PAGE> 17
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements of the Partnership
have been derived from the historical balance sheets and income statements of
the Partnership and Santa Fe (i) as of December 31, 1997 and for the year then
ended and (ii) for the three month period ended March 31, 1998. The unaudited
pro forma combined financial statements have been prepared to give effect to the
acquisition of Santa Fe through the issuance of 1.39 Units of the Partnership
for each outstanding Santa Fe common unit and the purchase of the general
partner interest of Santa Fe for $84.4 million in cash using the purchase method
of accounting. The unaudited pro forma combined balance sheet has been prepared
assuming the acquisition of Santa Fe, the formation of Shell CO(2) Company and
the refinancing of existing indebtedness had been consummated on December 31,
1997. The unaudited pro forma combined statements of income for the year ended
December 31, 1997 and for the three month period ended March 31, 1998 have been
prepared assuming the acquisition of Santa Fe had been consummated on January 1,
1997.
The purchase price for Santa Fe allocated in the unaudited pro forma
combined financial statements is based on management's preliminary estimate of
the fair market values of assets acquired and liabilities assumed and are
subject to adjustment. The final allocation of the purchase price will be based
on the fair market values determined by valuations and other studies which are
not yet completed.
The unaudited pro forma combined financial statements assume all of the
VREDs are exchanged in the VRED Exchange. On June 4, 1998, the VRED Exchange
closed, which resulted in approximately $1.31 million being paid to the holders
of the VREDs who did not exchange their VREDs for Units and the cancellation of
66,429 Units representing Units which were not exchanged for VREDs and
fractional Units which holders of VREDs were entitled to receive in connection
with the VRED Exchange. The Partnership believes that the impact of the
foregoing would not have a material effect on the unaudited pro forma combined
financial statements.
The unaudited pro forma combined financial statements include assumptions
and adjustments as described in the accompanying notes and should be read in
conjunction with the historical financial statements and related notes of the
Partnership and Santa Fe, incorporated by reference herein.
The unaudited pro forma combined financial statements may not be indicative
of the results that would have occurred if the acquisition of Santa Fe had been
consummated on the date indicated or which will be obtained in the future.
12
<PAGE> 18
PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------------
PARTNERSHIP SANTA FE PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............ $ 9,612 $ 40,872 $(19,200)(d) $ 25,484
(5,800)(e)
Accounts receivable.................. 8,569 34,307 42,876
Inventories..........................
Products.......................... 1,901 1,901
Materials and supplies............ 1,710 1,710
Other current assets................. 2,875 2,875
-------- --------- -------- ----------
21,792 78,054 (25,000) 74,846
Property, plant and equipment at
cost................................. 290,620 744,925 664,107(a) 1,643,212
(56,440)(b)
Less accumulated depreciation........ (45,653) (115,560) 115,560(a) (45,653)
-------- --------- -------- ----------
244,967 629,365 723,227 1,597,559
Investments in partnerships............ 31,711 81,440(b) 113,151
Deferred charges and other assets...... 14,436 19,303 1,705(d) 35,444
-------- --------- -------- ----------
Total assets................. $312,906 $ 726,722 $781,372 $1,821,000
======== ========= ======== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable -- trade............ 4,930 5,755 10,685
Accrued liabilities.................. 3,585 32,920 12,000(c) 48,505
Accrued taxes........................ 2,861 2,861
-------- --------- -------- ----------
11,376 38,675 12,000 62,051
Long-term debt......................... 146,824 355,000 108,923(d) 610,747
Deferred credits and other
liabilities.......................... 2,997 58,767 61,764
Minority interest...................... 1,485 1,342 9,623(g) 11,582
(138)(d)
(730)(k)
Partners' capital
Common units......................... 146,840 271,596 671,609(a) 1,071,657
(13,368)(d)
(5,020)(k)
General Partner...................... 3,384 1,342 (1,342)(f) 3,199
(135)(d)
(50)(k)
-------- --------- -------- ----------
150,224 272,938 651,694 1,074,856
-------- --------- -------- ----------
Total liabilities and
partners' capital.......... $312,906 $ 726,722 $781,372 $1,821,000
======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
13
<PAGE> 19
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
PARTNERSHIP SANTA FE PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues...................................... $73,932 $244,415 $ $318,347
Costs and expenses
Cost of products sold....................... 7,154 7,154
Operations and maintenance.................. 17,982 61,585 (2,625)(h) 76,942
Fuel and power.............................. 5,636 20,674 26,310
Depreciation and amortization............... 10,067 21,351 9,961(i) 41,379
General and administrative.................. 8,862 26,495 (7,875)(h) 27,482
Provision for litigation costs.............. 8,000 8,000
------- -------- ------- --------
49,701 138,105 (539) 187,267
------- -------- ------- --------
Operating income.............................. 24,231 106,310 539 131,080
Other income (expense)
Equity in earnings of partnerships.......... 5,724 5,724
Interest expense............................ (12,605) (35,922) (4,547)(j) (53,074)
Interest income and other, net.............. (174) 1,374 1,200
Minority interest............................. (179) (2,315) 1,273(l) (1,221)
------- -------- ------- --------
Income before income taxes and extraordinary
item........................................ 16,997 69,447 (2,735) 83,709
Income tax (expense).......................... 740 740
------- -------- ------- --------
Net income before extraordinary
item..................................... $17,737 $ 69,447 $(2,735) $ 84,449
======= ======== ======= ========
General Partner's interest in net income
before extraordinary item................... $ 4,074 $ 2,315 $ 5,841(l) $ 12,230
Limited partners' interest in net income
before extraordinary item................... 13,663 67,132 (8,576)(l) 72,219
------- -------- ------- --------
Net income before extraordinary item.......... $17,737 $ 69,447 $(2,735) $ 84,449
======= ======== ======= ========
Allocation of net income before extraordinary
item per limited partner unit............... $ 1.02 $ 3.51 $ 1.80
======= ======== ======= ========
Number of Units used in computation........... 13,411 26,616(a) 40,027
------- ------- --------
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
14
<PAGE> 20
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------
PARTNERSHIP SANTA FE PRO FORMA PRO FORMA
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................................... $ 36,741 $39,247 $ -- $ 75,988
Costs and expenses
Cost of products sold.................... 853 -- -- 853
Operations and maintenance............... 6,360 18,840 (438)(h) 24,762
Fuel and power........................... 3,145 -- 3,145
Depreciation and amortization............ 4,719 3,558 1,290(i) 9,567
General and administrative............... 5,094 -- (1,312)(h) 3,782
Taxes, other than income taxes........... 1,479 2,169 -- 3,648
-------- ------- ------- --------
21,650 24,567 (460) 47,757
-------- ------- ------- --------
Operating income........................... 15,091 14,680 460 30,231
Other income (expense)
Equity in earnings of partnerships....... 5,282 5,282
Interest expense......................... (5,903) (5,507) (758)(j) (12,168)
Interest income and other, net........... (444) 348 (96)
Minority interest.......................... (62) (307) 225(l) (144)
-------- ------- ------- --------
Income before income taxes and
extraordinary item....................... 13,964 9,214 (73) 23,105
Income tax (expense)....................... -- -- -- --
-------- ------- ------- --------
Net income before extraordinary item....... $ 13,964 $ 9,214 $ (73) $ 23,105
======== ======= ======= ========
General Partner's interest in net income
before extraordinary item................ $ 2,865 $ 307 $ 2,354(l) $ 5,526
Limited partners' interest in net income
before extraordinary item................ 11,099 8,907 (2,427)(l) 17,579
-------- ------- ------- --------
Net income before extraordinary item....... $ 13,964 $ 9,214 $ (73) $ 23,105
======== ======= ======= ========
Allocation of net income before
extraordinary item per limited partner
unit..................................... $ .52 -- $ 0.43
======== ======= ======= ========
Number of Units used in computation........ 21,505 -- 19,222(a) 40,727
-------- ------- ------- --------
</TABLE>
- ---------------
(1) Includes the Pacific Operations since March 6, 1998.
(2) Covers the period between January 1, 1998 to March 6, 1998.
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
15
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER UNIT AMOUNTS)
BASIS OF PRESENTATION
The following described pro forma adjustments give recognition to the
acquisition of Santa Fe through the issuance of 1.39 Units at a unit price, as
of the close of business on March 6, 1998, of $35.4375 to the public holders of
Santa Fe common units for each outstanding Santa Fe common unit, the redemption
of the general partner interest in Santa Fe for $84,400 in cash, a General
Partner cash contribution of $9,623, the refinancing of indebtedness and the
purchase of a 20% interest in Shell CO(2) Company.
(a) Reflects the preliminary allocation of the total purchase price in excess
of the net assets acquired to estimated fair value of property, plant and
equipment utilizing the purchase method of accounting for the acquisition
of Santa Fe as of December 31, 1997. The purchase price allocation is
subject to revision based on a preliminary appraisal. The valuation of the
assets and liabilities is not complete as of the date of this filing.
The purchase price is calculated as follows:
<TABLE>
<S> <C>
Issuance of 26,616 Units.................................... $ 943,205
Cash for general partner interest in Santa Fe............... 84,400
Involuntary termination costs............................... 12,000
Acquisition fees and other costs............................ 13,000
----------
Total costs................................................. 1,052,605
Santa Fe net book value..................................... 272,938
----------
Excess of purchase price over net assets acquired........... $ 779,667
==========
</TABLE>
The excess of the purchase price over the book value of net assets acquired
is allocated to the fair market value of property, plant and equipment
acquired, which is yet to be finalized. The excess of the purchase price
over this fair value, if any, will be allocated to goodwill and amortized
over forty years.
(b) Gives effect to the purchase of a 20% equity interest in Shell CO(2)
Company for a contribution of property, plant and equipment with a net book
value of $56,440 and cash of $25,000.
(c) Reflects the assumption of involuntary termination costs of certain Santa
Fe employees in connection with the Partnership's acquisition of Santa Fe
estimated to total $12,000 (net of a $4,500 reimbursement by Santa Fe).
(d) Reflects borrowings totaling $108,923 calculated as follows:
<TABLE>
<S> <C>
Cash for general partner interest in Santa Fe............... $ 84,400
Acquisition fees and other costs............................ 13,000
General Partner cash contribution........................... (9,623)
Less: utilization of cash resources......................... (19,200)
--------
Total Borrowings associated with Partnership's acquisition
of Santa Fe............................................... 68,577
Purchase of interest in Shell CO(2) Company................. 25,000
Refinancing of existing debt................................ 12,746
Credit facility fees........................................ 2,600
--------
Total............................................. $108,923
========
</TABLE>
The Partnership entered into a revolving credit facility agreement on
February 17, 1998, in which a portion of the proceeds were used to
refinance certain existing long-term debt,
16
<PAGE> 22
including the payment of a $12,746 make-whole premium on certain debt. The
payment of such make-whole premium and write-off of unamortized debt costs
of $895 resulted in an extraordinary loss of approximately $13,611 which is
reflected in the Pro Forma Balance Sheet as a reduction to Partners'
Capital and minority interest. The extraordinary loss and the interest
expense associated with the refinancing of certain debt, borrowings related
to the make-whole premium and the investment in the Shell CO(2) Company are
not directly related to the acquisition of Santa Fe and are not reflected
in the Pro Forma Combined Statement of Income for the 12 months ended
December 31, 1997. The extraordinary loss was recorded in the first quarter
of 1998.
(e) Gives effect to the utilization of $5,800 of cash from SFPP, L.P., the
operating partnership of Santa Fe ("SFPP"), to redeem a .5101% special
limited partner interest ("Special LP Interest") owned by the former
general partner of Santa Fe.
(f) To give effect to the removal of the former general partner of Santa Fe as
the general partner of Santa Fe.
(g) To account for the additional $9,623 cash contribution to Kinder Morgan
Operating L.P. "D" ("OLP-D") (minority interest of 1.0101%).
(h) To reduce operating and general and administrative expenses for the costs
related to certain employees involuntarily terminated in connection with
the acquisition of Santa Fe. The Partnership management has made explicit
determinations of salary, benefit, and other cost reductions resulting from
these terminations. Such reductions will have a continuing impact on
expenses in future periods. None of the identified terminations or cost
reductions will reduce revenues or efficiency of operations.
(i) To record estimated additional depreciation expense using a remaining
useful life of 45 years. The actual range of useful lives will not be known
until a formal analysis and appraisal of assets acquired is completed.
(j) Reflects incremental interest expense on new debt associated with the
acquisition of Santa Fe of $68,577 at a rate of 6.63% as discussed in (d)
above.
(k) Gives effect to the redemption of the .5101% Special LP Interest in
connection with the acquisition of Santa Fe. Pursuant to the Purchase
Agreement, SFPP redeemed a portion of the Special LP Interest from the
former Santa Fe general partner for $5,800. These amounts reduce Partners
Capital-Units by $5,020, Partners Capital-General Partner by $50, and
minority interest by $52. This leaves the former Santa Fe general partner
with a remaining minority Special LP Interest of .5% in SFPP.
(l) Gives effect to the allocation of pro forma net income to the General
Partner and the limited partners resulting from the utilization of
Partnership sharing ratios. Amounts are calculated giving consideration to
cash available for distribution after certain anticipated cost savings and
interest expense (see notes h and j, respectively). The General Partner's
interest in net income includes incentive distributions the General Partner
would have received based on total distributions. These incentive
distributions are greater under the Partnership's Partnership Agreement
than they would have been under the Santa Fe Partnership Agreement.
17
<PAGE> 23
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth, for the periods and at the dates indicated,
selected historical financial and operating data for the Partnership and Santa
Fe. The data in the tables is derived from and should be read in conjunction
with the historical financial statements, including the notes thereto, of the
Partnership and Santa Fe incorporated by reference.
THE PARTNERSHIP
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998 (7)
-------- -------- -------- ---------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues.................................. $ 51,180 $ 54,904 $ 64,304 $ 71,250 $ 73,932 $ 19,132 $ 36,741
Cost of product sold...................... 685 940 8,020 7,874 7,154 2,161 853
Operating and maintenance................. 12,932 13,644 15,928 22,347 17,982 4,739 7,839
Fuel and power............................ 6,875 5,481 3,934 4,916 5,636 1,705 3,145
Depreciation and amortization............. 7,167 8,539 9,548 9,908 10,067 2,555 4,719
General and administrative................ 7,073 8,196 8,739 9,132 8,862 2,045 5,094
-------- -------- -------- ---------- -------- -------- ----------
Operating income.......................... 16,448 18,104 18,135 17,073 24,231 5,927 15,091
Equity in earnings of partnerships........ 1,835 5,867 5,755 5,675 5,724 839 5,282
Interest expense.......................... (10,302) (11,989) (12,455) (12,634) (12,605) (3,283) (5,903)
Other income (expense).................... 510 509 1,311 3,129 (353) 120 (506)
Income tax (provision) benefit............ 83 (1,389) (1,432) (1,343) 740 (175) --
Extraordinary charge on early
extinguishment of debt.................. -- -- -- -- -- -- (13,611)
-------- -------- -------- ---------- -------- -------- ----------
Net income................................ $ 8,574 $ 11,102 $ 11,314 $ 11,900 $ 17,737 $ 3,428 $ 353
======== ======== ======== ========== ======== ======== ==========
Net income per Unit(1).................... $ .75 $ .93 $ .85 $ .90 $ 1.02 $ 0.26 $ (0.12)
======== ======== ======== ========== ======== ======== ==========
Cash distributions paid per Unit.......... $ 1.26 $ 1.26 $ 1.26 $ 1.26 $ 1.63 $ .315 $ .5625
======== ======== ======== ========== ======== ======== ==========
Additions to property, plant and
equipment(2)............................ $ 4,688 $ 5,195 $ 7,826 $ 8,575 $ 6,884 $ 713 $ 4,359
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and equipment......... $228,859 $238,850 $236,854 $ 235,994 $244,967 $234,260 $1,664,214
Total assets.............................. 288,345 299,271 303,664 303,603 312,906 302,822 1,911,177
Long-term debt............................ 138,485 150,219 156,938 160,211 146,824 160,214 636,652
Partners' capital......................... 132,391 128,474 123,116 118,344 150,224 121,772 1,083,636
OPERATING DATA:
Liquids pipelines transportation volumes
(MBbls)................................. 52,600 46,078 41,613 46,601 46,309 11,967 11,816
NGL fractionation volumes (MBbls)(3)...... 53,053 57,703 59,546 59,912 71,686 17,280 18,105
Gas processing volumes (MMcf/d)(4)........ -- 34 34 14 -- -- --
NGL revenue volumes (MBbls)(5)............ -- -- 477 1,638 395 397 --
CO(2) transportation volumes (Bcf)........ 33 32 44 63 76 17 24
Coal transport volumes (Mtons)(6)......... 1,209 4,539 6,486 6,090 9,087 1,712 2,964
</TABLE>
- ---------------
(1) Represents net income per Unit adjusted for the 2-for-1 split of Units
effective on October 1, 1997. Allocation of net income per Unit was computed
by dividing the interest of the holders of Units in net income by the
weighted average number of Units outstanding during the period.
(2) Additions to property, plant and equipment for 1993, 1994 and 1997 exclude
the $25,291, $12,825 and $11,688 of assets acquired in the September 1993
Cora Terminal, the June 1994 Painter Gas Processing Plant ("Painter Plant")
and the September 1997 Grand River Terminal acquisitions, respectively.
(3) Represents total volumes for the Mont Belvieu Fractionator and the Painter
Plant.
(4) Represents the volumes of the gas processing portion of the Painter Plant,
which has been operationally idle since June 1996.
(5) Represents the volumes of the Bushton facility (beginning in October, 1995).
(6) Represents the volumes of the Cora Terminal, excluding ship or pay volumes
of 252 Mtons for 1996, and the Grand Rivers Terminal from September 1997.
(7) Includes results of operations for the Pacific Operations from March 6,
1998.
18
<PAGE> 24
SANTA FE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Total revenues...................... $219,471 $228,066 $233,677 $240,142 $244,415
Operating expenses (excluding
provisions for depreciation &
amortization)..................... 95,178 97,199 103,196 107,941 108,754
Provisions for environmental And
litigation costs.................. 27,000 -- 34,000 23,000 8,000
Depreciation & amortization......... 18,971 19,820 20,500 21,080 21,351
-------- -------- -------- -------- --------
Operating income.................... 78,322 111,047 75,981 88,121 106,310
Interest expense.................... 37,086 37,570 37,247 36,518 35,922
Other income (expense), net......... 380 3,408 1,633 672 (941)
-------- -------- -------- -------- --------
Net income.......................... $ 41,616 $ 76,885 $ 40,367 $ 52,275 69,447
======== ======== ======== ======== ========
PER UNIT DATA:
Net income.......................... $ 2.13 $ 3.93 $ 2.04 $ 2.64 $ 3.51
======== ======== ======== ======== ========
Cash distributions paid............. $ 2.80 $ 2.80 $ 2.95 $ 3.00 $ 3.00
======== ======== ======== ======== ========
CAPITAL EXPENDITURES:............... $ 21,084 $ 17,913 $ 31,431 $ 27,686 $ 24,934
BALANCE SHEET DATA (AT PERIOD END):
Properties, plant and equipment,
net............................... $616,610 $613,039 $623,318 $628,694 $629,365
Total assets........................ 696,980 714,772 720,854 725,818 726,722
Long-term debt...................... 355,000 355,000 355,000 355,000 355,000
Total partners' capital............. 265,851 287,961 270,065 262,915 272,937
OPERATING DATA:
Barrels delivered (thousands)....... 332,679 349,754 354,324 365,377 369,845
Barrel miles (millions)............. 46,579 49,070 50,010 51,827 53,046
Total revenue per barrel............ $ 0.66 $ 0.65 $ 0.66 $ 0.66 $ 0.66
</TABLE>
19
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS OF THE PARTNERSHIP
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
The Partnership's net income before extraordinary charge increased to
$13.96 million in 1998 from $3.43 million in 1997. The increase resulted
primarily from earnings attributable to the Pacific Operations (formerly Santa
Fe), which were acquired March 6, 1998. In addition, earnings increased
significantly in all the other business segments, which include the
Mid-Continent Operations, Coal Transfer, Storage and Services and Gas Processing
and Fractionation.
The Mid-Continent Operations' earnings increased 25% to $8.13 million in
1998 compared to $6.51 million in 1997. The Mid-Continent Operations consist of
the North System, the Cypress Pipeline and CO(2) activities. Earnings increased
primarily as a result of the CO(2) joint venture with affiliates of Shell,
effective the first quarter of 1998, and increased ethane volumes due to a
25,000 barrel per day expansion of the Cypress Pipeline in late 1997. The
increase was partially offset by lower petrochemical and refinery volumes and a
9% decrease in average tariffs.
Earnings from Coal Transfer, Storage and Services segment increased 48% to
$2.45 million in 1998 compared to $1.66 million in 1997. The increase was
primarily due to the marketing of coal and propane products to utilities and
industrial customers and the coal terminal acquisition in September 1997.
The Gas Processing and Fractionation business segment earnings increased
341% to $1.28 million in 1998 compared to $.29 million in 1997. This increase
was primarily due to earnings from the Partnership's interest in the Mont
Belvieu Fractionator which increased due to higher volumes and the elimination
of corporate taxes and certain start up costs incurred in 1997 for the 1996
expansion.
Revenues of the Partnership increased 92% to $36.74 million in 1998
compared to $19.13 million in 1997. Revenues from the Pacific Operations
contributed $20.77 million and revenues from the Coal Transfer, Storage and
Services segment totaled $5.84 million, up 136%. These increased revenues were
partially offset by a decrease of $5.40 million in the Mid-Continent Operations.
This decrease was primarily a result of lower product sales and lower
petrochemical and refinery volumes due to warmer than normal weather. Revenues
from the Central Basin Pipeline are not recorded by the Partnership due to its
contribution of this pipeline to Shell CO(2) Company. The Partnership recorded
its share of equity earnings in Shell CO(2) Company as Other Income, which is
included in the Mid-Continent Operations earnings.
Operating statistics for the first quarter are as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
-------------
1997 1998
----- -----
<S> <C> <C>
Pacific Operations(1)
Delivery Volumes (MMBbls)................................. -- 29.9
Average Tariff ($/Bbl).................................... -- $ .66
Mid-Continent Operations
Delivery Volumes (MMBbls)................................. 12.0 11.8
Average Tariff ($/Bbl).................................... $ .86 $ .78
Coal Transfer, Storage and Services
Transport Volumes (MM Tons)............................... 1.7 3.0
Average Revenues ($/Ton).................................. $1.41 $1.28
</TABLE>
- ---------------
(1) Pacific Operations were acquired on March 6, 1998.
20
<PAGE> 26
Earnings contribution by business segment for the first quarter is as
follows:
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT(1)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST QUARTER
----------------
1997 1998
------ -------
<S> <C> <C>
Pacific Operations(2)....................................... -- $12,865
Mid-Continent Operations.................................... $6,508 $ 8,128
Coal Transfer, Storage and Services......................... $1,657 $ 2,450
Gas Processing and Fractionation............................ $ 290 $ 1,281
</TABLE>
- ---------------
(1) Excludes general and administrative expenses, debt costs and minority
interest.
(2) Pacific Operations were acquired on March 6, 1998.
Cost of products sold decreased 61% to $.85 million in 1998 compared to
$2.16 million in 1997. The decrease was due to fewer purchase/sale contracts for
the Mid-Continent Operations, which was partially offset by the increased cost
of products for the Coal Transfer, Storage and Services segment due to higher
volumes.
Fuel and power expenses increased to $3.15 million in 1998 compared to
$1.71 million in 1997. The 84% increase was due primarily to the addition of the
Pacific Operations.
Operating and maintenance expenses, combined with general and
administrative expenses, were $11.45 million in 1998. This amount represents a
95% increase from the $5.86 million in 1997. A significant amount of the
increase resulted from the newly acquired Pacific Operations and the newly
acquired coal terminal, which were $4.85 million and $1.27 million,
respectively. Higher operating and general and administrative expenses were
partially offset by lower expenses from the Gas Processing and Fractionation
segment due to the assignment of the Mobil gas processing agreement at the
Bushton Plant (the "Mobil Agreement") to KN Processing, Inc. on April 1, 1997
and the leasing of the Painter facility to Amoco Oil Company.
Depreciation expense increased 84% to $4.72 million in 1998 compared to
$2.56 million in 1997. The Pacific Operations accounted for $2.42 million of the
increase, which was partially offset by lower depreciation for the Mid-Continent
Operations due to the transfer of the Central Basin Pipeline to Shell CO(2)
Company.
Taxes other than income increased $.56 million (60%) compared to 1997
primarily due to the addition of the Pacific Operations, which was partially
offset by the Mid-Continent Operations as a result of the joint venture with
Shell.
Earnings from investments in partnerships increased $4.44 million compared
to 1997 primarily due to equity in earnings from Shell CO(2) Company and an 80%
increase in equity in earnings from Mont Belvieu Associates.
Interest Expense increased $2.62 million compared to last year primarily
due to the Pacific Operations, which accounted for $2.47 million of the increase
in interest expense.
Other income, which includes interest income and other non-operating income
and expense, decreased $.6 million in 1998 compared to 1997. The decrease was
due to the FERC Rate Case reserve for the Pacific Operations.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net income of the Partnership increased 49% to $17.7 million in 1997 from
$11.9 million in 1996. The results for 1996 included a non-recurring gain of
$2.5 million, attributable to the cash buyout
21
<PAGE> 27
received from Chevron, USA ("Chevron") for early termination of a gas processing
contract at the Painter Plant. See Note 5 of the Notes to the Consolidated
Financial Statements of the Partnership, incorporated herein by reference.
A significant earnings increase was attributable to the Coal Transfer,
Storage and Services segment. This segment reported net income of $10.7 million
for 1997, $6.3 million (143%) higher than last year. Earnings from the coal
terminals increased 81%, primarily the result of increases in coal tons
transferred and average transfer rates at the Cora Terminal, as well as the
addition of the Grand Rivers Terminal in September 1997. Operating results from
Red Lightning Energy Services business unit, also contributed positive earnings.
The Liquids Pipelines segment's net income increased to $23.9 million (8%)
in 1997 compared to $22.1 million in 1996. Earnings from the Central Basin
Pipeline increased by 16%, as a result of higher throughput and a decrease in
cost of products sold. Increased throughput on the Cypress Pipeline, due to a
25,000 barrel per day expansion which came on-line in late November 1997, led to
an earnings increase of 9% over 1996. Earnings on the North System for 1997
increased 3% compared to last year, chiefly due to lower operating and
maintenance expenses.
Higher earnings from the segments cited above were offset by lower earnings
in the Gas Processing and Fractionation segment. Segment earnings decreased $3.1
million in 1997, primarily the result of the $2.5 million non-recurring gain
recognized in 1996 (referred to above). Earnings from the Partnership's interest
in the Mont Belvieu Fractionator increased by 13% from a year ago. The favorable
Fractionator results included $.7 million of tax benefits associated with the
partial liquidating distribution of Kinder Morgan Natural Gas Liquids
Corporation ("KMNGL"), the corporate entity holding the Partnership's interest
in the Fractionator, partially offset by a $0.6 million reserve established for
a contested product loss. Lower overall segment earnings were due to the
termination of the Painter Plant's gas processing agreement by Chevron,
effective as of August 1, 1996.
Revenues of the Partnership increased 4% to $73.9 million in 1997 compared
to $71.3 million in 1996. Revenues from the Coal Transfer, Storage and Services
segment totaled $18.2 million, up $10.1 million from 1996. The large increase
reflects the addition of the Red Lightning Energy Services unit and the Grand
Rivers Terminal starting in April and September, respectively. Revenues from the
Cora Terminal increased to $10.9 million (35%) in 1997. The increase resulted
from a 17% increase in volumes transferred, accompanied by a 6% increase in
average transfer rates.
1997 revenues reported by the Liquids Pipelines segment remained relatively
flat compared to 1996. Revenues in 1997 were $53.5 million compared to $54.0
million last year. Revenues from the Cypress Pipeline increased 11% due to a 14%
increase in throughput volumes. The North System's revenues decreased 3% due to
a 5% decrease in barrels transported. Revenue from the Central Basin Pipeline
was essentially unchanged.
Revenues from the Gas Processing and Fractionation segment declined in 1997
compared to the previous year. The decrease was the result of the termination of
gas processing at the Painter Plant in August 1996 and the assignment of the
Mobil Agreement to KN Processing, Inc. on April 1, 1997.
Cost of products sold decreased 9% to $7.2 million in 1997 compared to
1996. The decrease was due to fewer purchase/sale contracts on the liquids
pipelines as well as the termination of purchase/sale contracts at the Painter
Plant. The lower overall cost of sales was partially offset by costs incurred by
the Red Lightning Energy Services unit.
Fuel and power expense increased to $5.6 million in 1997 compared to $4.9
million in 1996. The 14% increase from the prior period was principally the
result of higher fuel costs reported by the Liquids Pipelines, as well as
increases in coal tons transferred by the coal terminals.
22
<PAGE> 28
Operating and maintenance expenses, combined with general and
administrative expenses, were $23.9 million in 1997. This amount represents a
15% decrease from the $28.0 million reported in 1996. A significant decrease in
operating and administrative expense resulted from the Gas Processing and
Fractionation segment's assignment of the Mobil Agreement to KN Processing, Inc.
and leasing of the Painter Plant to Amoco Oil Company. Operating, maintenance,
and administrative expenses for the Liquids Pipelines in 1997 decreased by 10%
versus 1996 as a result of increased operating efficiencies and cost savings
realized by new management. Lower overall operating, maintenance, and general
and administrative expenses were partially offset by higher expenses from the
Coal Transfer, Storage and Services segment. Higher operating expenses from this
segment were due to increased business activity.
Taxes other than income decreased $0.5 million (15%) in 1997 due to
adjustments to the Liquids Pipelines' ad valorem tax valuations and prior year
ad valorem tax provisions.
Other income which includes interest income, other non-operating income and
expense, and reserves, decreased $3.4 million in 1997. The decrease reflects the
$2.5 million buyout payment received from Chevron in 1996 and a $0.6 million
contested product loss at the Mont Belvieu Fractionator.
A decrease in the cumulative difference between book and tax depreciation
and the effect of a partial liquidating distribution resulted in a $2.1 million
reduction in income tax expense for 1997 compared to 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net income of the Partnership increased to $11.9 million in 1996 from $11.3
million in 1995. The 5% increase was primarily due to increased operating
earnings from the Liquids Pipelines segment and a $2.5 million buyout payment
received from Chevron for early termination of a gas processing contract at the
Painter Plant. The Liquids Pipelines segment reported a 15% increase in net
income for 1996, chiefly due to increased earnings from the Central Basin
Pipeline and the Cypress Pipeline of 83% and 12%, respectively. Higher overall
Partnership earnings were partially offset by lower operating earnings from the
Gas Processing and Fractionation segment and the Coal Transfer, Storage and
Services segment.
Revenues of the Partnership increased 11% to $71.3 million in 1996 compared
to $64.3 million in 1995. The Liquids Pipelines' revenues increased 15% in 1996,
mainly due to a 55% increase in revenues reported by the Central Basin Pipeline.
Central Basin's increase in revenues was due primarily to a 41% increase in
transport volumes in 1996 as compared to 1995. Additionally, the North System's
revenues increased 7% in 1996 over 1995 due to a 12% increase in transport
volumes resulting from a favorable crop drying season and colder weather. The
Gas Processing and Fractionation segment also reported higher revenues in 1996.
Overall, the segment's revenues increased 2% over the comparable period in 1995,
mainly due to a full year of revenues earned at the Bushton facility in
connection with the Mobil Agreement, which was assigned to the Partnership as of
October 1, 1995. The overall increase was somewhat offset by lower revenues at
the Painter Plant due to the Chevron gas processing contract termination and
unscheduled downtime due to an equipment malfunction.
Cost of products sold decreased $0.1 million (2%) in 1996 as compared to
1995 primarily due to reduced product sales on the North System.
Operating expense, including operations and maintenance expense, fuel and
power costs, and taxes other than income taxes, increased 37% to $27.3 million
in 1996 compared to $19.9 million in 1995, due to expenses incurred in
connection with the Mobil Agreement. Additionally, operating expense increased
$0.9 million as a result of a new storage agreement with a Partnership affiliate
on the North System that went into effect on January 1, 1996. The new storage
agreement increased
23
<PAGE> 29
the North System's storage capacity at Bushton, Kansas from 1.5 million barrels
to 5.0 million barrels.
Depreciation expenses increased $0.4 million (4%) during 1996 as compared
to 1995 primarily as a result of 1996 property additions.
General and administrative expenses increased $0.4 million (4%) in 1996 as
compared to 1995 primarily due to a 6% annual increase in reimbursements to
Enron for services provided to the Partnership by Enron and its affiliates.
Interest expense increased $0.2 million (1%) in 1996 as compared to 1995
primarily as a result of increased borrowings under a working capital facility
due to borrowings for expansion capital expenditures.
Interest income and Other, net income increased 128% to $3.3 million in
1996 as compared to $1.4 million in 1995 primarily due to the $2.5 million
buyout payment received from Chevron in 1996. In addition, other income for 1995
included a $0.5 million business interruption insurance settlement related to a
previous year event on the North System.
RESULTS OF OPERATIONS OF SANTA FE
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net income for Santa Fe increased $17.1 million, or 32.7%, to $69.4
million, or $3.51 per Santa Fe unit, in 1997, compared to $52.3 million, or
$2.64 per Santa Fe unit, in 1996 due to higher revenues and lower operating
expenses. Results of operations included provisions for litigation and
transaction costs aggregating $10.3 million in 1997 and provisions for
litigation costs aggregating $23.0 million in 1996.
Total revenues for Santa Fe increased $4.3 million, or 1.8%, to $244.4
million in 1997, compared to $240.1 million in 1996. Trunk revenues increased
$2.8 million, or 1.0%, to $192.0 million in 1997, compared to $189.2 million in
1996, due to increased commercial revenues, partially offset by lower military
revenues, and a longer average length of haul. Storage and terminaling revenues
increased $0.8 million, or 2.1%, to $39.1 million in 1997 compared to $38.3
million in 1996. Other revenues increased $0.6 million, or 4.8%, to $13.3
million in 1997, compared to $12.6 million in 1996.
Total operating expenses decreased $13.9 million, or 9.2%, to $138.1
million in 1997, compared to $152.0 million in 1996, due to lower general and
administrative expenses, facilities costs and provisions for litigation costs,
partially offset by higher field operating expenses. Field operating expenses
increased by $7.5 million, or 20.1%, to $44.9 million in 1997, compared to $37.4
million in 1996, primarily due to lower product gains, higher maintenance costs
and higher centralized control costs. General and administrative expenses
decreased $3.8 million, or 12.5%, to $26.5 million in 1997, compared to $30.3
million in 1996, primarily due to lower property taxes due to tax credits
associated with the prior years. Facilities costs decreased $2.5 million, or
13%, to $16.7 million in 1997, compared to $19.2 million in 1996, primarily due
to interest income associated with the property tax credits.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Santa Fe reported 1996 net income of $52.3 million, or $2.64 per Santa Fe
unit, compared to net income of $40.4 million, or $2.04 per Santa Fe unit, in
1995, with the variance being primarily attributable to special items recorded
in both years. Results of operations included provisions for litigation costs
aggregating $23.0 million in 1996 and provisions for environmental and
litigation costs aggregating $34.0 million in 1995. Excluding these provisions,
adjusted net income was $74.5 million, or $3.76 per Santa Fe unit, in 1996,
compared to $73.3 million, or $3.70 per Santa Fe unit, in 1995.
24
<PAGE> 30
Total 1996 revenues of $240.1 million were approximately 3% above 1995
levels. Trunk revenues of $189.2 million were $6.0 million higher than in 1995
primarily due to growth in total volumes transported. Commercial volumes were
about 3.5% higher, and military volumes 7.5% lower, than in 1995, and the
average length of haul was slightly greater. Commercial deliveries to all of the
major markets served by Santa Fe, including Southern California, increased
during 1996. The reduction in military volumes was largely attributable to the
downsizing and realignment of military bases served by Santa Fe. Storage and
terminaling revenues were about 2% higher than in 1995. Other revenues were 1%
lower than in 1995.
Total operating expenses of $152.0 million were $5.7 million lower than in
1995. Excluding the provisions described above, operating expenses would have
been $5.3 million, or about 4.5%, higher than in 1995, with higher field
operating expenses ($4.4 million), general and administrative expenses ($2.8
million) and depreciation and amortization ($0.6 million), being partially
offset by lower facilities costs ($1.8 million) and power costs ($0.7 million).
The increase in field operating expenses was largely attributable to higher
pipeline repairs and maintenance, including pipeline reconditioning projects,
and higher environmental costs, partially offset by reductions in certain other
field costs. General and administrative expenses were higher due to outside
legal costs, primarily associated with the East Line civil litigation, the FERC
proceedings, and environmental insurance litigation, higher employee health care
and other benefit costs, and business process redesign costs. The increase in
depreciation and amortization resulted from Santa Fe's expanding capital asset
base. The decrease in facilities costs is largely attributable to approximately
$3 million in property tax refunds, partially offset by higher insurance
premiums and right-of-way rental costs. The decrease in power costs resulted
from periodic fuel cost adjustments received at several locations and savings
from power transmission capital investments. Excluding provisions for
environmental remediation and East Line litigation, costs recorded as operating
expense aggregated $9.6 million in 1996 and $7.0 million in 1995.
Other income, net decreased $0.6 million compared to 1995, primarily due to
lower interest income, attributable to lower cash balances, partially offset by
a gain on the sale of excess land.
OUTLOOK
The Partnership intends to actively pursue a strategy to increase the
Partnership's operating income. A three-pronged strategy will be utilized to
accomplish this goal.
- COST REDUCTIONS. The Partnership has substantially reduced its
operating expenses and will continue to seek further reductions
where appropriate.
- INTERNAL GROWTH. The Partnership intends to expand the operations of
its current facilities. The Partnership has taken a number of steps
that management believes will increase revenues from existing
operations, including the following:
The Cypress Pipeline has expanded capacity by 25,000 barrels per day
starting in November 1997.
The coal terminals, Cora and Grand Rivers, are expected to handle an
aggregate of approximately 17 million tons during 1998 as a result
of sales agreements and other new business.
Earnings and cash flow, as historically related to the operations of the
Central Basin Pipeline, are expected to increase in 1998 as a result of
the partnership formed with Shell.
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<PAGE> 31
- STRATEGIC ACQUISITIONS. The acquisition of Santa Fe closed on March
6, 1998. The Partnership intends to seek opportunities to make
additional strategic acquisitions to expand existing businesses or
to enter into related businesses. The Partnership periodically
considers potential acquisition opportunities as such opportunities
are identified by the Partnership. No assurance can be given that
the Partnership will be able to consummate any such acquisitions.
Management anticipates that acquisitions will be financed
temporarily by bank bridge loans and permanently by a combination of
debt and equity funding from the issuance of new Units.
On May 13, 1998, the Partnership announced an increase in its quarterly
distribution to $.60 per Unit, effective with the distribution for the second
quarter of 1998. Management intends to maintain the distribution at an annual
level of at least $2.40 per Unit assuming no adverse change in the Partnership's
operations, economic conditions and other factors. See "Risk Factors -- Possible
Insufficient Cash to Pay Announced Level of Distributions."
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Partnership's primary cash requirements, in addition to normal
operating expenses, are debt service, sustaining capital expenditures,
discretionary capital expenditures, and quarterly distributions to partners. In
addition to utilizing cash generated from operations, the Partnership could meet
its cash requirements through the utilization of credit facilities or by issuing
additional limited partner interests in the Partnership. The Partnership expects
to fund future cash distributions and sustaining capital expenditures with
existing cash and cash flows from operating activities. Expansion capital
expenditures are expected to be funded through additional Partnership borrowings
or the issuance of additional Units. The following discussion of "Cash Provided
by Operating Activities," "Cash Used in Investing Activities" and "Cash Used in
Financing Activities" does not include the activities of Santa Fe prior to the
Partnership's acquisition of Santa Fe on March 6, 1998.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $21.46 million for the first
quarter of 1998 versus $8.17 million for the comparable period of 1997. This
$13.29 million increase in cash flow from operations was primarily the result of
the $10.54 million improvement in earnings before the extraordinary charge on
early extinguishment of debt and an increase in working capital and other
primarily due to the Pacific Operations.
Net cash provided by operating activities was $32.0 million for the year
ended December 31, 1997 versus $22.8 million for the comparable period of 1996.
This $9.2 million period-to-period increase in cash flow from operations was
primarily the result of a $5.8 million improvement in net earnings and a $2.8
million increase in distributions received from the Partnership's investment in
Mont Belvieu Associates. Total capital expenditures were $6.9 million in 1997,
including sustaining capital expenditures of $3.1 million.
Net changes in working capital items provided $5.6 million in the first
quarter of 1998, as compared to $2.2 million provided in the same period in
1997. This positive change in cash flow resulted principally from the
acquisition of the Pacific Operations and a decrease in accounts receivables.
The benefit was partially offset by a decrease in accrued liabilities and
accrued taxes and an increase in inventories.
Net changes in working capital items provided $1.1 million in 1997, as
compared to $1.8 million used in 1996. This positive change in cash flow
resulted principally from an increase in current payables and liabilities. The
benefit was partially offset by lower deferred tax expenses ($2.0 million) in
1997 versus 1996. A 1997 tax benefit, producing an adjustment to deferred taxes,
resulted from the partial liquidation of KMNGL.
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<PAGE> 32
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities totaled $91.34 million for the first
quarter of 1998 compared to $2.01 million for the comparable period in 1997.
Approximately $61.78 million of this $89.33 million increase was attributable to
the March 6, 1998 acquisition of the Pacific Operations.
Cash used in investing activities totaled $30.3 million in 1997 compared to
$9.1 million in 1996. This $21.2 million increase was mainly due to the
Partnership's purchase of $20.0 million of long-term assets relating to the
September 1997 acquisition of the Grand Rivers Terminal.
Excluding the effect of assets purchased in the acquisition of the Pacific
Operations, additions to property, plant, and equipment, including both
sustaining and expansion capital expenditures, were $4.36 million in the first
quarter of 1998 compared to $.71 million for the first quarter of 1997. This
increase was due to the property additions for the Pacific Operations of $1.86
million since the date of acquisition and $1.29 million of property additions
related to the expansion of the Coal Operations.
Excluding the effect of long-term assets purchased in the Grand Rivers
acquisition, additions to property, plant, and equipment were $6.9 million, $8.6
million, and $7.8 million for 1997, 1996, and 1995, respectively. Property
additions were highest in 1996 chiefly due to the construction of a new propane
terminal on the North System and pipeline laterals on the Central Basin
Pipeline.
Contributions to partnership investments increased by $23.92 million in the
first quarter of 1998 compared to the first quarter of 1997. The increase
reflects the Partnership's $25 million cash investment in Shell CO(2) Company,
partially offset by a decrease in capital funding for the Mont Belvieu
Fractionator.
Contributions to partnership investments increased $3.0 million in 1997
over the prior year. The increase reflects the funding of the Partnership's
share of loan repayments associated with the 1996 expansion project at the Mont
Belvieu Fractionator.
CASH USED IN FINANCING ACTIVITIES
Cash provided from financing activities totaled $117.57 million in the
first quarter of 1998 compared to cash used in financing activities of $4.07
million in the first quarter of 1997. This increase of $121.64 million was the
result of a $250.4 million increase in long-term debt and a $9.62 million
increase in capital contributions from the General Partner due to the
acquisition of the Pacific Operations and the formation of Shell CO(2) Company.
The increase in cash provided from financing activities was partially offset by
a $116.2 million increase in long-term debt payments due to the refinancing of
long-term debt, $16.26 million for the cost of refinancing long-term debt, and
an increase in distributions to partners.
Net cash used in financing activities totaled $6.3 million in 1997 compared
to $13.6 million in 1996. This decrease of $7.3 million from 1996 was the result
of $33.7 million in net proceeds received from the issuance of Units, partially
offset by an increase in debt payments and distributions to partners.
The proceeds from the issuance of Units in 1997 relate to the Partnership's
issuance of 1,091,200 Units in the third quarter of 1997. These proceeds were
partially utilized to reduce net debt by $15.1 million in 1997. Overall net debt
financing used for capital expansion projects on the Central Basin Pipeline and
the North System provided $3.3 million and $6.1 million in 1996, and 1995,
respectively.
Distributions to partners increased to $24.3 million in 1997 compared to
$16.8 million in 1996. This increase reflects an increase in the number of
Unitholders, an increase in paid distributions per Unit and an increase in
incentive distributions to the General Partner as a result of the higher
distributions to Unitholders. The Partnership paid distributions of $1.63 per
Unit in 1997 compared to
27
<PAGE> 33
$1.26 per Unit in 1996. The Partnership believes that the increase in paid
distributions resulted from favorable operating results in 1997.
First quarter distributions to partners increased to $10.02 million in 1998
compared to $4.21 million in 1997. This increase was attributable to increased
distributions paid to Unitholders of $.5625 per Unit in the first quarter of
1998 compared to $.315 per Unit in the first quarter of 1997, the issuance of
26.6 million additional Units due to the acquisition of the Pacific Operations
and increased incentive distributions to the General Partner. The Partnership
believes that the increase in paid distributions per Unit resulted from
favorable operating results in the first quarter of 1998. On May 13, 1998, the
Partnership announced an increase in its quarterly distribution from $.5625 to
$.60 per Unit, effective with the distribution for the second quarter of 1998.
The Partnership believes that future operating results will continue to support
similar levels of quarterly cash distributions, however, no assurance can be
given that future distributions will continue at such levels.
The Partnership's debt instruments generally require the Partnership to
maintain a reserve for future debt service obligations. The purpose of the
reserve is to lessen differences in the amount of Available Cash from quarter to
quarter due to the timing of required principal and interest payments (which may
only be required on a semi-annual or annual basis) and to provide a source of
funds to make such payments. The Partnership's debt instruments generally
require the Partnership to set aside each quarter a portion of the principal and
interest payments due in the next six to 12 months.
PARTNERSHIP DISTRIBUTIONS
The Partnership Agreement requires the Partnership to distribute 100% of
"Available Cash" (as defined in the Partnership Agreement) to the Partners
within 45 days following the end of each calendar quarter in accordance with
their respective percentage interests. Available Cash consists generally of all
cash receipts of the Partnership and its operating partnerships, less cash
disbursements and net additions to reserves and amounts payable to the former
Santa Fe general partner in respect of its .5% interest in SFPP.
Available Cash of the Partnership generally is distributed 98% to the
Limited Partners (including the approximate 2% limited partner interest of the
General Partner) and 2% to the General Partner. This general requirement is
modified to provide for incentive distributions to be paid to the General
Partner in the event that quarterly distributions to Unitholders exceed certain
specified targets.
In general, Available Cash for each quarter is distributed, first, 98% to
the Limited Partners and 2% to the General Partner until the Limited Partners
have received a total of $0.3025 per Unit for such quarter, second, 85% to the
Limited Partners and 15% to the General Partner until the Limited Partners have
received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited
Partners and 25% to the General Partner until the Limited Partners have received
a total of $0.4675 per Unit for such quarter, and fourth, thereafter 50% to the
Limited Partners and 50% to the General Partner. Incentive distributions are
generally defined as all cash distributions paid to the General Partner that are
in excess of 2% of the aggregate amount of cash being distributed. The General
Partner's incentive distributions declared by the Partnership for the first
quarter of 1998 and for the year ended December 31, 1997 were approximately $5.5
million and $3.9 million, respectively.
CREDIT FACILITIES
On February 17, 1998, the Partnership entered into a $325 million revolving
credit facility (the "Credit Facility") with Goldman Sachs Credit Partners L.P.,
as syndication agent, First Union National Bank, as administrative agent,
issuing bank and swingline lender, and the other financial institutions as
lenders under the agreement. The Partnership and Kinder Morgan Operating L.P.
"B" ("OLP-B") are co-borrowers under the Credit Facility. Commencing in May
2000, the amount available under the Credit Facility reduces on a quarterly
basis, with the final installment due in February 2005.
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<PAGE> 34
The obligations of the Partnership under the Credit Facility are guaranteed
by the Partnership's operating partnerships and each other Restricted Subsidiary
(as defined in the Credit Facility) of the Partnership (other than SFPP). The
Partnership has guaranteed the obligations of OLP-B under the Credit Facility.
The Credit Facility is secured by, among other things, a first priority lien on
(i) the Partnership's limited partner interests in the Partnership's operating
partnerships; (ii) all of the assets of OLP-D (including its general partner
interest in SFPP), (iii) the Partnership's ownership interests in the Mont
Belvieu Fractionator and Shell CO(2) Company, and (iv) intercompany notes
executed by each of the Partnership's operating partnerships (other than SFPP)
in favor of the Partnership for loan proceeds lent to them by the Partnership.
If the Partnership fails to maintain certain financial ratios, then each of the
Partnership's operating partnerships will secure its intercompany note with its
assets.
Interest on loans under the Credit Facility accrues at the Partnership's
option at a floating rate equal to either First Union National Bank's base rate
(but not less than the Federal Funds Rate plus .5% per annum) or LIBOR plus a
margin that will vary from .75% to 1.5% per annum depending upon the ratio of
the Partnership's Funded Indebtedness to Cash Flow. Interest on advances is
generally payable quarterly.
The Credit Facility includes restrictive covenants that are customary for
this type of facility, including without limitation, the maintenance of certain
financial ratios and restrictions on (i) the incurrence of additional
indebtedness; (ii) entering into mergers, consolidations, and sales of assets;
(iii) making investments; and (iv) granting liens. In addition, the Credit
Facility generally prohibits the Partnership from making cash distributions to
holders of Units more frequently than quarterly, from distributing amounts in
excess of 100% of Available Cash for the immediately preceding calendar quarter,
and from making any distribution to holders of Units if an event of default
exists or would exist upon making such distribution.
As of May 26, 1998, the Partnership had borrowed under the Credit Facility
a total of $257 million consisting of (i) approximately $142 million borrowed to
refinance its First Mortgage Notes, including a make whole prepayment premium
thereunder, and the Refinanced Indebtedness; (ii) approximately $25 million
borrowed to fund its cash investment in Shell CO(2) Company; and (iii)
approximately $90 million borrowed to fund its acquisition of the general
partner interest in Santa Fe and a portion of the transaction costs associated
with the acquisition of Santa Fe.
The Partnership First Mortgage Notes were incurred in connection with the
original formation of the Partnership. The remainder of the Refinanced
Indebtedness was incurred for working capital and general partnership purposes.
The Partnership's First Mortgage Notes bore interest at a fixed rate of 8.79%
per annum. The remaining Refinanced Indebtedness bore interest at varying rates
(a weighted average rate of approximately 7.65% per annum as of December 31,
1997). The Partnership's First Mortgage Notes were payable in 10 equal annual
installments of $11 million commencing in June 1998. The remaining Refinanced
Indebtedness was scheduled to mature in 1999.
As of December 31, 1997, SFPP's long term debt aggregated $355 million and
consisted of $276.5 million of First Mortgage Notes (the "SF Notes") and a $78.5
million borrowing under SFPP's $175 million bank credit facility. The SF Notes
are payable in annual installments through December 15, 2004. The credit
facility matures in August 2000. The Partnership intends to refinance some or
all of the remaining SF Notes as they become payable. The credit facility
permits SFPP to refinance the $64 million of SF Notes due on or before December
15, 1999 (plus a $31.5 million prepayment allowed on such date). The SFPP credit
facility also provides for a working capital facility of up to $25 million.
29
<PAGE> 35
CAPITAL REQUIREMENTS FOR RECENT TRANSACTIONS
SHELL CO(2) COMPANY. On March 5, 1998, the Partnership transferred the
Central Basin Pipeline and $25 million in cash to Shell CO(2) Company in
exchange for a 20% limited partner interest in Shell CO(2) Company. The
Partnership financed its cash investment in Shell CO(2) Company through the
Credit Facility.
SANTA FE PACIFIC PIPELINE PARTNERS, L.P. On March 6, 1998, the Partnership
acquired substantially all of the assets of Santa Fe for approximately $1.46
billion in aggregate consideration consisting of approximately 26.6 million
Units, $84.4 million in cash and the assumption of certain liabilities. The
Partnership financed the $84.4 million cash portion of the purchase price and a
portion of the transaction expenses through the Credit Facility.
In September 1990, SFP Pipeline Holdings, Inc., the parent corporation of
the general partner of Santa Fe ("SF Holdings"), issued $218,981,000 principal
amount of Variable Rate Exchangeable Debentures due 2010 ("VREDs"). Originally,
the VRED Holders were entitled to received 37.2093 Santa Fe common units for
each $1,000 principal amount of VREDs upon the happening of certain triggering
events, such as a change of control, merger or sale of substantially all of the
assets (each an "Exchange Event").
The acquisition of substantially all of the assets of Santa Fe constituted
an Exchange Event. As a result of the acquisition, SF Holdings and the VRED
trustee entered into a supplemental indenture dated as of March 6, 1998,
pursuant to which each $1,000 principal amount of VREDs became exchangeable for
51.720927 Units (the 37.2093 Santa Fe common units for which such VREDs were
previously exchangeable multiplied by 1.39, the exchange ratio for the Santa Fe
transaction) or an aggregate of approximately 11.3 million Units.
The Partnership agreed as part of the acquisition that it would cause OLP-D
to perform all of SF Holdings' obligations related to the VREDs.
Prior to the acquisition of Santa Fe, the former general partner owned
approximately 8.1 million Santa Fe common units, which was approximately equal
to the total number of Santa Fe common units into which the VREDs were
exchangeable. As a result of the acquisition, those Santa Fe common units were
converted into approximately 11.3 million Units. The former general partner of
Santa Fe has placed the certificate representing approximately 11.3 million
Units into escrow to satisfy SF Holdings' obligations under the Indenture.
The holders of approximately $217.7 million principal amount of VREDs
elected to exchange their VREDs for approximately 11,259,000 Units. The
Partnership paid the remaining $1.28 million principal amount of VREDs in cash
at par, plus accrued and unpaid interest, on June 4, 1998 (the "Exchange Date").
In connection with the VRED Exchange, 66,429 Units representing the VREDs that
were not exchanged and fractional units which holders of VREDs were entitled to
receive were cancelled.
YEAR 2000
The Partnership is assessing its internal computer systems and software to
ensure that its information technology infrastructure will be Year 2000 capable.
The Partnership cannot reasonably estimate, at this time, the potential impact
on its financial position and operations if key suppliers, customers and other
third parties with whom the Partnership conducts business (including other
pipelines with which it interconnects) do not become Year 2000 capable on a
timely basis. Costs incurred to become Year 2000 capable are not expected to
have a material adverse effect on the Partnership's financial position or
results of operations.
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<PAGE> 36
THE PARTNERSHIP
GENERAL
The Partnership is a publicly traded 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 and 21 truck loading terminals. The Partnership also
owns two coal terminals, a 20% interest in Shell CO(2) Company and a 25%
interest in a Y-grade fractionation facility.
On March 6, 1998, the Partnership acquired substantially all of the assets
of 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 CO(2) Pipeline and approximately $25.0 million in
cash for a 20% limited partner interest in Shell CO(2) 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.
BUSINESS STRATEGY
GENERAL. Management's objective is to operate as a low-cost,
growth-oriented, publicly traded MLP by reducing operating expenses, better
utilizing and expanding its asset base, and making selective, strategic
acquisitions that are accretive to Unitholder distributions. The General
Partner's incentive distributions provide it with a strong incentive to increase
Unitholder distributions through successful management and business growth. With
the addition of the Pacific Operations, the Partnership has become the largest
pipeline MLP and the second largest products pipeline system in the United
States in terms of volumes delivered.
PACIFIC OPERATIONS. The Partnership plans to expand its presence in the
rapidly growing refined products market 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.
NORTH SYSTEM. Because 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.
SHELL CO(2) COMPANY. Within the Permian Basin, the strategy of Shell CO(2)
Company is to offer customers "one-stop shopping" for CO(2) supply,
transportation and technical support service. Outside the Permian Basin, Shell
CO(2) Company intends to compete aggressively for new supply and transportation
projects which the Partnership believes will arise as other U.S. oil producing
basins mature and make the transition from primary production to enhanced
recovery methods.
COAL TERMINALS. Both of the Partnership's coal terminals are strategically
positioned to benefit from the expected increase in demand for low sulfur
western coals in eastern U.S. markets due to increasing environmental compliance
standards. Because many utilities' compliance strategies require a diverse blend
of higher and lower sulfur coals, the Partnership's modern blending facilities
and large storage capacities enable it to offer higher margin services to its
customers. During 1997, the Partnership expanded throughput and storage capacity
at the Cora Terminal and in 1998 began expansion of its Grand Rivers Terminal.
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<PAGE> 37
The Partnership's operations are grouped into three reportable business
segments: Liquid Pipelines; Coal Transfer, Storage and Services; and Gas
Processing and Fractionation. The following table reflects 1997 revenues,
earnings and EBITDA for the Partnership's segments.
<TABLE>
<CAPTION>
1997 1997 SEGMENT 1997 SEGMENT
REVENUES EARNINGS(A) EBITDA(B)
-------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Pacific Liquids
Pipelines(c)........ $244.415 76.8% $134.179 77.8% $155.530 76.6%
Mid-Continent Liquids
Pipelines........... 53.511 16.8% 23.884 13.9% 31.953 15.7%
Coal Transfer, Storage
and Services(d)..... 18.155 5.7% 10.708 6.2% 11.766 5.8%
Gas Processing and
Fractionation....... 2.266 0.7% 3.598 2.1% 3.798 1.9%
-------- ----- -------- ----- -------- -----
$318.347 100.0% $172.369 100.0% $203.047 100.0%
</TABLE>
- ---------------
(a) Excludes interest and debt expense, general and administrative expense,
minority expense and other insignificant items.
(b) Segment Earnings plus depreciation, amortization and income taxes.
(c) The amounts reflected state the historical performance of Santa Fe and may
not be indicative of the results that would have occurred if the
acquisition of Santa Fe had been consummated on January 1, 1997 or which
will be obtained in the future.
(d) 1997 results include only four months of Grand Rivers Terminal operations
(acquired September 1, 1997).
LIQUIDS PIPELINES
The Partnership's Liquids Pipelines segment is conducted through two
geographic divisions: Pacific Operations and Mid-Continent Operations. The
segment includes both interstate common carrier pipelines regulated by the FERC
and intrastate pipeline systems, which are regulated by the CPUC in California.
Products transported on these pipelines include refined petroleum products, NGLs
and CO(2).
Refined petroleum products and related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
------- ---
<S> <C>
Gasoline............................. Transportation
Jet/Kerosene......................... Commercial and military air transportation
Distillate........................... Transportation (auto, rail, marine), farm, industrial
and commercial
Residual Fuels....................... Marine transportation and power generation
</TABLE>
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<PAGE> 38
NGLs are typically extracted from natural gas in liquid form under low
temperature and high pressure conditions. NGL products and related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
------- ---
<S> <C>
Propane.............................. Residential heating, agricultural uses and
petrochemical feedstock
Isobutanes........................... Further processing
Natural Gasoline..................... Further processing or gasoline blending into gasoline
motor fuel
Ethane............................... Feedstock for petrochemical plants
Normal Butane........................ Feedstock for petrochemical plants
</TABLE>
CO(2) is used in enhanced oil recovery projects as a flooding medium for
recovering crude oil from mature oil fields.
The Liquids Pipelines are, in general, located on land owned by others and
are operated under easements or rights-of-way granted by land owners. Where
Partnership facilities are located on or across public property, railways,
rivers, roads or highways, or similar crossings, they are operating under
permits or easements from public authorities, railways, or public utilities,
some of which are revocable at the election of the grantor.
PACIFIC OPERATIONS
The Pacific Operations, which include the South Line, North Line, Oregon
Line and San Diego Line, serve six western states with approximately 3,300 miles
of refined petroleum products pipeline and related terminal facilities. The
Pacific Operations pipelines transport approximately one million barrels per day
of refined petroleum products, consisting primarily of: gasoline (63%), diesel
fuel (20%) and jet fuel (17%). The operations also include 13 truck loading
terminals and provide pipeline service to approximately 44 customer-owned
terminals, three commercial airports and 12 military bases.
These pipeline assets provide refined petroleum products to some of the
fastest growing populations in the United States. Significant population gains
have occurred in the Los Angeles and Orange, California areas as well as the Las
Vegas, Nevada and the Tucson-Phoenix, Arizona regions. Pipeline transportation
of gasoline and jet fuels has a direct correlation with demographic patterns.
The Partnership believes that the positive demographic changes associated with
the Pacific Operations are expected to continue in the future.
SOUTH LINE. The South Line consists of two pipeline segments, the West Line
and the East Line.
The West Line consists of approximately 555 miles of primary pipeline and
currently transports products for approximately 50 shippers from seven
refineries and three pipeline terminals in the Los Angeles Basin to Phoenix and
Tucson and various intermediate commercial and military delivery points. Also, a
significant portion of West Line volumes are transported to Colton, California
for local distribution and for delivery to CalNev Pipeline, an unaffiliated
common carrier of refined petroleum products to Las Vegas and intermediate
points. The West Line serves Partnership terminals located in Colton and
Imperial, California as well as in Phoenix and Tucson.
The East Line is comprised of two parallel lines originating in El Paso,
Texas and continuing approximately 300 miles west to the Tucson terminal and one
line continuing northwest approximately 130 miles from Tucson to Phoenix. All
products received by the East Line at El Paso come from a refinery in El Paso or
are delivered through connections with non-affiliated pipelines from refineries
in Odessa and Dumas, Texas and Artesia, New Mexico. The East Line transports
refined petroleum products for approximately 17 shippers and serves Partnership
terminals located in Tucson and Phoenix.
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<PAGE> 39
In late 1995, Diamond Shamrock, Inc. completed construction of a new
10-inch diameter refined petroleum products pipeline from its refinery near
Dumas, Texas to El Paso. In late 1996, Diamond Shamrock connected this pipeline
to the East Line and began shipping products to Tucson and Phoenix.
Longhorn Partners Pipeline is a proposed joint venture project which would
begin transporting refined products from refineries on the Gulf Coast to El Paso
and other destinations in Texas. Increased product supply in the El Paso area
could result in some shift of volumes transported into Arizona from the West
Line to the East Line. While increased movements into the Arizona market from El
Paso would displace higher tariff volumes supplied from Los Angeles on the West
Line, such shift of supply sourcing has not had, and is not expected to have, a
material effect on operating results.
NORTH LINE. The North Line consists of approximately 1,075 miles of
pipeline in six segments originating in Richmond, Concord and Bakersfield,
California. This line serves the Partnership's terminals located in Brisbane,
Bradshaw, Chico, Fresno and San Jose, California, and Sparks, Nevada. The
products delivered through the North Line come from refineries in the San
Francisco area. A small percentage of supply is received from various pipeline
and marine terminals that deliver products from foreign and domestic ports.
Substantially all of the products shipped through the Bakersfield-Fresno segment
of the North Line are supplied by a refinery located in Bakersfield.
OREGON LINE. The Oregon Line is a 114-mile pipeline serving approximately
ten shippers. The Oregon Line receives products from marine terminals in
Portland, Oregon and from Olympic Pipeline, a non-affiliated carrier, which
transports products from the Puget Sound, Washington area to Portland. From its
origination point in Portland, the Oregon Line extends south and serves the
Partnership's terminal located in Eugene, Oregon.
SAN DIEGO LINE. The San Diego Line is a 135-mile pipeline serving major
population areas in Orange County (immediately south of Los Angeles) and San
Diego, California. Approximately 20 shippers transport products on this line,
supplied by the same refineries and terminals that supply the West Line, and
extends south to serve Partnership terminals in the cities of Orange and San
Diego.
TRUCK LOADING TERMINALS. The Pacific Operations include 13 truck loading
terminals with an aggregate usable tankage capacity of approximately 8.2 million
barrels. Terminals are located at destination points on each of the lines as
well as at certain intermediate points along each line where deliveries are
made. These terminals furnish short-term product storage, truck loading and
ancillary services, such as vapor recovery, additive injection, oxygenate
blending and quality control. The simultaneous truck loading capacity of each
terminal ranges from 2 to 12 trucks.
The capacity of terminaling facilities varies throughout the pipeline
systems and terminal facilities are not owned at all pipeline delivery
locations. At certain locations, product deliveries are made to facilities owned
by shippers or independent terminal operators. Truck loading and other terminal
services are provided as an additional service, and a separate fee (in addition
to transportation tariffs) is charged.
MARKETS. Currently, the Pacific Operations serve in excess of 100 shippers
in the refined products market, with the largest customers consisting of major
petroleum companies, independent refineries, the United States military and
independent marketers and distributors of products. A substantial portion of
product volume transported is gasoline, the demand for which is dependent on
such factors as prevailing economic conditions and demographic changes in the
markets served. The majority of the Pacific Operations' market is expected to
maintain growth rates that exceed the national average for the foreseeable
future.
Currently, the California gasoline market is approximately 900,000 barrels
per day, of which the Partnership transports in excess of 65%. The Arizona
gasoline market is served primarily by the Partnership at a market demand of
135,000 barrels per day. Nevada's gasoline market is currently in
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excess of 50,000 barrels per day and Oregon's is approximately 98,000 barrels
per day. The distillate market is approximately 377,000 barrels per day, 78,000
barrels per day, 72,000 barrels per day and 62,000 barrels per day in
California, Arizona, Nevada and Oregon, respectively.
The volume of products transported is directly affected by the level of
end-user demand for such products in the geographic regions served. Certain
product volumes can experience seasonal variations and overall volumes are
generally slightly lower during the first and fourth quarters of each year.
SUPPLY. The majority of refined products supplied to the Pacific Operations
initiate from the major refining centers around Los Angeles, San Francisco and
Puget Sound, as well as waterborne terminals. The waterborne terminals have
three central locations on the Pacific Coast: (1) terminals operated by GATX,
Mobil and others on the Washington/Oregon coast; (2) the Wickland Terminal on
the Northern California Coast; and (3) terminals operated by GATX, Shell and
ASTC on the Southern California Coast.
COMPETITION. The most significant competitors of the Pacific Operations
pipeline systems are proprietary pipelines owned and operated by major oil
companies in the area where the pipeline system delivers products, refineries
within the Partnership's market areas and related trucking arrangements. The
Partnership believes that high capital costs, tariff regulation and
environmental permitting considerations make it unlikely that a competing
pipeline system comparable in size and scope will be built in the foreseeable
future, provided that the Partnership has available capacity to satisfy demand
and its tariffs remain at reasonable levels. However, the possibility of
pipelines being constructed to serve specific markets is a continuing
competitive factor. Trucks may competitively deliver products in certain
markets. Increased utilization of trucking by major oil companies has caused
minor but notable reductions in product volumes delivered to certain
shorter-haul destinations, primarily Orange and Colton, California. Management
cannot predict with certainty whether this trend towards increased short-haul
trucking will continue in the future.
MID-CONTINENT OPERATIONS
The Mid-Continent Operations include the North System, the Cypress
Pipeline, and the Partnership's interests in Shell CO(2) Company and the
Heartland Pipeline Company.
NORTH SYSTEM
GENERAL. The North System is an approximately 1,600 mile interstate common
carrier of NGL and refined petroleum products. The pipeline system extends from
South Central Kansas to the Chicago area. South Central Kansas is a major hub
for producing, gathering, storing, fractionating and transporting NGLs. The
North System's primary pipeline is composed of approximately 1,400 miles of
8(##) and 10(##) pipelines and includes (i) two parallel pipelines (except for a
50-mile segment in Nebraska) originating at Bushton, Kansas and continuing to a
major storage and terminal area in Des Moines, Iowa, (ii) a third pipeline,
which extends from Bushton to the Kansas City, Missouri area, and (iii) a fourth
pipeline that transports product to the Chicago area from Des Moines. Through
interconnections with other major liquids pipelines, the pipeline system
connects Mid-Continent producing areas to markets in the Midwest and eastern
United States. The North System operated at approximately 62%, 66% and 59% of
capacity during 1997, 1996, and 1995, respectively.
The Partnership has defined sole carrier rights to utilize capacity on an
extensive pipeline system owned by the Williams Company which interconnects with
the North System. The Partnership negotiated an amendment to this capacity lease
agreement in March, 1998 which extends the lease term to February, 2013, with a
five year renewal option. A reduction in the minimum guaranteed payment and an
increase in capacity provided in exchange for such payment under this agreement
should result in expected annual cost savings to the Partnership of
approximately $.6 million.
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The following table sets forth volumes (MBbls) of NGLs transported on the
North System for delivery to the various markets for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------------------- ENDED
1993 1994 1995 1996 1997 MARCH 31, 1998
------ ------ ------ ------ ------ ------------------
VOLUMES(MBBLS)
<S> <C> <C> <C> <C> <C> <C>
Petrochemicals....... 11,201 2,861(1) 1,125 684 1,200 175
Refineries and line
reversal........... 9,676 10,478 9,765 9,536 10,600 2,488
Fuels................ 8,957 10,039 7,763(2) 10,500 7,976 2,334
Other(3)............. 6,879 6,551 7,114 8,126 7,399 1,105
------ ------ ------ ------ ------ -----
Total...... 36,713 29,929 25,767 28,846 27,175 6,102
====== ====== ====== ====== ====== =====
</TABLE>
- ---------------
(1) The 1994 volumes reflect the loss of the major petrochemical shipper as of
February 28, 1994.
(2) The 1995 volumes reflect the shut down of a synthetic natural gas plant in
1995.
(3) NGL gathering systems and Chicago originations other than long-haul volumes
of refinery butanes.
The North System has approximately 7.3 million barrels of storage capacity
which include caverns, steel tanks, pipeline line-fill and leased storage
capacity. This storage capacity provides operating efficiencies and flexibility
in meeting seasonal demand of shippers as well as propane storage for the truck
loading terminals.
TRUCK LOADING TERMINALS. The North System has seven propane truck loading
terminals and one multi-terminal complex at Morris, Illinois, in the Chicago
area, which is capable of loading propane, normal butane, isobutane, and natural
gasoline.
MARKETS. The North System currently serves approximately 50 shippers in the
upper Midwest market, including both users and wholesale marketers of NGLs.
These shippers include all four major refineries in the Chicago area. Wholesale
marketers of NGLs primarily make direct large volume sales to major end-users,
such as propane marketers, refineries, petrochemical plants, and industrial
concerns.
Market demand for NGLs varies in respect to the different end uses to which
NGL products may be applied. Demand for transportation services is influenced
not only by demand for NGLs, but also by the available supply of NGLs.
SUPPLY. NGLs extracted or fractionated at the Bushton gas processing plant
operated by KN Processing, Inc. have historically accounted for a significant
portion of the NGLs transported through the North System (approximately 40-50%).
Other sources of NGLs transported in the North System include major independent
oil companies, marketers, end-users and natural gas processors that use
interconnecting pipelines to transport hydrocarbons.
COMPETITION. The North System competes with other liquids pipelines and to
a lesser extent rail carriers. In most cases, established pipelines are
generally the lowest cost alternative for the transportation of NGLs and refined
petroleum products. Therefore, the Partnership's primary competition is
represented by pipelines owned and operated by others.
In the Chicago area, the North System competes with other NGL pipelines
that deliver into the area and with rail car deliveries primarily from Canada.
Other Midwest pipelines and area refineries compete with the North System for
propane terminal deliveries. The North System also competes indirectly with
pipelines that deliver product to markets not served by the North System, such
as the Gulf Coast market area.
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SHELL CO(2) COMPANY
GENERAL. On March 5, 1998, the Partnership and affiliates of Shell agreed
to combine their CO(2) activities and assets into a partnership (Shell CO(2)
Company) to be operated by Shell. The Partnership acquired, through a newly
created limited liability company, a 20% interest in Shell CO(2) Company in
exchange for contributing its Central Basin Pipeline and approximately $25
million in cash. Shell contributed its approximately 45% interest in the McElmo
Dome CO(2) reserves, its 11% interest in the Bravo Dome CO(2) reserves, its
indirect 50% interest in the Cortez pipeline, its indirect 13% interest in the
Bravo pipeline and other related assets in exchange for an 80% interest in Shell
CO(2) Company. The Cortez and Bravo pipelines connect CO(2) reserves in the
McElmo and Bravo Domes principally to Denver City, Texas, where they
interconnect with the Central Basin Pipeline, among others.
The Partnership's approval will be required for certain key decisions,
including (i) capital calls in excess of $5 million, (ii) changes in
distribution policy and (iii) approval of the five-year budget. The combination
of Partnership and Shell assets facilitates the marketing of CO(2) by bringing a
complete package of CO(2) supply, transportation and technical expertise to the
customer. By creating an area of mutual interest in the continental U.S., the
Partnership will have the opportunity to participate with Shell in certain new
CO(2) projects in the region. Altura, Shell's joint venture with Amoco, is also
a major user of CO(2) in its West Texas fields.
Under the terms of the Shell CO(2) Company partnership agreement, the
Partnership will receive a priority distribution of $14.5 million per year for
the first four years. To the extent the amount paid to the Partnership over the
first four years is in excess of 20% of Shell CO(2) Company's distributable cash
flow for such period (discounted at 10%), the amount of such overpayment will be
deducted from the Partnership's distributions equally over years five and six.
At any time after March 5, 2002, Shell has the right to purchase the
Partnership's interest in Shell CO(2) Company, and the Partnership has the right
to require Shell to purchase the Partnership's interest in Shell CO(2) Company.
The purchase price for the Partnership's interest in Shell CO(2) Company will be
at a discount from fair value in the event the Partnership exercises its put
option, and at a premium over fair value in the event Shell exercises its call
option. The amount of the discount or premium declines during the period from
March 5, 2003 through March 5, 2006 and is thereafter fixed at a 5%
discount/premium. If the parties are unable to agree to the fair value of the
Partnership's interest in Shell CO(2) Company, then the Partnership and Shell
will use an agreed-upon appraisal methodology to determine fair value.
MCELMO AND BRAVO DOMES. Shell CO(2) Company operates and owns 45% of the
McElmo Dome which contains more than 10 trillion cubic feet ("TCF") of nearly
pure CO(2). The remaining interest in McElmo is owned by Mobil (approximately
40%), Chevron (approximately 4%) and others. This dome produces from the
Leadville formation at 8,000 feet through wells that deliver gas at individual
rates up to 50 MMcf/d. Delivery capacity exceeds one Bcf per day to the Permian
Basin and 60 MMcf/d to Utah, and additional expansions are under consideration.
The Bravo Dome, of which Shell CO(2) Company owns 11%, holds reserves of
approximately eight TCF and covers an area of more than 1,400 square miles. It
produces more than 400 MMcf/d from more than 350 wells in the Tubb Sandstone at
2,300 feet. The remaining interest in the Bravo Dome is owned by Amoco
(approximately 74%), Amerada Hess (approximately 10%) and others.
CO(2) PIPELINES. The 502-mile, 30-inch Cortez Pipeline, operated by a Shell
affiliate, carries CO(2) from the McElmo Dome source reservoir to the Denver
City, Texas hub. The Cortez line currently transports in excess of 800 MMcf/d,
including approximately 90% of the CO(2) transported on the Central Basin
Pipeline (see below). The Cortez Pipeline is owned by Shell CO(2) Company (50%),
Mobil (37%) and Cortez Vickers Pipeline Company (13%).
The 20-inch Bravo pipeline runs 218 miles to the Denver City hub and has a
capacity of more than 350 MMcf/d. Major delivery points along the line include
the Slaughter Field in Cochran and
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Hockley counties, Texas, and the Wasson field in Yoakum County, Texas. Tariffs
on the Cortez and Bravo pipelines are not regulated. The Bravo Pipeline is owned
by Amoco (81%), Shell CO(2) Company (13%) and Markland (6%).
Placed in service in 1985, the Central Basin Pipeline consists of
approximately 143 miles of 16" to 20" main pipeline and 157 miles of 4" to 12"
lateral supply lines located in the Permian Basin between Denver City and
McCamey, Texas with a throughput capacity of 600 MMcf/d. At its origination
point in Denver City, the Central Basin Pipeline interconnects with the three
major CO(2) supply pipelines from Colorado and New Mexico, namely the Cortez,
Bravo and Sheep Mountain pipelines (operated by Shell, Amoco, and ARCO,
respectively). The mainline terminates near McCamey where it interconnects with
the Canyon Reef Carriers, Inc. pipeline.
CO(2) pipeline profitability is dependent upon the demand among oil
producers for CO(2) in connection with enhanced oil recovery programs. The level
of enhanced oil recovery programs is sensitive to the level of oil prices.
Although CO(2) floods are initially capital-intensive, they have relatively low
ongoing operational costs. Many existing floods remain economic at oil prices as
low as $5 per barrel. While volumes have increased on all three of Shell CO(2)
Company's pipelines, significant capacity exists for additional CO(2) movement.
This system should benefit from increased utilization due to the increased use
of enhanced recovery techniques by companies expanding or initiating recovery
projects. The CO(2) pipelines' tariffs are not regulated.
COMPETITION. Shell CO(2) Company's primary competitors for the sale of
CO(2) include suppliers which have an ownership interest in McElmo Dome, Bravo
Dome and Sheep Mountain Dome CO(2) reserves.
Shell CO(2) Company's ownership interests in the Cortez and Bravo pipelines
are in direct competition with Sheep Mountain pipeline, as well as competing
with one another, for transportation of CO(2) to the Denver City market area.
Competitive position is influenced by providing a lower laid in price in Denver
City. The laid in price is a combination of the commodity price from the source
field and the transportation fee to move it to the market. Utilization of Shell
CO(2) Company's Central Basin Pipeline, which runs from Denver City to the
Permian Basin is generally dependent upon the relative distance between it and
other competing pipelines to a CO(2) flood project.
There is no assurance that new CO(2) source fields will not be discovered
which could compete with Shell CO(2) Company or that new methodologies for
enhanced oil recovery could replace CO(2) flooding.
CYPRESS PIPELINE
GENERAL. The Cypress Pipeline, which began operations in April 1991, is an
interstate common carrier pipeline system originating at storage facilities in
Mont Belvieu, Texas and extending 104 miles east to the Lake Charles, Louisiana
area. Mont Belvieu, located approximately 20 miles east of Houston, is the
largest hub for NGL gathering, transportation, fractionation and storage in the
United States and is located at the intersection of multiple long-haul NGL
pipelines as well as NGL pipelines for transportation to the Port of Houston,
the area with the largest concentration of major petrochemical plants and
refineries in the United States.
MARKETS. The pipeline was built to service a major petrochemical producer
in the Lake Charles, Louisiana area under a 20-year ship-or-pay agreement that
expires in 2011. The producer is a private company engaged primarily in the
olefins and vinyls businesses in North America with 20 operating sites producing
in excess of 7 billion pounds per year of product. The contract requires a
minimum volume of 30,000 barrels per day. In 1996, the Partnership entered into
an agreement with the producer to expand the Cypress Pipeline's capacity by
25,000 barrels per day to 57,000 barrels per day. The expansion was completed on
October 31, 1997. In addition, a new five-year ship-or-pay contract with the
producer was signed for a minimum of 13,700 additional barrels
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per day and shipment of additional volumes began on December 1, 1997. Management
continues to pursue projects that could increase throughput on the Cypress
Pipeline.
The producer has elected to be an "investor shipper" and as such has the
right, at the end of any year during the contract term, to purchase up to a 50%
joint venture interest in the Cypress Pipeline at a price established in
accordance with a formula contained in the transportation agreement. The
Partnership believes, based on the formula purchase price and current market
conditions, that it would be uneconomical for the producer to exercise its
buy-in option in the foreseeable future.
SUPPLY. The Cypress Pipeline originates in Mont Belvieu where it is able to
receive ethane from local storage facilities. Mont Belvieu has facilities to
fractionate NGLs received from several pipelines into ethane and other
components. Additionally, ethane is supplied to Mont Belvieu through pipeline
systems that transport specification NGLs from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma, and the Mid-Continent Region.
HEARTLAND PIPELINE COMPANY
GENERAL. The Heartland pipeline was completed in the fall of 1990 and is
owned by Heartland Pipeline Company ("Heartland"), a partnership owned equally
by the Partnership and Conoco. The core of Heartland's pipeline system is one of
the North System's main line sections that originates in Bushton, Kansas.
Heartland leases certain specified pipeline capacity to ship refined petroleum
products on this line under a long-term lease agreement that will expire in
2010. Heartland's Des Moines terminal has five main tanks that allow storage of
approximately 200,000 barrels of gasoline and fuel oils.
Under Heartland's organizational structure and partnership agreement, the
Partnership operates the pipeline, and Conoco operates Heartland's Des Moines
terminal and serves as the managing partner.
MARKETS. Heartland provides transportation of refined petroleum products
from refineries in the Kansas and Oklahoma area to a Conoco terminal in Lincoln,
Nebraska and Heartland's Des Moines terminal. The volume of refined petroleum
products transported by Heartland is directly affected by the demand for, and
supply of, refined petroleum products in the geographic regions served. The
major portion of refined petroleum product volumes transported by Heartland is
motor gasoline, the demand for which is dependent on price, prevailing economic
conditions and demographic changes in the markets served. Heartland's business
has experienced only minor seasonal fluctuations in demand.
SUPPLY. Refined petroleum products transported by Heartland on the North
System are supplied primarily from the National Cooperative Refinery Association
crude oil refinery in McPherson, Kansas and the Conoco crude oil refinery in
Ponca City, Oklahoma. The Ponca City volumes move to the North System through
interconnecting third-party pipelines, while the McPherson volumes are
transported directly through the North System.
COMPETITION. Heartland competes with other refined product carriers in the
geographic market served. Heartland's principal competitor is Williams Pipeline
Company.
COAL TRANSFER, STORAGE AND SERVICES
Coal continues to dominate as the fuel for electric generation, accounting
for more than 55% of U.S. capacity. Forecasts of overall coal usage and power
plant usage for the next 20 years show an increase of about 1.5% per year.
Current domestic supplies are predicted to last for more than 300 years. Most of
the Partnership's coal terminals' volume is destined for use in coal-fired
electric generation.
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Environmental legislation is currently driving changes in specification of
coal used for electric generation to low-sulfur products. When burned, the
sulfur in coal converts to an air pollutant known as sulfur dioxide (SO(2)).
Effective January 1, 1995, Phase I of the Clean Air Act Amendments required the
110 largest sulfur-emitting power plants to reduce SO(2) emissions. Effective
January 1, 2000, Phase II of the Clean Air Act requires the plants to further
decrease emissions. The Partnership believes that obligations to comply with the
Clean Air Act Amendments of 1990 will drive shippers to increase the use of
low-sulfur coal from the western United States. Approximately 80% of the coal
loaded through the Cora Terminal and the Grand Rivers Terminal is low sulphur
coal originating from mines located in the western United States, including the
Hanna basin, Powder River basin, western Colorado and Utah.
CORA COAL TERMINAL
The Cora Terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, the Cora Terminal is located on approximately 480 acres
of land along the upper Mississippi River near Cora, Illinois, about 80 miles
south of St. Louis, Missouri. The terminal's equipment includes 3.5 miles of
railroad track, a rotary dumping station and train indexer, a multidirectional
coal stacker/reclaimer, approximately 4,000 feet of conveyor belts and an
anchored terminaling facility on the Mississippi River that takes advantage of
approximately five miles of owned and leased available riverfront access of
which approximately 7,000 feet is developed. The Cora Terminal is located on
lands owned by the Partnership and on private lands under lease to the
Partnership. The primary lease for the Cora Terminal expires December 2015.
The terminal has a throughput capacity of about 15 million tons per year
which can be expanded to 20 million tons with certain capital additions. The
facility's equipment permits it to continuously unload 115-car unit trains at a
rate of 3,500 tons per hour. The terminal can transfer the coal to a storage
yard or unload to barges at a rate up to 5,700 tons per hour. The railroad track
can accommodate two 115-car trains simultaneously and the riverfront access
permits simultaneous fleeting of up to 100 barges. The terminal also has
automatic sampling, programmable controls, certified belt scales, computerized
inventory control and the ability to blend different types of coal. The terminal
currently is equipped to store up to 1.0 million tons of coal, which gives
customers the flexibility to coordinate their supplies of coal with the demand
at power plants.
Management believes there is significant opportunity to increase the
volumes of coal handled through the Cora Terminal. A $1.5 million capital
expenditure, completed in 1997, increased throughput capacity by approximately
25% and doubled storage capacity. The terminal handled approximately 7.1 million
tons, 6.0 million tons, and 6.5 million tons of coal in 1997, 1996, and 1995,
respectively. Increased volume in 1997 resulted from higher volumes shipped
under certain existing contracts plus volumes shipped under a new contract with
the Tennessee Valley Authority and other new business. Management plans to
continue to lower costs in order to remain competitive and intends to cultivate
strategic partners such as rail and major barge carriers.
MARKETS. Four major customers ship approximately 80% of all the coal loaded
through the terminal. TECO Energy, Inc. ("TECO") is the parent of Tampa Electric
of Tampa, Florida. TECO Transport, TECO's barge subsidiary, transports the coal
by barge down the Mississippi River and intercoastal waterway and burns the coal
in Tampa Electric's power plants. Through Ziegler Coal, TECO has two contracts
with Cora Terminal which expire December 31, 2004. Carboex International Limited
("Carboex") is a Spanish state-owned coal purchasing company, which purchases
coal for the various Spanish state-owned utilities. Carboex transports coal by
barge to New Orleans and then by ship to Spain for use in the Puentes de Garcia
Rodriguez Power Plant. Carboex's contract with Cora Terminal expires December
31, 2001. Indiana-Kentucky Electric Corp. ("IKEC") is a subsidiary of American
Electric Power ("AEP") of Columbus, Ohio, which transports coal by barge to its
various power plants on the Ohio River. The IKEC contract continues through
December 31, 2004. The Partnership signed a coal transfer contract with the
Tennessee Valley Authority on May 15, 1997 (effective January 1, 1997)
continuing through December 31, 1999.
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SUPPLY. Historically, the Cora Terminal has moved coal that originated in
the mines of southern Illinois. Many shippers, however, particularly in the
East, are now using western coal loaded at the Cora Terminal or a mixture of
western coal and Illinois coal as a means of meeting environmental restrictions.
The Partnership believes that Illinois coal producers and shippers will continue
to be important customers, but anticipates that growth in volume through the
terminal will be primarily due to western coal originating in Wyoming, Colorado
and Utah.
The Cora Terminal sits on the mainline of the Union Pacific Railroad and is
strategically well positioned to receive coal shipments from the West. Mines in
southern Illinois and in Wyoming (Hanna and Powder River basins) are within the
Union Pacific's service area and its connecting lines. With the recent merger of
the Union Pacific and Southern Pacific Railroads, coal mined in the Colorado and
Utah basins can now be shipped through the Cora Terminal. Union Pacific is one
of only two major rail lines connected to the western mines that ship coal to
the East and serves major coal companies that have substantial developed and
undeveloped reserves.
GRAND RIVERS TERMINAL
On September 4, 1997, the Partnership acquired at a cost of approximately
$20 million the assets of BRT Transfer Terminal, Inc. and other assets from
Vulcan Materials Company and the name of the terminal was subsequently changed
to Grand Rivers Terminal. The Grand Rivers Terminal is operated on land under
easements with an initial expiration of July 2014.
The Grand Rivers Terminal is a coal transloading and storage facility
located on the Tennessee River, just above the Kentucky Dam. The Grand Rivers
Terminal 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 that can blend up to four
different coals at one time. The terminal has four distinct and separate
facilities, three of which are in close proximity. Three of the facilities
receive coal by rail and the fourth by truck and barge. Coal blending can be
done in two of the facilities. The terminal has an annual throughput capacity of
approximately 25 million tons with a storage capacity of approximately 2 million
tons.
Coal can be unloaded and sent either to storage or directly dumped into
barges at the rate of 5,000 tons per hour. Coal can be automatically blended and
loaded into barges at the rate of 3,000 tons per hour. The fleeting of barges is
currently handled by Vulcan pursuant to an operating agreement with the
Partnership. Other features of the terminal include automatic sampling,
programmable controls, computerized blending, belt scales, and computerized
inventory control.
Management believes there is significant opportunity to increase throughput
at the Grand Rivers Terminal because it offers access to seven Class I
railroads, is located on two major waterways (the Tennessee and Cumberland
Rivers) with further access to the Ohio and Mississippi Rivers and the Gulf
Coast via the Tennessee-Tombigbee System and is isolated from flooding problems
due to its location near the Kentucky Dam.
SUPPLY. Grand Rivers has its main operations on the Tennessee River, near
Grand Rivers, Kentucky. The terminal provides easy access to the
Ohio-Mississippi River network, the Tennessee-Tombigbee System, major trucking
routes on the interstate highway system and is served by the Paducah &
Louisville Railroad, a short line railroad with connections to seven Class I
rail lines including the Union Pacific, CSX, Illinois Central and Burlington
Northern. The Grand Rivers Terminal is situated between the Illinois and western
low-sulphur coal fields. The major coal companies served by these railroads have
substantial developed and undeveloped reserves.
MARKETS. The Grand Rivers Terminal's primary business has been to supply
blends of western United States, southern Illinois and western Kentucky coal to
the power plants operated by the Tennessee Valley Authority and other power
plants located on the Ohio-Mississippi and Tennessee-Tombigbee Systems. The
Grand Rivers Terminal is strategically positioned to receive and store both
local and western basin coals and can also blend large volumes of coal with
speed and accuracy.
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The strategic position and blending capabilities will provide an advantage in
meeting increased demand by power plants for blends of western and eastern coals
necessary for continued compliance with the Clean Air Act Amendments of 1990.
The Grand Rivers Terminal is the only major terminal in the area that can both
receive and load barge coal.
COMPETITION
The Cora Terminal and the Grand Rivers Terminal compete with several coal
terminals located in the general geographic area, however, no significant new
coal terminals have been constructed near the Cora Terminal or the Grand Rivers
Terminal in the last ten years. There are significant barriers to entry for the
construction of new coal terminals, including the requirement for significant
capital expenditures and restrictive environmental permitting requirements.
Management believes the Cora Terminal and the Grand Rivers Terminal can compete
successfully with other terminals because of their favorable location,
independent ownership, available capacity, modern equipment and large storage
area. Some of the major competing terminals include:
- AMERICAN COMMERCIAL MARINES' HALL STREET TERMINAL, owned by CSX, is
located in St. Louis. This terminal is similar to Cora in design and
operation, with annual volumes estimated at 6 million tons. Like Cora,
this terminal experiences occasional interruptions of service due to high
water conditions.
- COOK TERMINAL, owned by a consortium of power companies led by American
Electric Power, is located north of the Grand Rivers Terminal on the Ohio
River. This terminal is connected to both the Union Pacific and
Burlington Northern railroads. Annual volumes are estimated at 12 million
tons.
- KELLOGG DOCK, owned by Consolidated Coal Company ("Consol"), is located
25 miles north of the Cora Terminal. Kellogg is connected to the Union
Pacific railroad and has annual volumes estimated at 3 million tons.
There are numerous other terminals, many that are for proprietary use by
the owners.
RED LIGHTNING ENERGY SERVICES
In 1997, the Partnership began marketing energy related products and coal
terminal services through its Red Lightning Energy Services unit ("Red
Lightning"). Products marketed include coal and propane. The unit provides
marketing of coal terminal services for both the Cora Terminal and the Grand
Rivers Terminal.
MARKETS. Coal is marketed and sold to utilities and industrial customers in
the Midwest and Southeastern region of the United States on short term delivery
or spot contracts. These customers use coal primarily for the generation of
electricity. Propane is marketed and sold to industrial customers in the Midwest
for use as fuel for a variety of industrial applications. Terminal services are
marketed to utility and industrial customers on both short and long term
contracts for storage and blending of coal.
SUPPLY. Red Lightning obtains coal primarily through producers in the
Powder River and Illinois Basins on short term or spot sales contracts. Some
coal is purchased through other coal marketers and brokers. Propane is purchased
from propane marketers. Other services marketed by Red Lightning include storage
and blending at the Partnership's two coal terminals.
The Partnership plans to expand Red Lightning in 1998 by adding refined
fuels and natural gas to the products it is currently marketing to utilities and
municipal and industrial customers. The Partnership does not utilize derivatives
or other similar instruments to hedge its risk with respect to commodity price
fluctuations.
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GAS PROCESSING AND FRACTIONATION
The Partnership's gas processing and fractionating assets include its
indirect interest in the Mont Belvieu Fractionator and the Painter Plant.
MONT BELVIEU FRACTIONATOR
GENERAL. The Partnership owns an indirect 25% interest in the Mont Belvieu
Fractionator, located approximately 20 miles east of Houston in Mont Belvieu,
Texas. The fractionator is a full-service fractionating facility that produces a
range of specification products, including ethane, propane, normal butane,
isobutane and natural gasoline from a raw stream of natural gas liquids
(Y-grade). The facility, which was built in 1980, is operated by Enterprise
Products Company and has access to virtually all major liquids pipelines and
storage facilities located in the Mont Belvieu area. The Partnership's cash flow
from its indirect interest in the Mont Belvieu Fractionator depends on the
difference between fractionation revenues and fractionation costs (including the
level of capital expenditures), as well as demand for fractionation services.
The Mont Belvieu Fractionator has two major components: NGL fractionating and
butane splitting. The NGL fractionating component consists of two trains: The
West Texas train and the Seminole train. Each train consists of a de-ethanizer,
a de-propanizer and a de-butanizer. Each major unit has an associated reboiler
and related control equipment. The fractionation process uses heat recovery
equipment and cogeneration. In December 1996, the total capacity of the
fractionator was expanded by approximately 45,000 barrels per day to
approximately 200,000 barrels per day. The Mont Belvieu Fractionator operated at
approximately 100% of capacity during the first quarter of 1998 and
approximately 98%, 100% and 96% of capacity, respectively, during 1997, 1996,
and 1995.
The fractionator is owned 50% by Mont Belvieu Associates, which is owned
50% by each of the Partnership and Enterprise Products. The remaining 50% of the
fractionator is owned equally by Enterprise, Texaco, Union Pacific Fuels and
Burlington Resources. The owners of the fractionator, with the exception of the
Partnership, account for approximately 75% of its revenues. Other major
customers include Enron, Exxon, ARCO, Marathon, Warren and Phillips.
MARKETS. The fractionator is located in proximity to major end-users of its
specification products, ensuring consistent access to the largest domestic
market for NGL products. In addition, the Mont Belvieu hub has access to
deep-water port loading facilities via the Port of Houston, allowing access to
import and export markets.
SUPPLY. The Mont Belvieu Fractionator is fed by six major Y-grade pipelines
(Attco, Chevron, Black Lake, Seminole, Chaparral and Panola). Through several
pipeline interconnects and unloading facilities, the Mont Belvieu Fractionator
also can access supply from a variety of other sources. Supply can either be
brought directly into the facility or directed into underground salt dome
storage. The Chaparral and Seminole pipelines gather Y-grade from a variety of
natural gas processing plants in Texas, New Mexico, Oklahoma and the
Mid-Continent area. The Chevron line transports NGLs from Chevron's East Texas
and Central Texas facilities. Black Lake draws its supply from the Northern
Louisiana region. The Attco pipeline draws its supply from South Texas and the
Panola pipeline transports NGLs from East Texas. Additionally, import barrels
can be brought to the Mont Belvieu Fractionator from locations on the Port of
Houston.
COMPETITION. The Mont Belvieu Fractionator competes for volumes of Y-grade
with three other fractionators located in the Mont Belvieu hub and surrounding
areas. Competitive factors for customers include primarily the level of
fractionation fees charged and the relative amount of available capacity.
PAINTER GAS PROCESSING PLANT
The Painter Plant is located near Evanston, Wyoming and consists of a
natural gas processing plant, a nitrogen rejection unit, a fractionator, an NGL
terminal and interconnecting pipelines with
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<PAGE> 49
truck and rail loading facilities. The fractionation facility has a capacity of
approximately 6,000 barrels per day, depending on the feedstock composition.
After fractionation, the propane, mixed butanes and natural gasoline are
delivered through three interconnecting NGL pipelines to the Partnership's
Millis Terminal and Storage Facility, which is located approximately seven miles
from the Painter Plant. Truck and rail loading of fractionated products is
provided at Millis, where there is approximately 14,000 barrels of aboveground
storage for all products. The Painter Plant is located on Bureau of Land
Management land that is leased to the Partnership and Enron (50% each) until
September 2009. Millis is located on private lands and is under lease to the
Partnership until September 2009.
On February 14, 1997, the Partnership executed an operating lease agreement
with Amoco Oil Company for Amoco's use of the Painter Plant fractionator and the
Millis facilities with the nearby Amoco Painter Complex gas plant. The lease
will generate approximately $1.0 million of cash flow per year for the
Partnership. The primary term of the lease expires February 14, 2007, with
evergreen provisions at the end of the primary term. Amoco took an assignment of
all commercial arrangements in place on February 14, 1997, and assumed all day
to day operations, maintenance, repairs and replacements, and all expenses
(other than minor easement fees), taxes and charges associated with the
fractionator and the Millis facilities. After year seven, Amoco may elect to
purchase the fractionator and Millis facilities under certain terms.
MAJOR CUSTOMERS OF THE PARTNERSHIP
Although the Partnership's 1997 revenues were derived from a wide customer
base, revenues from Amoco Corporation, including its subsidiaries, accounted for
approximately 11.9% of consolidated revenues. In 1996, revenues from Mobil
Corporation and Amoco Corporation, including their subsidiaries, accounted for
approximately 12.4% and 10.4%, respectively, of revenues. For the year ended
December 31, 1995, revenues from Chevron Corporation and Amoco Corporation,
including their subsidiaries, each accounted for approximately 10.2% of
revenues.
EMPLOYEES
The Partnership does not have any employees. The General Partner employs
all persons necessary for the operation of the Partnership's business and the
Partnership reimburses the General Partner for the services of such persons. As
of March 6, 1998, the General Partner had approximately 550 employees. Twenty
hourly personnel at the Cora Terminal are represented by the International Union
of Operating Engineers under a collective bargaining agreement that expires in
September 1998. No other employees of the General Partner are members of a union
or have a collective bargaining agreement. The General Partner considers its
relations with its employees to be good.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
As is commonly the case with publicly-traded limited partnerships, the
Partnership does not employ any of the persons responsible for managing or
operating the Partnership, but instead reimburses the General Partner for their
services. Set forth below is certain information concerning the directors and
executive officers of the General Partner. All directors of the General Partner
are elected annually by, and may be removed by, Kinder Morgan, Inc. as the sole
shareholder of the General Partner. All officers serve at the discretion of the
directors of the Board of Directors of the General Partner.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
---- --- ---------------------------------
<S> <C> <C>
Richard D. Kinder.................... 53 Director, Chairman, and CEO
William V. Morgan.................... 54 Director and Vice Chairman
Alan L. Atterbury*................... 55 Director
Edward O. Gaylord*................... 66 Director
Thomas B. King....................... 36 Director, President, and Chief Operating Officer
William V. Allison................... 51 Vice President, General Counsel
David G. Dehaemers, Jr............... 37 Vice President, Treasurer, and Chief Financial Officer
Clare H. Doyle....................... 43 Vice President, Secretary, and Corporate Counsel
James E. Higgins..................... 41 Vice President, Pacific Business Development and
Marketing
Roger M. Knouse...................... 47 Vice President, Houston Commercial Operations,
Pipelines
Mary F. Morgan....................... 45 Vice President, Pacific Customer Service
Michael C. Morgan.................... 29 Vice President, Corporate Development and Investments
Roger C. Mosby....................... 50 Vice President, Coal Commercial and Terminal Operations
William M. White..................... 52 Vice President, Pipeline Field Operations
Eashy Yang........................... 56 Vice President, Technical Services
</TABLE>
- ---------------
* Member of the Conflicts and Audit Committee
RICHARD D. KINDER was elected Director, Chairman, and Chief Executive
Officer of the General Partner in February 1997. From 1992 to 1994, Mr. Kinder
served as Chairman of the General Partner. From October 1990 until December
1996, Mr. Kinder was President of Enron Corp. Mr. Kinder was employed by Enron
and its affiliates and predecessors for over 16 years.
WILLIAM V. MORGAN was elected Director of the General Partner in June 1994
and Vice Chairman of the General Partner in February 1997. Mr. Morgan has been
the President of Morgan Associates, Inc., an investment and pipeline management
company, since February 1987, and Cortez Holdings Corporation, a related
pipeline investment company, since October 1992. He has held legal and
management positions in the energy industry since 1975, including the
presidencies of three major interstate natural gas companies which are now a
part of Enron: Florida Gas Transmission Company, Transwestern Pipeline Company
and Northern Natural Gas Company. Prior to joining Florida Gas in 1975, Mr.
Morgan was engaged in the private practice of law in Washington, D.C.
ALAN L. ATTERBURY was elected Director of the General Partner in February
1997. Mr. Atterbury has been the Chief Executive Officer and President of
Midland Loan Services, Inc. since its formation in April 1998. Mr. Atterbury
co-founded Midland Loan Services, L.P. (the predecessors of Midland Loan
Services, Inc.) and served as Chief Executive Officer and President from the
partnership's inception in 1992 until April 1998. Mr. Atterbury was also the
President and a Director of Midland Data Systems, the general partner of Midland
Loan Services, L.P. from its inception in 1990 until April 1998. Mr. Atterbury
has also been the President of Midland Properties, a property management and
real estate development company, since 1980.
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<PAGE> 51
EDWARD O. GAYLORD was elected Director of the General Partner in February
1997. Mr. Gaylord is the President of Gaylord & Company, a venture capital
company located in Houston, Texas. Mr. Gaylord also serves as Chairman of the
Board for EOTT Energy Corporation, an oil trading and transportation company
also located in Houston, Texas. He is also President of Jacintoport Terminal
Company.
THOMAS B. KING was elected Director, President, and Chief Operating Officer
of the General Partner in February, 1997. Prior to that, he held the position of
Vice-President, Midwest Region for the General Partner from July 1995 until
February 1997. Mr. King has held several positions since he joined Enron in
1989, including Vice President, Gathering Services of Transwestern Pipeline
Company and Northern Natural Gas Company and as Regional Vice President,
Marketing of Northern Natural Gas Company. From December 1989 to August 1993, he
served as Director, Business Development for Northern Border Pipeline Company in
Omaha, Nebraska.
WILLIAM V. ALLISON was elected Vice President and General Counsel of the
General Partner in April 1998. From 1977 to April 1998 Mr. Allison was employed
at Enron Corp. where he held various executive positions, including President of
Enron Liquid Services Corporation, Florida Gas Transmission Company and Houston
Pipeline Company and Vice President and Associate General Counsel of Enron Corp.
Prior to joining Enron Corp., he was an attorney at the FERC.
DAVID G. DEHAEMERS, JR. was elected Treasurer in February 1997 of the
General Partner and Vice President and Chief Financial Officer of the General
Partner in July 1997. He served as Secretary of the General Partner from
February 1997 to August 1997. From October 1992 to January 1997, he was Chief
Financial Officer of Morgan Associates, Inc., an energy investment and pipeline
management company. Mr. Dehaemers was previously employed by the national CPA
firms of Ernst & Whinney and Arthur Young. He is a CPA and received his
undergraduate Accounting degree from Creighton University in Omaha, Nebraska.
Mr. Dehaemers received his law degree from the University of Missouri-Kansas
City and is a member of the Missouri Bar.
CLARE H. DOYLE was elected Vice President, Corporate Counsel and Secretary
of the General Partner in July 1997. Prior to that, she was employed as counsel
for Enron Operations Corp. from September 1996 to March 1997. From April 1988 to
June 1996, she was counsel for PanEnergy Corp. (now Duke Energy).
JAMES E. HIGGINS was elected Vice President, Pacific Business Development
and Marketing of the General Partner in March 1998. Previously, Mr. Higgins was
Director of Business Development for the former general partner of Santa Fe from
1993 until March 1998. Prior to that, he was Director of Business Development
and Administration for Enron Oil Trading and Transportation in 1992 and Director
of Business Development for GATX Terminals Corporation from 1989 until 1992. Mr.
Higgins held manager positions in sales and operations for GATX from 1985 until
1989. He also held treasury and economic analyst positions with Powerline Oil
Company from 1979 until 1983.
ROGER M. KNOUSE was elected Vice President, Houston Commercial Operations,
Pipelines of the General Partner in March 1998. Prior to that, he served as
Director of Business Development for the General Partner from February 1997
until March 1998. Mr. Knouse was Director of Pipeline Services for Enron Liquid
Service Corp. from July 1995 until February 1997 and Director of Pipeline
Transportation for Enron Liquids Pipeline Company from January 1987 until July
1995. He held various operations and commercial positions with Enron Liquids
Pipeline Company from November 1973 until January 1987.
MARY F. MORGAN was elected Vice President, Pacific Customer Service of the
General Partner in March 1998. Prior to that, she was Director, Customer Service
Center for the former general partner of Santa Fe since 1997. Prior to this
assignment, Ms. Morgan served as Director, Products Movement and District
Manager, Western District for the former general partner of Santa Fe. Over the
past twenty years, she also served in various engineering and operations
assignments with the former general partner of Santa Fe, Exxon Pipeline Company,
and Amoco Production Company.
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<PAGE> 52
MICHAEL C. MORGAN was elected Vice President, Corporate Development and
Investments of the General Partner in February 1997. From August 1995 until
February 1997, Mr. Morgan was an associate with McKinsey & Company, an
international management consulting firm. In 1995, Mr. Morgan received a Masters
in Business Administration from the Harvard Business School. From March 1991 to
June 1993, Mr. Morgan held various positions at PSI Energy, Inc., an electric
utility, including Assistant to the Chairman. Mr. Morgan received a Bachelor of
Arts in Economics and a Masters of Arts in Sociology from Stanford University in
1990. Mr. Morgan is the son of William V. Morgan.
ROGER C. MOSBY was elected Vice President, Coal Commercial and Terminal
Operations of the General Partner in February 1997. Prior to that, Mr. Mosby was
Vice President for Enron Liquid Services Corp. from July 1994 until February
1997. He was Vice President of Enron Gas Processing Company from January 1990
until March 1994.
WILLIAM M. WHITE was elected Vice President, Pipeline Field Operations of
the General Partner in March 1998. Previously, Mr. White served as Vice
President of Engineering for the former general partner of Santa Fe from 1993
until March 1998. Prior to that, he held various engineering and operation
positions with the former general partner of Santa Fe since December 1974. Mr.
White graduated from the University of Kentucky with a degree in Electrical
Engineering and he completed graduate work in Business Administration at the
University of Tulsa.
EASHY YANG was elected Vice President, Technical Services of the General
Partner in July 1997. Mr. Yang was Director of Engineering and Technical
Services for Enron Operations Corp. from June 1993 until February 1997. Prior to
that, he was Director of Technical Operations and held various engineering
positions with Enron from September 1974 until June 1993.
SELLING UNITHOLDERS
In September 1990, SFP Pipeline Holdings, Inc. issued $218,981,000
principal amount of its Variable Rate Exchangeable Debentures due 2010 (the
"VREDs"). The VREDs were initially exchangeable into Units of Santa Fe upon the
happening of certain events. As a result of the Partnership's acquisition of
substantially all the assets of Santa Fe, each $1,000 principal amount of VREDs
became exchangeable for 51.720927 Units (the "VRED Exchange"). Holders of
approximately $217.7 million principal amount of VREDs elected to exchange their
VREDs for an aggregate of approximately 11,259,000 Units in the VRED Exchange,
which closed on June 4, 1998. The Partnership did not issue any new Units in the
VRED Exchange. Instead, outstanding Units owned by the former general partner of
Santa Fe were delivered to the VRED holders.
On June 4, 1998, the Partnership paid at par the $1.28 million principal of
VREDs that were not exchanged for Units in the VRED Exchange, plus accrued and
unpaid interest.
As part of the VRED Exchange, the Partnership agreed to permit the VRED
holders to resell the Units received in the VRED Exchange in this offering. The
Units offered by the Selling Unitholders represent Units that the former VRED
holders requested to be included in this offering.
The following table sets forth certain information with respect to the
Selling Unitholders and their beneficial ownership of the Units as of May 26,
1998 and as adjusted to reflect the sale of Units offered by the Selling
Unitholders hereby. None of the Selling Unitholders has held any position or
office or had any other material relationship with the Partnership or any
predecessor or affiliate thereof, other than as a Unitholder thereof, during the
past three years. Unless otherwise indicated, each Selling Unitholder named has
sole voting and investment power with respect to its Units. The
47
<PAGE> 53
information presented in the preceding discussion and in the following table
assumes that the over-allotment options are exercised in full.
<TABLE>
<CAPTION>
UNITS BENEFICIALLY UNITS BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERINGS NUMBER OF OFFERINGS
NAME AND ADDRESS OF ------------------- UNITS -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
California Public Employees' Retirement System
(Custodian; State, Street, Bank and Trust Company)... 594,790 1.46% 594,790 -- --
400 P Street
Sacramento, California 45814
Attn: Daniel Kiefer
Bank Calumet, N.A.................................... 51,720 * 51,720 -- --
5231 Hohman Avenue
Hammond, Indiana 46320
Attn: Michael Bartochowski
Anthony Hanes........................................ 155,162 * 155,162 -- --
c/o Capital Research Co.
135 S. State College Boulevard
Brea, California 92821
Attn: ATH
Morgan Stanley Trust Company......................... 127,750 * 127,750 -- --
One Pierrepont Plaza
Brooklyn, New York 11201
Attn: Corporate Actions Dept.
</TABLE>
- ---------------
* Less than 1% of class.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion is a summary of material tax considerations that
may be relevant to a prospective Unitholder. To the extent set forth herein the
discussion is the opinion of Morrison & Hecker L.L.P. ("Counsel") as to the
material federal income tax 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 Unitholder.
The discussion below is directed primarily to a Unitholder which is a
United States person (as determined for federal income tax purposes). Except as
specifically noted, the discussion does not address all of the federal income
tax consequences that may be relevant to (i) a Unitholder in light of such
holder's particular circumstances, (ii) a Unitholder that is a partnership,
corporation, trust or estate (and their respective partners, shareholders and
beneficiaries), (iii) Unitholders subject to special rules, such as certain
financial institutions, tax-exempt entities, foreign corporations, non-
48
<PAGE> 54
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 Unitholders depends in some instances
on determinations of fact and interpretations of complex provisions of federal
income tax laws for which no clear precedent or authority may be available.
ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT HIS OWN TAX ADVISORS
WHEN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF 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 this offering and either has been admitted or is pending
admission to the Partnership as an additional limited partner or (ii)
acquired beneficial ownership of 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.
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 Unitholder'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
the Partnership which is relevant to a determination of whether its income
qualifies for the Natural Resource Exception pursuant to Section 7704 of the
Code. See "-- General Features of Partnership Taxation -- Partnership Status."
The opinion of Counsel is based upon existing provisions of the Code and the
Regulations,
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<PAGE> 55
existing administrative rulings and procedures of the IRS and existing court
decisions. There can be no assurances that any of such authorities will not be
changed in the future, which change could be retroactively applied. Such
opinions represent only Counsel's best legal judgment as to the particular
issues and are not binding on the IRS or the courts.
GENERAL FEATURES OF PARTNERSHIP TAXATION
PARTNERSHIP STATUS. The applicability of the federal income tax
consequences described herein depends on the treatment of the Partnership and
the Operating Partnerships as partnerships for federal income tax purposes and
not as associations taxable as corporations. For federal income tax purposes, a
partnership is not a taxable entity, but rather a conduit through which all
items of partnership income, gain, loss, deduction and credit are passed through
to its partners. Thus, income and deductions resulting from partnership
operations are allocated to the partners and are taken into account by the
partners on their individual federal income tax returns. In addition, a
distribution of money from a partnership to a partner generally is not taxable
to the partner, unless the amount of the distribution exceeds the partner's tax
basis in the partner's interest in the partnership. If the Partnership or any of
the Operating Partnerships were classified for federal income tax purposes as an
association taxable as a corporation, the entity would be a separate taxable
entity. In such a case, the entity, rather than its members, would be taxed on
the income and gains and would be entitled to claim the losses and deduction
resulting from its operations. A distribution from the entity to a member would
be taxable to the member in the same manner as a distribution from a corporation
to a shareholder (i.e., as ordinary income to the extent of the current and
accumulated earnings and profits of the entity, then as a nontaxable reduction
of basis to the extent of the member's tax basis in the member's interest in the
entity and finally as gain from the sale or exchange of the member's interest in
the entity). Any such characterization of either the Partnership or one of the
Operating Partnerships as an association taxable as a corporation would result
in a material reduction of the anticipated cash flow and after-tax return to the
Unitholders.
Pursuant to Final Treasury Regulations 301.7701-1, 301.7701-2 and
301.7701-3, effective January 1, 1997 (the "Check-the-Box Regulations"), an
entity in existence on January 1, 1997, will generally retain its current
classification for federal income tax purposes. As of January 1, 1997, the
Partnership was classified and taxed as a partnership. Pursuant to the
Check-the-Box Regulations this prior classification will be respected for all
periods prior to January 1, 1997, if (1) the entity had a reasonable basis for
the claimed classification; (2) the entity recognized federal tax consequences
of any change in classification within five years prior to January 1, 1997; and
(3) the entity was not notified prior to May 8, 1996, that the entity
classification was under examination. Prior to the finalization of the
Check-the-Box Regulations, the classification of an entity as a partnership was
determined under a four factor test developed by a number of legal authorities.
Based on this four factor test, the Partnership had a reasonable basis for its
classification as a partnership. Moreover, the Partnership has not changed its
classification and it has not received any notification that its classification
was under examination.
Section 7704 provides that publicly traded partnerships will, as a general
rule, be taxed as corporations. However, an exception exists with respect to
publicly traded partnerships 90% or more of the gross income of which for every
taxable year consists of "qualifying income" (the "Natural Resource Exception").
"Qualifying income" includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines) or marketing of any mineral or natural resource including
oil, natural gas or products thereof. Other types of "qualifying income" include
interest, dividends, gains from the sale of real property and gains from the
sale or other disposition of capital assets held for the production of income
that otherwise constitute "qualifying income." The General Partner has
represented that in excess of 90% of the Partnership's gross income will be
derived from fees and charges for transporting (through the Liquids Pipelines)
NGLs, CO(2) and other hydrocarbons, dividends from the corporation that owns the
Mont Belvieu Fractionator and interest. Based upon that representation,
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<PAGE> 56
Counsel is of the opinion that the Partnership's gross income derived from these
sources will constitute "qualifying income."
If (a) a publicly traded partnership fails to meet the National Resource
Exception for any taxable year, (b) such failure is inadvertent, as determined
by the IRS, and (c) the partnership takes steps within a reasonable time to once
again meet the gross income test and agrees to make such adjustments and pay
such amounts (including, possibly, the amount of tax liability that would be
imposed on the partnership if it were treated as a corporation during the period
of inadvertent failure) as are required by the IRS, such failure will not cause
the partnership to be taxed as a corporation. The General Partner, as general
partner of the Partnership, will use its best efforts to assure that the
Partnership will continue to meet the qualifying income test for each taxable
year and the Partnership anticipates that it will meet the test. If the
Partnership fails to meet the qualifying income test with respect to any taxable
year, the General Partner, as general partner of the Partnership, will use its
best efforts to assure that the Partnership will qualify under the inadvertent
failure exception discussed above.
If the Partnership fails to meet the Natural Resource Exception (other than
a failure determined by the IRS to be inadvertent that is cured within a
reasonable time after discovery), the Partnership will be treated as if it had
transferred all of its assets (subject to liabilities) to a newly-formed
corporation (on the first day of the year in which it fails to meet the Natural
Resource Exception) in return for stock in such corporation, and then
distributed such stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to the
Unitholders and the Partnership, so long as the Partnership, at such time, does
not have liabilities in excess of the basis of its assets. Thereafter, the
Partnership would be treated as a corporation.
If the Partnership or any Operating Partnership were treated as an
association or otherwise taxable as a corporation in any taxable year, as a
result of a failure to meet the Natural Resource Exception or otherwise, its
items of income, gain, loss, deduction and credit would be reflected only on its
tax return rather than being passed through to the Unitholders, and its net
income would be taxed at the entity level at corporate rates. In addition, any
distribution made to a Unitholder would be treated as either taxable dividend
income (to the extent of the Partnership's current or accumulated earnings and
profits), or, in the absence of earnings and profits as a nontaxable return of
capital (to the extent of the Unitholder's basis in the Units) or taxable
capital gain (after the Unitholder'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 and thus would likely result in a substantial
reduction of the value of the Units.
There can be no assurance that the law will not be changed so as to cause
the Partnership or its Operating Partnerships to be treated as associations
taxable as corporations for federal income tax purposes or otherwise to be
subject to entity-level taxation. The Partnership Agreement provides that, if a
law is enacted that subjects the Partnership to taxation as a corporation or
otherwise subjects the Partnership to entity-level taxation for federal income
tax purposes, certain provisions of the Partnership Agreement relating to the
General Partner's incentive distributions will be subject to change.
Under current law, the Partnership and the Operating Partnerships will be
classified and taxed as partnerships for federal income tax purposes and will
not be classified as associations taxable as corporations. This conclusion is
based upon certain factual representations and covenants made by the General
Partner including:
(a) the Partnership and the Operating Partnerships will be operated
strictly in accordance with (i) all applicable partnership statutes; (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 following discussion assumes that the Partnership and the Operating
Partnerships are, and will continue to be, treated as partnerships for federal
income tax purposes. If either assumption proves incorrect, most, if not all, of
the tax consequences described herein would not be applicable to Unitholders. In
particular, if the Partnership is not a partnership, a Unitholder may be treated
for federal income tax purposes (i) as recognizing ordinary income, as the
result of any payments to him in respect of partnership distributions and (ii)
as not being entitled to allocations of partnership income, gain, loss and
deduction.
LIMITED PARTNER STATUS. Unitholders who have been admitted as limited
partners will be treated as partners of the Partnership for federal income tax
purposes. Moreover, the IRS has ruled that assignees of partnership interests
who have not been admitted to a partnership as partners, but who have the
capacity to exercise substantial dominion and control over the assigned
partnership interests, will be treated as partners for federal income tax
purposes. On the basis of this ruling, except as otherwise described herein, (a)
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners and (b) Unitholders whose 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.
There is no direct authority which addresses the status of 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 of the Partnership would not appear to be reportable by a Unitholder who
is not a partner, and any cash distributions received by such Unitholders would
therefore be fully taxable as ordinary income. These Unitholders should consult
their own tax advisors with respect to their status as partners in the
Partnership for federal income
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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 Unitholders of record, 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 and Deemed Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS. Kinder Morgan G.P., Inc., the
General Partner of the Partnership (the "General Partner"), estimates that a
purchaser of a Unit in the offering made hereby who holds such Unit through the
record date for the distribution with respect to the final calendar quarter of
2001 (assuming for this purpose quarterly distributions on the Units with
respect to each year during that period are equal to the most recent announced
quarterly distribution rate of $0.60 per Unit) will be allocated an amount of
federal taxable income of less than 20% of the amount of cash distributed to
such Unitholder with respect to each such year during that period. Thereafter,
any Unitholder will receive an increased allocation of federal taxable income as
a percentage of cash distributed primarily because of the continuing reduction
in depreciation expense attributable to the use of 150% declining balance
depreciation method for a significant portion of the Partnership's assets.
The foregoing estimates are based upon numerous assumptions regarding the
business and operations of the Partnership (including assumptions as to tariffs,
capital expenditures, cash flows and anticipated cash distributions). Such
estimates and assumptions are subject to, among other things, numerous business,
economic, regulatory and competitive uncertainties that are beyond the control
of the General Partner or the Partnership and to certain tax reporting positions
(including estimates of the relative fair market values of the assets of the
Partnership and the validity of certain curative allocations) that the General
Partner has adopted or intends to adopt and with which the Internal Revenue
Service ("IRS") could disagree. Accordingly, no assurance can be given that the
estimates will prove to be correct. The actual percentages could be higher or
lower than as described above, and such differences could be material.
It is extremely difficult to project with any precision the ratio of
taxable income to cash distributions for any particular Unitholder. The amount
of taxable income recognized by any particular Unitholder in any particular year
will depend upon a number of factors including, but not limited to: (a) the
amount of federal taxable income generally recognized by the Partnership; (b)
the gains attributable to specific asset sales that may be wholly or partially
attributable to Section 704(c) Gain (as defined below) which will be specially
allocated to certain Unitholders depending on which asset(s) are sold; (c) the
Section 743(b) basis adjustment available to any particular Unitholder based
upon its purchase price for a Unit and the amount by which such price exceeded
the proportionate share of inside tax basis of the Partnership's assets
attributable to such Unit when such Unit was purchased; and (d) the impact of
any adjustments to taxable income reported by the Partnership or conventions
utilized by the General Partner in allocating curative allocations between and
among Unitholders. The amounts of depreciation deductions and net curative
allocations available to a Unitholder may be a major contributing factor to the
differences in the amount of taxable income allocated to any Unitholder.
FLOW-THROUGH OF TAXABLE INCOME. No federal income tax will be paid by the
Partnership. Instead, each Unitholder will be required to report on such
Unitholder's income tax return such Unitholder's allocable share of the income,
gains, losses and deductions of the Partnership without regard to whether
corresponding cash distributions are received by such Unitholders. Consequently,
a Unitholder may be allocated income from the Partnership even if the Unitholder
has not received a cash distribution. Each Unitholder must include in income his
allocable share of
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Partnership income, gain, loss and deduction for the taxable year of the
Partnership ending with or within the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Under Section 731 of the Code, a
partner will recognize gain as a result of a distribution from a partnership
only if the partnership distributes an amount of money to the partner which
exceeds such partner's adjusted tax basis in the partnership interest prior to
the distribution. The amount of gain is limited to this excess. Cash
distributions in excess of such Unitholder's basis generally will be considered
to be gain from the sale or exchange of the Units, taxable in accordance with
the rules described under "-- Disposition of Units" below.
A decrease in a Unitholder's percentage interest in the Partnership,
because of the issuance by the Partnership of additional Units, or otherwise,
will decrease a Unitholder's share of nonrecourse liabilities of the
Partnership, if any, and thus will result in a corresponding deemed distribution
of cash. The Partnership does not currently have, and the General Partner does
not anticipate that it will have, any material amounts of nonrecourse
liabilities.
A non-pro rata distribution of money or property may result in ordinary
income to a Unitholder, regardless of such Unitholder's tax basis in Units, if
the distribution reduces such Unitholder's share of the Partnership's "Section
751 Assets." "Section 751 Assets" are defined by the Code to include assets
giving rise to depreciation recapture or other "unrealized receivables" or
"substantially appreciated inventory". For this purpose, inventory is
substantially appreciated if its value exceeds 120% of its adjusted basis. In
addition to depreciation recapture, "unrealized receivables" include rights to
payment for goods (other than capital assets) or services to the extent not
previously includable in income under a partnership's method of accounting. To
the extent that such a reduction in a Unitholder's share of Section 751 Assets
occurs, the Partnership will be deemed to have distributed a proportionate share
of the Section 751 Assets to the Unitholder followed by a deemed exchange of
such assets with the Partnership in return for the non-pro rata portion of the
actual distribution made to such Unitholder. This deemed exchange will generally
result in the realization of ordinary income under Section 751(b) by the
Unitholder. Such income will equal the excess of (1) the non-pro rata portion of
such distribution over (2) the Unitholder's tax basis in such Unitholder's share
of Section 751 Assets deemed relinquished in the exchange.
BASIS OF 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.
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 Unitholder or a
corporate Unitholder (if more than 50% in the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations) if the "at risk" amount is less than the Unitholder's basis in
the Units. A Unitholder must recapture losses deducted in previous years to the
extent that the Partnership distributions cause such Unitholder's at risk amount
to be less than zero at the end of any taxable year. Losses disallowed to a
Unitholder or recaptured as a result of theses limitations will carry forward
and will be allowable to the extent that the Unitholder's basis or at risk
amount (whichever is the applicable limiting factor) is increased. Upon the
taxable dispositions of a Unit, a Unitholder may offset any gain recognized by
losses previously suspended by the at-risk limitation. However, any loss
suspended by the basis limitations is not available to offset recognized
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gain. Any suspended loss, whether by reason of the basis limitation or the
at-risk limitation, which exceeds the gain is no longer utilizable.
In general, a Unitholder will be "at risk" to the extent of the purchase
price of the Unitholder's Units but this may be less than the Unitholder's basis
for the Units in an amount equal to the Unitholder's share of nonrecourse
liabilities, if any, of the Partnership. A Unitholder's at risk amount will
increase or decrease as the basis of such Units held increases or decreases
(excluding any effect on basis resulting from changes in the Unitholder's share
of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely-held corporations and personal service corporations can
deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from such passive activities. The passive loss limitations are not
applicable to a widely held corporation. The passive loss limitations are
applied separately with respect to each publicly traded partnership.
Consequently, the losses generated by the Partnership, if any, will only be
available to offset future income generated by the Partnership and will not be
available to offset income from other passive activities or investments
(including other publicly traded partnerships) or salary or active business
income. Passive losses that are not deductible, because they exceed the
Unitholder's allocable share of income generated by the Partnership would be
deductible in the case of a fully taxable disposition of such Units to an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
The IRS has announced that Treasury Regulations will be issued that
characterize net passive income from a publicly traded partnership as investment
income for purposes of the limitations on the deductibility of investment
interest.
LIMITATIONS ON INTEREST EXPENSE. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
such taxpayer's "net investment income." As noted, a Unitholder's net passive
income from the Partnership will be treated as investment income for this
purpose. In addition, the Unitholder's share of the Partnership's portfolio
income will be treated as investment income. Investment interest expense
includes (i) interest on indebtedness properly allocable to property held for
investment, (ii) the Partnership's interest expense attributed to portfolio
income, and (iii) the portion of interest expense incurred to purchase or carry
an interest in a passive activity to the extent attributable to portfolio
income. The computation of a Unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a Unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income pursuant to
the passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION. In general, the
Partnership's items of income, gain, loss and deduction will be allocated, for
book and tax purposes, among the General Partner, in its capacity as general
partner, and the Unitholders in the same proportion that available cash is
distributed (as between the General Partner and the Unitholders) in respect of
such taxable year. If distributions of available cash are not made in respect of
a particular taxable year, such items will be allocated among the partners in
accordance with their respective percentage interests. If the Partnership has a
net loss, items of income, gain, loss and deduction will be allocated, first, to
the General Partner and the Unitholders in accordance with their respective
percentage interests to the extent of their positive book capital accounts, and
second, to the General Partner. On a liquidating sale of assets, the Partnership
Agreement provides separate gain and loss allocations, designed to the extent
possible, (i) to eliminate a deficit in any partner's book capital account and
(ii) to produce book capital accounts which, when followed on liquidation, will
result in each Unitholder recovering Unrecovered Capital, and a distributive
share of any additional value.
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The Section 704 Regulations require that capital accounts be (1) credited
with the fair market value of property contributed to the partnership (net of
liabilities encumbering the contributed property that the partnership is
considered to assume or take subject to pursuant to Section 752) ("Contributed
Property"), (2) credited with the amount of cash contributed to the partnership
and (3) adjusted by items of depreciation, amortization, gain and loss
attributable to partnership properties that have been computed by taking into
account the book value (rather than tax basis) of such properties. (As a result,
such capital accounts are often referred to as "book" capital accounts.) A
partner's capital account must also be reduced by (i) the amount of money
distributed to such partner by the partnership, (ii) the fair market value of
property distributed to such partner by the partnership (net of liabilities
encumbering the distributed property that such Unitholder is considered to
assume or take subject to pursuant to Section 752) and (iii) a distributive
share of certain partnership expenses that are neither deductible nor
amortizable.
The "Book-Tax Disparities" created by crediting capital accounts with the
value of Contributed Properties are eliminated through tax allocations that
cause the partner whose book capital account reflects unrealized gain or loss to
bear the corresponding tax benefit or burden associated with the recognition of
such unrealized gain or loss in accordance with the principles of Section
704(c). The allocations of these tax items that differ in amount from their
correlative book items do not have economic effect, because they are not
reflected in the partners' capital accounts. However, the allocations of such
items will be deemed to be in accordance with the partners' interests in the
partnership if they are made in accordance with the Section 704(c) Regulations.
In addition, the Regulations permit the partners' capital accounts to be
increased or decreased to reflect the revaluation of partnership property (at
fair market value) if the adjustments are made for a substantial non-tax
business purpose in connection with a contribution or distribution of money or
other property in consideration for the acquisition or relinquishment of an
interest in the partnership. These adjustments may also create Book-Tax
Disparities, which the Regulations require to be eliminated through tax
allocations in accordance with Section 704(c) principles.
Except as discussed below, items of income, gain, loss and deduction
allocated to the Unitholders, in the aggregate, will be allocated among the
Unitholders in accordance with the number of Units held by such Unitholder.
Special tax (but not book) allocations will be made to reflect Book-Tax
Disparities with respect to Contributed Properties. The Partnership Agreement
also provides for certain special allocations of income and gain as required by
the qualified income offset and minimum gain chargeback provisions. In addition,
the General Partner is empowered by the Partnership Agreement to allocate
various Partnership items other than in accordance with the percentage interests
of the General Partner and the Unitholders when, in its judgment, such special
allocations are necessary to comply with applicable provisions of the Code and
the Regulations and to achieve uniformity of 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
Unitholders and gain or loss from the disposition of such property attributable
to the Book-Tax Disparity (the "Section 704(c) Gain") will be allocated to the
contributing Unitholders so that the non-contributing Unitholders will be
allowed, to the extent possible, cost recovery and depreciation deductions and
will be allocated gain or loss from the sale of assets generally as if they had
purchased a direct interest in the Partnership's assets.
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The Partnership Agreement also requires gain from the sale of properties
that is characterized as recapture income to be allocated among the Unitholders
and the General Partner (or its successors) in the same manner in which such
partners were allocated the deductions giving rise to such recapture income.
Final Treasury Regulations under Section 1245 provide that depreciation
recapture will be specially allocated based on the allocation of the deductions
giving rise to such recapture income, as provided for in the Partnership
Agreement.
Items of gross income and deduction will be allocated in a manner intended
to eliminate Book-Tax Disparities, if any, that are not eliminated by Section
704(c) allocations as a result of the application of the Ceiling Rule with
respect to Contributed Property or Adjusted Property ("Curative Allocations").
Such Curative Allocations of gross income and deductions to preserve the
uniformity of the income tax characteristics of Units will not have economic
effect, because they will not be reflected in the capital accounts of the
Unitholders. However, such allocations will eliminate Book-Tax Disparities and
are thus consistent with the Regulations under Section 704(c). With the
exception of certain conventions adopted by the Partnership with respect to
administration of the Section 754 election and the attendant Section 743(b)
basis adjustments discussed at "-- Tax Treatment of Operations-Section 754
Election"; and allocation of the effect of unamortizable Section 197 book-up
amounts and common inside basis, allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
Unitholder's distributive share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the Regulations relating to allocations of
partnership income, and Unitholders should be aware that some of the allocations
in the Partnership Agreement may be successfully challenged by the IRS. See
"-- Tax Treatment of Operations-Section 754 Election --" and "-- Uniformity of
Units" for a discussion of such allocations.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR. The Partnership currently maintains the
calendar year as its taxable year and has adopted the accrual method of
accounting for federal income tax purposes.
TAX BASIS, DEPRECIATION AND AMORTIZATION. The Partnership's tax bases for
its assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, after adjustment for intervening depreciation or
cost recovery deductions, gain or loss on the disposition of such assets.
The Partnership and the Operating Partnerships will have tangible assets of
substantial value (including the pipelines and related equipment). A significant
portion of the assets were placed in service prior to the effective dates of the
accelerated cost recovery system and will be depreciated over a 17 1/2 year
period on a declining balance method. The General Partner will depreciate
certain assets using the accelerated methods provided for under Section 168 of
the Code. In addition, the Partnership will use accelerated methods provided for
under Section 167 of the Code to depreciate certain other assets during the
early years of the depreciable lives of those assets, and then elect to use the
straight line method in subsequent years.
The 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 would not be able to
amortize 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 of Section 197. However, see "-- Section 754 Election"
with respect to the amortization of Section 743(b) adjustments available to a
purchase of Units. The IRS may challenge
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either the fair market values or the useful lives assigned to assets contributed
in the Santa Fe transaction or which are otherwise owned by the Partnership. If
any such challenge or characterization were successful, the deductions allocated
to a Unitholder in respect of such assets would be reduced and a Unitholder's
share of taxable income from the Partnership would be increased accordingly. Any
such increase could be material.
If the Partnership disposes of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner that has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required to
recapture such deductions upon a sale of such partner's interest in the
Partnership. See "-- Allocation of Partnership Income, Gain, Loss and Deduction"
and "-- Disposition of Units -- Recognition of Gain or Loss."
Costs incurred in organizing a partnership may be amortized over any period
selected by the partnership not shorter than 60 months. The costs incurred in
promoting the issuance of Units, including underwriting commissions and
discounts, must be capitalized and cannot be deducted currently, ratably or upon
termination of the Partnership. There are uncertainties regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses which may not be amortized.
VALUATION OF PROPERTY OF THE PARTNERSHIP. The federal income tax
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the General Partner of the relative fair market values,
and determinations of the tax basis, of the assets of the Partnership. Although
the General Partner may from time to time consult with professional appraisers
with respect to valuation matters, many of the relative fair market value
estimates will be made solely by the General Partner. These estimates are
subject to challenge and will not be binding on the IRS or the courts. In the
event the determinations of fair market value are subsequently found to be
incorrect, the character and amount of items of income, gain, loss, deductions
or credits previously reported by Unitholders might change, and Unitholders
might have additional tax liability for such prior periods.
SECTION 754 ELECTION. The Partnership has previously made a Section 754
election and will make another Section 754 election after the Santa Fe
transaction for protective purposes. This election is irrevocable and may not be
revoked without the consent of the IRS. The election will generally permit a
purchaser of 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
Unitholders. (For purposes of this discussion, a Unitholder's inside basis in
the Partnership's assets will be considered to have two components: (1) the Unit
holder's share of the Partnership's actual basis in such assets ("Common Basis")
and (2) the Unitholder's Section 743(b) adjustment allocated to each such
asset.)
A Section 754 election is advantageous if the transferee's basis in 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
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amount that a Unitholder 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 1.743-1(j)(4)(B) and Treasury Regulation
Section 1.167(c)-1(a)(6). If an asset is not subject to depreciation or
amortization, no Section 743(b) adjustment would be available to that extent. If
the General Partner determines that such position cannot reasonably be taken, it
may adopt a depreciation convention under which all purchasers acquiring Units
in the same month would receive depreciation, whether attributable to Common
Basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in the Partnership's property. Such an aggregate
approach, or any other method required as a result of an IRS examination, may
result in lower annual depreciation deductions than would otherwise be allowable
to certain Unitholders. See "-- Uniformity of 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
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions attributable to them will not be disallowed or
reduced.
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 Unitholder will be required to take into
account such holder's distributive share of any items of the Partnership's
income, gain or loss for purposes of the alternative minimum tax
("AMT") -- currently a tax of 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income of individuals. Alternative minimum taxable
income is calculated using the 150% declining balance method of depreciation
with respect to personal property and 40-year straight-line depreciation for
real property. These depreciation methods are not as favorable as the
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alternative straight line and accelerated methods provided for under Section 168
which the Partnership will use in computing its income for regular federal
income tax purposes. Accordingly, a Unitholder's AMT taxable income derived from
the Partnership may be higher than such holder's share of the Partnership's net
taxable income. Prospective Unitholders should consult with their tax advisors
as to the impact of an investment in Units on their liability for the
alternative minimum tax.
DISPOSITION OF UNITS
RECOGNITION OF GAIN OR LOSS. A Unitholder will recognize gain or loss on a
sale of Units equal to the difference between the amount realized and a
Unitholder's tax basis for the Units sold. A Unitholder's amount realized will
be measured by the sum of the cash received or the fair market value of other
property received, plus such Unitholder's share of the Partnership's nonrecourse
liabilities. Because the amount realized includes a Unitholder's share of the
Partnership's nonrecourse liabilities, the gain recognized on the sale of Units
could result in a tax liability in excess of any cash received from such sale.
In general, the Partnership's items of income, gain, loss and deduction
will be allocated, for book and tax purposes, among the General Partner, in its
capacity as general partner, and the Unitholders in the same proportion that
Available Cash is distributed (as between the General Partner and the
Unitholders) in respect of such taxable year. If distributions of Available Cash
are not made in respect of a particular taxable year, such items will be
allocated among the partners in accordance with their respective percentage
interests. If a Unitholder has received distributions from the Partnership which
exceed the cumulative net taxable income allocated to him, his basis will
decrease to an amount less than his original purchase price for the 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 Unitholders, the
aggregation of tax bases of a Unitholder 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 Unitholder'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 Unitholder. A Unitholder 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 Unitholder could
realize more gain from the sale of its Units than if such convention had been
respected. In that case, the Unitholder may have been entitled to additional
deductions against income in prior years, but may be unable to claim them, with
the result of greater overall taxable income than appropriate. Counsel is unable
to opine as to the validity of the convention because of the lack of specific
regulatory authority for its use.
TREATMENT OF SHORT SALES AND DEEMED SALES. Under the 1997 Act, a taxpayer
is treated as having sold an "appreciated" partnership interest (one in which
gain would be recognized if such interest were sold), if such taxpayer or
related persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the appreciated
financial position
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(including selling "short against the box" transactions). Unitholders 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 Unitholder 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 Unitholders 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 Unitholder may be required to recognize gain or loss.
UNITHOLDERS DESIRING TO ENSURE THEIR STATUS AS PARTNERS SHOULD MODIFY THEIR
BROKERAGE ACCOUNT AGREEMENTS, IF ANY, TO PROHIBIT THEIR BROKERS FROM BORROWING
THEIR UNITS.
CHARACTER OF GAIN OR LOSS. Generally, gain or loss recognized by a
Unitholder (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 Unitholder 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 Unitholders
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 Unitholders 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 Unitholders of
record as of the opening of the NYSE on the first business day of the month in
which such gain or loss is recognized. As a result of this monthly allocation, a
Unitholder transferring Units in the open market may be allocated income, gain,
loss, deduction, and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between a
transferor and a transferee of Units. If a monthly convention is not allowed by
the Treasury Regulation (or only applies to transfers of less than all of the
Unitholder's Units), taxable income or losses of the Partnership might be
reallocated among the Unitholders. The General Partner is authorized to review
the Partnership's method of allocation
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between transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted by
future Treasury Regulations.
A Unitholder who owns 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 Unitholders. The "new"
Partnership is then treated as a new partnership for tax purposes. A
constructive termination of the Partnership will also cause a Section 708
termination of the Operating Partnerships. Such a termination could also result
in penalties or loss of basis adjustments under Section 754, if the Partnership
were unable to determine that the termination had occurred and, therefore, did
not timely file a tax return and make the appropriate Section 754 elections for
the "new" Partnership.
In the case of a Unitholder reporting on a fiscal year other than a
calendar year, the closing of a tax year of the Partnership may result in more
than 12 months' taxable income or loss of the Partnership being includable in
its taxable income for the year of termination. New tax elections required to be
made by the Partnership, including a new election under Section 754, must be
made subsequent to the constructive termination. A constructive termination
would also result in a deferral of the Partnership deductions for depreciation
and amortization. In addition, a termination might either accelerate the
application of or subject the Partnership to any tax legislation enacted with
effective dates after the date of the termination.
ENTITY-LEVEL COLLECTIONS. If the Partnership is required under applicable
law to pay any federal, state or local income tax on behalf of any Unitholder or
the General Partner or former Unitholders, the General Partner is authorized to
pay such taxes from Partnership funds. Such payments, if made, will be deemed
current distributions of cash to such 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
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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 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 Unitholders and risk the loss of depreciation
deductions not taken in the year that such deductions are otherwise allowable.
This convention will not be adopted if the Partnership determines that the loss
of depreciation deductions would have a material adverse effect on a Unitholder.
If the Partnership chooses not to utilize this aggregate method, the Partnership
may use any other reasonable depreciation convention to preserve the uniformity
of the intrinsic tax characteristics of Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If such
a challenge were to be sustained, the uniformity of 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 Unitholder 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.
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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 Unitholders. Each foreign Unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the Transfer Agent
on a Form W-8 in order to obtain credit for the taxes withheld. Subsequent
adoption of Treasury Regulations or the issuance of other administrative
pronouncements may require the Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a Unitholder may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder must comply
with special reporting requirements under Section 6038C.
An interest in the Partnership may also constitute a "United States Real
Property Interest" ("USRPI") under Section 897(c) of the Code. For this purpose,
Treasury Regulation Section 1.897-1(c)(2)(iv) treats a publicly traded
partnership the same as a corporation. Assuming that the Units continue to be
regularly traded on an established securities market, a foreign Unitholder 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 a Unitholder may be subject
to federal income tax on any gain realized on the disposition that is treated as
effectively connected with a United States trade or business of the foreign
Unitholder (regardless of a foreign Unitholder's percentage interest in the
Partnership or whether Units are regularly traded). A foreign Unitholder will be
subject to federal income tax on gain attributable to real property held by the
Partnership if the Unitholder held more than 5% in value of the 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 Unitholder will also be subject to withholding under Section 1445
of the Code if such Unitholder 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 Unitholder within 90 days after the close of each Partnership
taxable year, certain tax information, including a Schedule K-1, which sets
forth each Unitholder's allocable share of the Partnership's income, gain, loss,
deduction and credit. In preparing this information, which will generally not be
reviewed by counsel, the General Partner will use various accounting and
reporting conventions, some of which have been mentioned in the previous
discussion, to determine the respective
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Unitholder's allocable share of income, gain, loss, deduction and credits. There
is no assurance that any such conventions will yield a result which conforms to
the requirements of the Code, the Regulations or administrative interpretations
of the IRS. The General Partner cannot assure a current or prospective
Unitholder that the IRS will not successfully contend in court that such
accounting and reporting conventions are impermissible.
No assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made. The rights of a Unitholder owning
less than a 1% profits interest in the Partnership to participate in the income
tax audit process have been substantially reduced. Further, any adjustments in
the Partnership's returns will lead to adjustments in Unitholder's returns and
may lead to audits of their returns and adjustments of items unrelated to the
Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder's personal tax return.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. Under the 1997 Act, any penalty relating to an adjustment to a
partnership item is determined at the partnership level. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against holders of Units with respect to the
Partnership items. The Tax Matters Partner may bind a Unitholder with less than
a 1% profits interest in the Partnership to a settlement with the IRS, unless
such holder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review (to which all the 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 Unitholders having in the aggregate at
least a 5% profits interest. However, only one action for judicial review will
go forward, and each Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment
of any item on its federal income tax return that is not consistent with the
treatment of the item on the Partnership's return to avoid the requirement that
all items be treated consistently on both returns. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties.
ELECTING LARGE PARTNERSHIPS. The 1997 Act provides that certain
partnerships with at least 100 partners may elect to be treated as an electing
large partnership ("ELP") for tax years ending after December 31, 1997. If
further revisions are made to the law, it is possible that at some future date
the Partnership will make this election to be taxed as an electing large
partnership. However, based on current law it is not contemplated that such an
election will be made for 1998 or any subsequent year.
Under the reporting provisions of the 1997 Act, each partner of an ELP will
take into account separately such partner's share of several designated items,
determined at the partnership level. The ELP procedures provide that any tax
adjustments generally would flow through to the Unitholders for the year in
which the adjustment takes effect, and the adjustments would not affect
prior-year returns of any Unitholder, except in the case of changes to any
Unitholder's distributive share. In lieu of passing through an adjustment to the
Unitholders, the Partnership may elect to pay the tax resulting from any audit
adjustment. The Partnership, and not the Unitholders, would be liable for any
interest and penalties resulting from a tax adjustment.
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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 Unitholder, and a Unitholder 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
Unitholder must disclose the tax shelter registration number of the Partnership
on Form 8271 to be attached to the tax return on which any deduction, loss,
credit or other benefit generated by the Partnership is claimed or income of the
Partnership is included. A Unitholder who fails to disclose the tax shelter
registration number on such holder's tax return, without reasonable cause for
such failure, will be subject to a $250 penalty for each such failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Code. No penalty will be
imposed, however, with respect to any portion of an underpayment if it is shown
that there was a reasonable cause for such portion and that the taxpayer acted
in good faith with respect to such portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion (i) is attributable to an item with respect to which
there is, or was, "substantial authority" for the position taken on the return
or (ii) is attributable to an item for which there was a reasonable basis for
the tax treatment of the items and as to which the pertinent facts are disclosed
on the return. Certain more stringent rules apply to "tax shelters," which term
includes a partnership if a significant purpose of such entity is the avoidance
or evasion of income tax. This term does not appear 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
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in such an "understatement" of income for which no "substantial authority"
exists, the Partnership must disclose the pertinent facts on its return. In
addition, the Partnership will make a reasonable effort to furnish sufficient
information for Unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement is in excess of $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAXES
Unitholders may be subject to other taxes, such as state and local taxes,
unincorporated business taxes, and estate, inheritance or intangible taxes that
may be imposed by the various jurisdictions in which the Partnership does
business or owns property. 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 Unitholder
will likely be required to file state income tax returns and/or to pay such
taxes in most of such states and may be subject to penalties for failure to do
so. Some of the states may require the Partnership to withhold a percentage of
income from amounts that are to be distributed to a Unitholder that is not a
resident of the state. Such amounts withheld, if any, which may be greater or
less than a particular Unitholder's income tax liability to the state, generally
do not relieve the non-resident Unitholder from the obligation to file a state
income tax return. Amounts withheld, if any, will be treated as if distributed
to Unitholders for purposes of determining the amounts distributed by the
Partnership. Based on current law and its estimate of future partnership
operations, the General Partner anticipates that any amounts required to be
withheld will not be material. In addition, an obligation to file tax returns or
to pay taxes may arise in other states.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states or localities, of
an investment in the Partnership. Further, it is the responsibility of each
Unitholder to file all state and local, as well as federal tax returns that may
be required of such Unitholder. Counsel has not rendered an opinion on the state
and local tax consequences of an investment in the Partnership.
67
<PAGE> 73
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Partnership and the Selling Unitholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase from the Partnership and the Selling Unitholders, the respective number
of Units set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
PaineWebber Incorporated....................................
Prudential Securities Incorporated..........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
Howard, Weil, Labouisse, Friedrichs Incorporated ...........
Wheat First Securities, Inc. ...............................
---------
Total............................................. 6,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Units offered hereby,
if any are taken.
The Underwriters propose to offer the Units in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $ per Unit. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per Unit to certain brokers and
dealers. After the Units are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the Underwriters.
The Partnership has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 975,000
additional Units solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Units to be purchased by each of them, as shown in
the foregoing table, bears to the Units offered.
During the period beginning from the date of this Prospectus and continuing
to and including the date 90 days after the date of this Prospectus, the
Partnership has agreed not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any Units or securities of the Partnership (or
any of its affiliates) that are substantially similar to the Units, including
but not limited to, any securities that are convertible into or exchangeable
for, or that represent the right to receive, Units or any such substantially
similar securities other than (i) in connection with the acquisition of assets,
businesses or the capital stock or other ownership interests of businesses by
the Partnership in exchange for Units, if the recipient(s) of such Units
agree(s) not to offer, sell, contract to sell, or otherwise dispose of during
such period any Units received in connection with such acquisition(s) and (ii)
pursuant to employee unit option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of the date of
this Prospectus, without the prior written consent of Goldman, Sachs & Co.
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority without the prior written approval of the
transaction by the customer.
In connection with the offering, the Underwriters may purchase and sell
Units in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created by the
Underwriters in connection with the offering. Stabilizing
68
<PAGE> 74
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Units and short positions
created by the Underwriters involve the sale by the Underwriters of a greater
number of Units than they are required to purchase from the Partnership and the
Selling Unitholders in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to broker-dealers in respect of Units
sold in the offering may be reclaimed by the Underwriters if such Units are
repurchased by the Underwriters in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Units, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the NYSE, in the over-the-counter
market or otherwise.
Certain of the Underwriters and their affiliates have from time to time
performed various investment banking and financial advisory services for the
Partnership and its affiliates for which they have received customary fees and
reimbursement of their out-of-pocket expenses. Within the twelve months
preceding this offering, Goldman, Sachs & Co. acted as financial advisors to the
General Partner in connection with the Partnership's acquisition of SFPP and the
general partner interest in Santa Fe and Paine Webber Incorporated was sole
underwriter of an equity offering by the Partnership in August 1997.
Goldman, Sachs Credit Partners L.P., an affiliate of Goldman, Sachs & Co.,
served as syndication agent and a lender and First Union National Bank, an
affiliate of Wheat First Securities, Inc., served as administrative agent and as
lender under the Partnership's Credit Facility for which they received customary
fees and out-of-pocket expense reimbursement. Substantially all of the net
proceeds of this offering to be received by the Partnership will be used to
repay lenders under the Credit Facility, including Goldman, Sachs Credit
Partners, L.P. and First Union National Bank. Since the amount to be repaid to
such lenders exceeds 10% of the net proceeds of this offering to be received by
the Partnership, the offering is being made pursuant to the provisions of Rule
2710(c)(8) of the NASD's Conduct Rules.
First Union Corporation, an affiliate of Wheat First Securities, Inc., owns
24.99% of the outstanding capital stock of KMI, which in turn owns all of the
outstanding capital stock of the General Partner.
The Partnership and the Selling Unitholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Units and certain
federal income tax considerations are being passed upon by Morrison & Hecker
L.L.P., Kansas City, Missouri, as counsel for the Partnership. Certain legal
matters are being passed upon for the Underwriters by Andrews & Kurth L.L.P.
EXPERTS
The consolidated financial statements as of and for the year ended December
31, 1997 of the Partnership and its subsidiaries and the financial statements as
of and for the year ended December 31, 1997 of Mont Belvieu Associates
incorporated in this Prospectus by reference to the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1997, have been so incorporated in
reliance on the report of 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 Partnership's
Annual Report on Form 10-K for the year ended
69
<PAGE> 75
December 31, 1997 and incorporated by reference in this Prospectus and elsewhere
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,
incorporated by reference in the Registration Statement of which this Prospectus
is a part, has 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.
70
<PAGE> 76
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... iii
Incorporation of Certain Documents...... iii
Information Regarding Forward Looking
Statements............................ iv
Summary................................. 1
Risk Factors............................ 7
Use of Proceeds......................... 9
Price Range of Units and Distribution
Policy................................ 10
Capitalization.......................... 11
Unaudited Pro Forma Combined Financial
Statements............................ 12
Selected Historical Financial and
Operating Data........................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
The Partnership......................... 31
Management.............................. 45
Selling Unitholders..................... 47
Material Federal Income Tax
Considerations........................ 48
Underwriting............................ 68
Legal Matters........................... 69
Experts................................. 69
</TABLE>
================================================================================
================================================================================
6,500,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
[KINDER MORGAN LOGO]
------------------
PROSPECTUS
------------------
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HOWARD, WEIL,
LABOUISSE, FRIEDRICHS
INCORPORATED
WHEAT FIRST UNION
================================================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs expected to be
incurred in connection with the issuance and distribution of the securities
registered hereby. All such costs shall be paid pro rata by the Partnership and
the Selling Unitholders based upon the number of Units being sold in the
offering.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 79,350.44
NYSE Fees................................................... $ 22,910.00
NASD Filing Fees............................................ $ 23,900.00
Printing.................................................... $ 80,000.00
Legal fees and expenses..................................... $150,000.00
Accounting fees and expenses................................ $ 75,000.00
Transfer Agent and Registrar Fees and Expenses.............. $ 7,100.00
Miscellaneous............................................... $100,000.00
-----------
Total............................................. $538,260.44
===========
</TABLE>
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 Partnership
Agreement) ("Indemnitees") from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, settlements and other amounts arising from
any and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an officer or director or a person serving at the request of the
Partnership in another entity in a similar capacity, provided that in each case
the Indemnitee acted in good faith and in a manner which such Indemnitee
believed to be in or not opposed to the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful. Any indemnification under these provisions will be only
out of the assets of the Partnership and the General Partner shall not be
personally liable for, or have any obligation to contribute or loan funds or
assets to the Partnership to enable it to effectuate, such indemnification. The
Partnership is authorized to purchase (or to reimburse the General Partner or
its affiliates for the cost of) insurance against liabilities asserted against
and expenses incurred by such person to indemnify such person against such
liabilities under the provisions described above.
Article XII(c) of the Certificate of Incorporation of the General Partner
(the "Corporation" therein) contains the following provisions relating to
indemnification of directors and officers:
(c) Each director and each officer of the corporation (and such
holder's heirs, executors and administrators) shall be indemnified by the
corporation against expenses reasonably incurred by him in connection with
any claim made against him or any action, suit or proceeding to which he
may be made a party, by reason of such holder being or having been a
director or officer of the corporation (whether or not he continues to be a
director or officer of the
II-1
<PAGE> 78
corporation at the time of incurring such expenses), except in cases where
the claim made against him shall be admitted by him to be just, and except
in cases where such action, suit or proceeding shall be settled prior to
adjudication by payment of all or a substantial portion of the amount
claimed, and except in cases in which he shall be adjudged in such action,
suit or proceeding to be liable or to have been derelict in the performance
of such holder's duty as such director or officer. Such right of
indemnification shall not be exclusive of other rights to which he may be
entitled as a matter of law.
Richard D. Kinder, the Chairman of the Board of Directors and Chief
Executive Officer of the General Partner, and William V. Morgan, a Director and
Vice Chairman of the General Partner, are also officers and directors of Kinder
Morgan, Inc., the parent corporation of the General Partner ("KMI") and are
entitled to similar indemnification from KMI pursuant to KMI's certificate of
incorporation and bylaws.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
***1.1 -- Form of Underwriting Agreement by and among Kinder Morgan
Energy Partners, L.P. and Goldman Sachs & Co., as
representative for the Underwriters.
*2.1 -- Second Amended and Restated Partnership Agreement of
Kinder Morgan Energy Partners, L.P. dated January 14,
1998.
*4.1 -- Form of Certificate representing a Unit.
***5.1 -- Form of Opinion of Morrison & Hecker L.L.P. as to the
legality of the securities registered hereby.
***8.1 -- Form of Opinion of Morrison & Hecker L.L.P. as to certain
tax matters.
***23.1 -- Consent of Morrison & Hecker L.L.P. (included in Exhibits
5.1 and 8.1).
***23.2 -- Consent of Price Waterhouse LLP.
***23.3 -- Consent of Price Waterhouse LLP.
***23.4 -- Consent of Arthur Andersen LLP.
****24.1 -- Power of Attorney (included on signature page).
**99.1 -- Balance Sheet of Kinder Morgan G.P., Inc. dated December
31, 1997.
</TABLE>
- ---------------
* Incorporated by reference from Kinder Morgan Energy Partners, L.P.'s
Amendment No. 1 to Registration Statement on Form S-4 filed February 4,
1998 (file no. 333-44519).
** Incorporated by reference from Amendment No. 1 to Kinder Morgan Energy
Partners, L.P.'s registration statement on Form S-4 filed April 14, 1998
(File No. 333-46709).
*** Filed herewith.
**** Previously filed.
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
II-2
<PAGE> 79
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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> 80
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 Amendment No. 2 to Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on June 8, 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 Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
NAME TITLE DATE
- ----------------------------------------------------- -------------------------------- ------------
<C> <S> <C>
* Director, Chairman of the Board June 8, 1998
- ----------------------------------------------------- and Chief Executive Officer of
Richard D. Kinder Kinder Morgan G.P., Inc.
(Principal Executive Officer)
/s/ WILLIAM V. MORGAN Director and Vice Chairman of June 8, 1998
- ----------------------------------------------------- Kinder Morgan G.P., Inc.
William V. Morgan
* Director of Kinder Morgan G.P., June 8, 1998
- ----------------------------------------------------- Inc.
Alan L. Atterbury
* Director of Kinder Morgan G.P., June 8, 1998
- ----------------------------------------------------- Inc.
Edward O. Gaylord
* Director, President and Chief June 8, 1998
- ----------------------------------------------------- Operating Officer of Kinder
Thomas B. King Morgan G.P., Inc.
* Vice President, Treasurer and June 8, 1998
- ----------------------------------------------------- Chief Financial Officer
David G. Dehaemers, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
*by /s/ WILLIAM V. MORGAN
--------------------------------
William V. Morgan
Attorney-in-Fact
II-4
<PAGE> 81
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
***1.1 -- Form of Underwriting Agreement by and among Kinder Morgan
Energy Partners, L.P. and Goldman Sachs & Co., as
representative for the Underwriters.
*2.1 -- Second Amended and Restated Partnership Agreement of
Kinder Morgan Energy Partners, L.P. dated January 14,
1998.
*4.1 -- Form of Certificate representing a Unit.
***5.1 -- Form of Opinion of Morrison & Hecker L.L.P. as to the
legality of the securities registered hereby.
***8.1 -- Form of Opinion of Morrison & Hecker L.L.P. as to certain
tax matters.
***23.1 -- Consent of Morrison & Hecker L.L.P. (included in Exhibits
5.1 and 8.1).
***23.2 -- Consent of Price Waterhouse LLP.
***23.3 -- Consent of Price Waterhouse LLP.
***23.4 -- Consent of Arthur Andersen LLP.
****24.1 -- Power of Attorney (included on signature page).
**99.1 -- Balance Sheet of Kinder Morgan G.P., Inc. dated December
31, 1997.
</TABLE>
- ---------------
* Incorporated by reference from Kinder Morgan Energy Partners, L.P.'s
Amendment No. 1 to Registration Statement on Form S-4 filed February 4,
1998 (file no. 333-44519).
** Incorporated by reference from Amendment No. 1 to Kinder Morgan Energy
Partners, L.P.'s registration statement on Form S-4 filed April 14, 1998
(File No. 333-46709).
*** Filed herewith.
**** Previously filed.
<PAGE> 1
EXHIBIT 1.1
KINDER MORGAN ENERGY PARTNERS, L.P.
___ COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
--------------------------------------------
UNDERWRITING AGREEMENT
--------------------------------------------
_____________, 1998
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
HOWARD WEIL LABOUISSE & FRIEDRICHS INCORPORATED
WHEAT FIRST UNION
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership
(the "Partnership"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of ________ common units ("Common Units")
representing limited partner interests in the Partnership and, at the election
of the Underwriters, up to ________ additional Common Units and the unitholders
of the Partnership named in Schedule II hereto (the "Selling Unitholders")
propose, subject to the terms and conditions stated herein, to sell to the
Underwriters an aggregate of ________ Common Units. The aggregate of ________
Common Units to be sold by the Partnership and the Selling Unitholders is herein
called the "Firm Units" and the aggregate of ________ additional Common Units to
be sold by the Partnership is herein called the "Optional Units". The Firm Units
and the Optional Units that the Underwriters elect to purchase pursuant to
Section 2 hereof are herein collectively called the "Units".
The Partnership, Kinder Morgan Operating L.P. "A", a Delaware limited
partnership ("OLP-A"), Kinder Morgan Operating L.P. "B", a Delaware limited
partnership ("OLP-B"), Kinder Morgan Operating L.P. "C", a Delaware limited
partnership ("OLP-C"), Kinder Morgan Operating L.P. "D", a Delaware limited
partnership ("OLP-D" and, together with OLP-A, OLP-B and OLP-C, the "Operating
Partnerships"), SFPP, L.P., a Delaware limited partnership ("SFPP"), Kinder
Morgan Natural Gas Liquids Corporation, a Delaware corporation ("KMNGL Corp."),
Kinder Morgan CO2, L.L.C., a Delaware limited liability company ("KM-LLC"), and
Kinder Morgan G.P., Inc., a Delaware corporation (the "General Partner"), in its
individual capacity and in its capacity as the general partner of the
Partnership and each of the Operating Partnerships, are collectively referred to
herein as the "Kinder Morgan Entities".
<PAGE> 2
1. (a) Each of the Kinder Morgan Entities represents and
warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-3 (File No.
333-50431), including any pre-effective amendments thereto, (the
"Initial Registration Statement") in respect of the Units has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto but including all documents incorporated by reference
in the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document with
respect to the Initial Registration Statement or any document
incorporated by reference therein has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or
the Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"); the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including (i) the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective and (ii) the
documents incorporated by reference in the prospectus contained in the
Initial Registration Statement at the time such part of the Initial
Registration Statement became effective, each as amended at the time
such part of the Initial Registration Statement became effective, are
hereinafter collectively called the "Registration Statement"; such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus"; any reference herein
to any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the Act, as of the date of such
Preliminary Prospectus or Prospectus, as the case may be; any reference
to any amendment or supplement to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include any documents filed
after the date of such Preliminary Prospectus or Prospectus, as the
case may be, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any
amendment to the Registration Statement shall be deemed to refer to and
include any annual report of the Partnership filed pursuant to Section
13(a) or 15(d) of the Exchange Act after the effective date of the
Initial Registration Statement that is incorporated by reference in the
Registration Statement;
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Partnership by an Underwriter through Goldman, Sachs & Co. expressly
for use therein or by a Selling Unitholder expressly for use in the
preparation of the answers therein to Item 7 of Form S-3;
2
<PAGE> 3
(iii) The documents incorporated by reference in the
Prospectus, when they became effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; and any further documents so
filed and incorporated by reference in the Prospectus or any further
amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Partnership by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(iv) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder and do not and will not, as of the
applicable effective date as to the Registration Statement and any
amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading (in the case of the Prospectus and any supplement or
amendment thereto, in the light of the circumstances under which they
were made); provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Partnership by an Underwriter through Goldman, Sachs & Co. expressly
for use therein or by a Selling Unitholder expressly for use in the
preparation of the answers therein to Item 7 of Form S-3;
(v) None of the Kinder Morgan Entities has sustained
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any material change in
the capitalization or long-term debt of any of the Kinder Morgan
Entities or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, partners' capital,
stockholders' equity or results of operations of the Kinder Morgan
Entities, taken as a whole, otherwise than as set forth or contemplated
in the Prospectus;
(vi) Each of the Kinder Morgan Entities has good and
marketable title (or indefeasible title in the State of Texas) in fee
simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Kinder Morgan Entities; and any real
property and buildings held under lease by a Kinder Morgan Entity is
held under valid, subsisting and enforceable leases with such
exceptions as are not material and do not materially interfere with the
use made and proposed to be made of such property and buildings by the
Kinder Morgan Entities;
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(vii) The Partnership is, and at the Closing Date
will be, a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware. The Partnership
has, and at the Closing Date will have, all necessary partnership power
and authority to conduct the activities conducted by it, to own or
lease all the assets owned or leased by it and to conduct its business
as described in the Registration Statement and the Prospectus. The
Partnership is, and at the Closing Date will be, duly licensed or
qualified to do business and in good standing as a foreign limited
partnership in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it
makes such licensing or qualification necessary (except where the
failure to be so licensed or qualified will not have a material adverse
effect on the financial condition, results of operations or business of
the Kinder Morgan Entities, taken as a whole, or subject the
Partnership or the limited partners of the Partnership to any material
liability or disability). Complete and correct copies of the
Certificate of Limited Partnership of the Partnership, and all
amendments thereto, and of the Agreement of Limited Partnership of the
Partnership, as amended and restated (the "Partnership Agreement"),
have been delivered to the Underwriters, and no changes therein will be
made subsequent to the date hereof and prior to the Closing Date;
(viii) Each of the Operating Partnerships is, and at
the Closing Date will be, a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Delaware.
Each of the Operating Partnerships has, and at the Closing Date will
have, all necessary partnership power and authority to conduct the
activities conducted by it, to own or lease all the assets owned or
leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. Each of the Operating
Partnerships is, and at the Closing Date will be, duly licensed or
qualified to do business and in good standing as a foreign limited
partnership in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it
makes such licensing or qualification necessary (except where the
failure to be so licensed or qualified will not have a material adverse
effect on the financial condition, results of operations or business of
the Kinder Morgan Entities, taken as a whole, or subject the
Partnership or the limited partners of the Partnership to any material
liability or disability). Complete and correct copies of the
Certificate of Limited Partnership of each of the Operating
Partnerships, and all amendments thereto, and of the Agreement of
Limited Partnership of OLP-A, as amended and restated (the "OLP-A
Agreement"), the Agreement of Limited Partnership of OLP-B, as amended
and restated (the "OLP-B Agreement"), the Agreement of Limited
Partnership of OLP-C, as amended and restated (the "OLP-C Agreement"),
and the Agreement of Limited Partnership of OLP-D, as amended and
restated (the "OLP-D Agreement" and, together with the OLP-A Agreement,
the OLP-B Agreement and the OLP-C Agreement, the "Operating Partnership
Agreements"), have been delivered to the Underwriters, and no changes
therein will be made subsequent to the date hereof and prior to the
Closing Date;
(ix) SFPP is, and at the Closing Date will be, a
limited partnership duly formed, validly existing and in good standing
under the laws of the State of Delaware. SFPP has, and at the Closing
Date will have, all necessary partnership power and authority to
conduct the activities conducted by it, to own or lease all the assets
owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus. SFPP is, and at the Closing
Date will be, duly licensed or qualified to do business and in good
standing as a foreign limited partnership in all jurisdictions in which
the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification
necessary (except where the failure to be so licensed or qualified will
not have a material adverse effect on the financial condition, results
of operations or business of the Kinder Morgan Entities, taken as a
whole, or subject the Partnership or the limited partners of the
Partnership to any material liability or disability). Complete and
correct copies of the Certificate of Limited Partnership of SFPP and of
the Agreement of Limited Partnership of SFPP, as amended and restated
(the "SFPP Agreement"), and all amendments thereto have been
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<PAGE> 5
delivered to the Underwriters, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date;
(x) Each of the General Partner and KMNGL Corp., is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. KM-LLC is a limited liability
company duly formed, validly existing and in good standing under the
laws of the State of Delaware. Each of the General Partner, KMNGL Corp.
and KM-LLC has, and at the Closing Date will have, all necessary
corporate or limited liability company power and authority, as the case
may be, to conduct all the activities conducted by it, to own or lease
all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. Each of the
General Partner, KMNGL Corp. and KM-LLC is, and at the Closing Date
will be, duly licensed or qualified to do business and in good standing
as a foreign corporation or foreign limited liability company, as the
case may be, in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it
makes such licensing or qualification necessary (except where the
failure to be so licensed or qualified will not have a material adverse
effect on the financial condition, results of operations or business of
the Kinder Morgan Entities, taken as a whole, or subject the
Partnership or the limited partners of the Partnership to any material
liability or disability). Complete and correct copies of the
certificate of incorporation and of the by-laws of the General Partner
and KMNGL Corp. and the limited liability agreement of KM-LLC and all
amendments to such documents have been delivered to the Underwriter,
and no changes therein will be made subsequent to the date hereof and
prior to the Closing Date;
(xi) To the knowledge of the Kinder Morgan Entities,
each of Heartland Partnership ("Heartland") and Mont Belvieu Associates
("Mont Belvieu") is, and at the Closing Date will be, a general
partnership duly formed and validly existing under the laws of the
State of Texas and Shell CO2 Company Ltd. ("Shell CO2") is, and at the
Closing Date will be, a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Delaware.
To the knowledge of the Kinder Morgan Entities, each of Heartland, Mont
Belvieu and Shell CO2 has, and at the Closing Date will have, all
necessary partnership power and authority, to conduct the activities
conducted by it, to own or lease all the assets owned or leased by it
and to conduct its business as described in the Registration Statement
and the Prospectus, except as would not have a material adverse effect
on the financial condition, results of operations or business of such
entities. To the knowledge of the Kinder Morgan Entities, each of
Heartland, Mont Belvieu and Shell CO2 is, and at the Closing Date will
be, duly licensed or qualified to do business and in good standing as a
foreign partnership in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or
leased by it makes such licensing or qualification necessary (except
where the failure to be so licensed or qualified will not have a
material adverse effect on the financial condition, results of
operations or business of the Kinder Morgan Entities, taken as a whole,
or subject the Partnership or the limited partners of the Partnership
to any material liability or disability);
(xii) The only subsidiaries (as such term is defined
in the rules and regulations of the Commission under the Act and the
Exchange Act) of the Partnership or other entities in which the
Partnership, any of the Operating Partnerships or SFPP has an equity
ownership interest of 50% or more are those listed on Schedule III
hereto.
(xiii) Kinder Morgan, Inc., a Delaware corporation
("KMI"), owns, and at the Closing Date will own, all of the issued and
outstanding shares of capital stock of the General Partner; such shares
of capital stock are duly authorized, validly issued, fully paid and
nonassessable.
(xiv) Richard D. Kinder, Morgan Associates, Inc.
("MAI") and First Union Corporation ("First Union") are the sole
stockholders of KMI. Richard D. Kinder owns 71.04% of the Class A
voting stock of KMI. MAI owns 27.65% of the Class A voting stock of
KMI. First Union owns
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<PAGE> 6
1.30% of the Class A voting stock and 100.0% of the Class B nonvoting
stock of KMI. All of such shares of Class A voting and Class B
nonvoting stock are duly authorized, validly issued, fully paid and
nonassessable.
(xv) The General Partner is the sole general partner
of the Partnership with a 1% general partner interest in the
Partnership; such general partner interest is duly authorized by the
Partnership Agreement and was validly issued to the General Partner;
and, the General Partner owns such general partner interest free and
clear of all liens, encumbrances, security interests, equities, charges
or claims (except for such liens, encumbrances, security interests,
equities, charges or claims as are not, individually or in the
aggregate, material or as described in the Registration Statement or
the Prospectus).
(xvi) The General Partner is the sole general partner
of each of the Operating Partnerships with a 1.0101% general partner
interest in each of the Operating Partnerships; such general partner
interests are duly authorized by the respective Operating Partnership
Agreement, and were validly issued to the General Partner; and the
General Partner owns such general partner interests free and clear of
all liens, encumbrances, security interests, equities, charges or
claims (except for such liens, encumbrances, security interests,
equities, charges or claims as are not, individually or in the
aggregate, material or as described in the Registration Statement or
the Prospectus).
(xvii) The Partnership is the sole limited partner of
each of the Operating Partnerships with a 98.9899% limited partner
interest in each of the Operating Partnerships; such limited partner
interests, in each of such Partnerships, are duly authorized by the
respective Operating Partnership Agreement, and were validly issued to
the Partnership and are fully paid and nonassessable (except as
nonassessability may be affected by certain provisions of the Delaware
Revised Limited Partnership Act (the "Delaware Act")); and the
Partnership owns such limited partner interests free and clear of all
liens, encumbrances, security interests, equities, charges or claims
(except for such liens, encumbrances, security interests, equities,
charges or claims as are not, individually or in the aggregate,
material or as described in the Registration Statement or the
Prospectus, including the security interest securing certain debt of
the Partnership and OLP-B);
(xviii) OLP-A owns, and at the Closing Date will own,
all of the issued and outstanding capital stock of KMNGL Corp. and all
of the issued and outstanding member interests of KM-LLC; all of such
capital stock and such member interests are duly authorized, validly
issued, fully paid and nonassessable; and OLP-A owns such capital stock
and such member interests free and clear of all liens, encumbrances,
security interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material or as described in the
Registration Statement or the Prospectus).
(xix) OLP-D is the sole general partner of SFPP with
a 99.5% general partner interest; such general partner interest is duly
authorized by the SFPP Agreement, and was validly issued to OLP-D; and
OLP-D owns such general partner interest free and clear of all liens,
encumbrances, security interests, equities, charges or claims (except
for such liens, encumbrances, security interests, equities, charges or
claims as are not, individually or in the aggregate, material or as
described in the Registration Statement or the Prospectus, including
the security interest securing the guarantee of certain debt of OLP-D
to the Partnership); Santa Fe Pacific Pipelines, Inc. (the "SF Limited
Partner") is the sole limited partner of SFPP with a 0.5% non-voting,
limited partner interest; such limited partner interest is duly
authorized by the SFPP Agreement, and validly issued to the SF Limited
Partner and fully paid and nonassessable (except as nonassessability
may be affected by certain provisions of the Delaware Act);
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<PAGE> 7
(xx) OLP-A is a general partner of Heartland with a
50% general partner interest in Heartland, KMNGL Corp. is a general
partner of Mont Belvieu with a 50% general partner interest in Mont
Belvieu, and KM-LLC is a limited partner of Shell CO2, with a 20%
limited partner interest in Shell CO2; such general partner interests
and such limited partner interests are duly authorized by the
respective partnership agreement of Heartland, Mont Belvieu and Shell
CO2, and were validly issued by each of Heartland, Mont Belvieu and
Shell CO2, respectively, and in the case of such limited partner
interests is fully paid and nonassessable (except as such
nonassessability may be affected by certain provisions of the Delaware
Act); and, OLP-A and KMNGL Corp. own such general partner interests in
Heartland and Mont Belvieu, respectively, and KM-LLC owns such limited
partner interest, free and clear of all liens, encumbrances, security
interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material or as described in the
Registration Statement or the Prospectus);
(xxi) At the Closing Date after giving effect to the
issuance of the Firm Units, the capitalization of the Partnership will
consist of ____ Common Units (____ Common Units if all of the Optional
Units are issued); such Common Units will be the only limited partner
interests of the Partnership that are issued and outstanding at the
Closing Date; all of the issued Common Units have been duly and validly
authorized and issued, and are fully paid and nonassessable (except as
nonassessability may be affected by certain provisions of the Delaware
Act) and substantially conform to the description of the Common Units
incorporated by reference into the Prospectus; and the unissued Units
to be issued and sold by the Partnership to the Underwriters hereunder
have been duly and validly authorized, and when issued against payment
therefor as provided herein, will be duly and validly authorized and,
fully paid and nonassessable (except as nonassessability may be
affected by certain provisions of the Delaware Act) and will
substantially conform to the description of the Common Units
incorporated by reference into the Prospectus;
(xxii) Each of the Kinder Morgan Entities has all
necessary partnership, corporate or limited liability company power and
authority, as the case may be, to enter into this Agreement. This
Agreement has been duly authorized, executed and delivered by each of
the Kinder Morgan Entities and constitutes a valid and binding
agreement with respect to each of such entities and is enforceable
against each of them in accordance with the terms hereof.
(xxiii) The issue and sale of the Units to be sold by
the Partnership hereunder, the compliance by the Kinder Morgan Entities
with all of the provisions of this Agreement, the consummation of the
transactions contemplated herein and the application by the Partnership
of the net proceeds from the offering and sale of the Units in the
manner set forth in the Prospectus under "Use of Proceeds" will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
any of the Kinder Morgan Entities is a party or by which any of the
Kinder Morgan Entities is bound or to which any of the property or
assets of the Kinder Morgan Entities are subject, nor will such action
result in any violation of the provisions of the certificate of
incorporation, by-laws, partnership agreement or other organizational
documents, as the case may be, of any of the Kinder Morgan Entities or
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over any of the Kinder
Morgan Entities or any of the properties of any such entities, except
where such occurrence will not prevent the consummation of the
transactions contemplated herein and will not have a material adverse
effect on the financial condition, results of operations or business of
the Kinder Morgan Entities, taken as a whole, or subject the
Partnership or the limited partners of the Partnership to any material
liability or disability; and no consent, approval, authorization,
order, registration or qualification of or with any court or
governmental agency or body having jurisdiction over any of the Kinder
Morgan Entities or any of the properties of such entities is required
for the issuance and sale of the Units or the
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<PAGE> 8
consummation by the Kinder Morgan Entities of the transactions
contemplated by this Agreement, except the registration under the Act
of the Units and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Units by the Underwriters;
(xxiv) None of the Kinder Morgan Entities is (a) in
violation of its Certificate of Incorporation, By-laws, Partnership
Agreement or other organizational documents, as the case may be, or (b)
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound, except for such violations and defaults as (i) would not have a
material adverse effect on the financial condition, results of
operations or business of the Kinder Morgan Entities, taken as a whole,
or subject the Partnership or the limited partners of the Partnership
to any material liability or disability and (ii) in the case of such
violations, have been disclosed in writing to Goldman, Sachs & Co.
prior to the execution of this Agreement;
(xxv) The statements set forth in the Prospectus
under the captions "Material Federal Income Tax Considerations" and
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Partnership by
an Underwriter through Goldman, Sachs & Co. expressly for use therein;
(xxvi) Other than as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which any of
the Kinder Morgan Entities is a party or of which any property of any
Kinder Morgan Entity is the subject which, if determined adversely to
the respective Kinder Morgan Entity, would individually or in the
aggregate have a material adverse effect on the financial condition,
results of operations or business of the Kinder Morgan Entities, taken
as a whole, or subject the Partnership or the limited partners of the
Partnership to any material liability or disability; and, to the
knowledge of the Kinder Morgan Entities, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(xxvii) None of the Kinder Morgan Entities is, nor at
the Closing Date will be, (i) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" thereof, within the
meaning of the Public Utility Holding Company Act of 1935, as amended,
or (ii) an "investment company", a person "controlled by" an
"investment company" or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
(xxviii) None of the Kinder Morgan Entities or any of
their affiliates does business with the government of Cuba or with any
person or affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes;
(xxix) Arthur Andersen LLP and Price Waterhouse LLP,
who have certified certain financial statements of the Kinder Morgan
Entities, and in the case of Price Waterhouse LLP, who has also
certified certain financial statements of Santa Fe Pacific Pipeline
Partners, L.P. ("Santa Fe"), are each independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder;
(xxx) There are no preemptive rights or other rights
to subscribe for or to purchase, nor any restrictions upon the voting
or transfer of, any partnership interests or shares of stock of any of
the Kinder Morgan Entities pursuant to any partnership agreement, any
articles or certificates of
8
<PAGE> 9
incorporation or other governing documents or any agreement or other
instrument to which any of the Kinder Morgan Entities is a party or by
which any of such entities may be bound (other than (a) the General
Partner's preemptive right contained in the Partnership Agreement, (b)
the restrictions on transfer arising from the pledge of the Common
Units owned by the General Partner, (c) the restrictions on transfer
under the Partnership's credit facility, and (d) as set forth in or
incorporated by reference into the Prospectus). The offering and sale
of Units as contemplated by this Agreement does not give rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any Partnership interests or other
securities of the Partnership. Except for certain grants made under the
Partnership's Executive Compensation Plan and the Common Unit Option
Plan, there are no outstanding options or warrants to purchase any
Common Units or other securities of any of the Kinder Morgan Entities.
(xxxi) The financial statements and schedules
included or incorporated by reference in the Registration Statement or
the Prospectus present fairly the consolidated financial condition of
the Partnership, the General Partner and Santa Fe as of the respective
dates thereof and the consolidated results of operations and cash flows
of the Partnership and Santa Fe for the respective periods covered
thereby, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. No other
financial statements or schedules of the Partnership, the General
Partner and Santa Fe are required by the Act, the Exchange Act or the
rules and regulations of the Commission under such acts to be included
in the Registration Statement or the Prospectus. The statements
included in the Registration Statement with respect to the Accountants
pursuant to Rule 509 of Regulation S-K of the Rules and Regulations are
true and correct in all material respects.
(xxxii) Each of the Kinder Morgan Entities maintains
a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxxiii) The pro forma financial statements included
in or incorporated by reference in the Registration Statement and the
Prospectus, including the presentation of the acquisition of SFPP
contained in such pro forma financial statements, comply as to form in
all material respects with the applicable accounting requirements of
the Act, the Exchange Act and the rules and regulations of the
Commission under such acts, have been prepared on a basis consistent
with the historical consolidated financial statements of the
Partnership and Santa Fe and give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith;
(xxxiv) Each of the Kinder Morgan Entities (i) is in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or imposing liability or standards of
conduct concerning any Hazardous Material (as hereinafter defined)
("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) is in compliance with all
terms and conditions of any such permit, license or approval, except as
disclosed in the Prospectus or where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not result in a material
adverse effect on the financial condition, results of operations or
business of the Kinder Morgan Entities, taken as a whole, or subject
the Partnership or the limited partners of the Partnership
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<PAGE> 10
to any material liability or disability. The term "Hazardous Material"
means (A) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, (B) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (C) any petroleum or
petroleum product, (D) any polychlorinated biphenyl and (E) any
pollutant or contaminant or hazardous, dangerous, or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other Environmental Law;
(xxxv) In the ordinary course of its business, each
of the Kinder Morgan Entities conducts a periodic review of the effect
of Environmental Laws on the business, operations and properties of
such entity, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or approval, any related constraints on operating activities and any
potential liabilities to third parties). Except as set forth in the
Registration Statement and the Prospectus, there are no costs and
liabilities associated with or arising in connection with Environmental
Laws as currently in effect (including, without limitation, costs of
compliance therewith) which would have a material adverse effect on the
financial condition, results of operations or business of the Kinder
Morgan Entities, taken as a whole, or subject the Partnership or the
limited partners of the Partnership to any material liability or
disability;
(xxxvi) On the Closing Date, the Units will be
approved for listing, subject to official notice of issuance, on the
New York Stock Exchange.
(xxxvii) Each of the Kinder Morgan Entities is in
compliance with all federal, state and local employment and labor laws,
including, but not limited to, laws relating to non-discrimination in
hiring, promotion and pay of employees (except where such noncompliance
will not have a material adverse effect on the financial condition,
results of operations or business of the Kinder Morgan Entities, taken
as a whole, or subject the Partnership or the limited partners of the
Partnership to any material liability or disability); no labor dispute
with the employees of any of the Kinder Morgan Entities exists or, to
the knowledge of any of the Kinder Morgan Entities, is imminent or
threatened, except as would not have a material adverse effect on the
financial condition, results of operation or business of the Kinder
Morgan Entities, taken as a whole, or subject the Partnership or the
limited partners of the Partnership to any material liability or
disability; and none of the Kinder Morgan Entities is aware of any
existing, imminent or threatened labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that could
result in a material adverse effect on the financial condition, results
of operations or business of the Kinder Morgan Entities, taken as a
whole, or subject the Partnership or the limited partners of the
Partnership to any material liability or disability.
(xxxviii) None of the Kinder Morgan Entities has nor,
to their knowledge, has any employee or agent thereof made any payment
of funds to any of the Kinder Morgan Entities or received or retained
any funds therefrom in violation of any law, rule or regulation of a
character required to be disclosed in the Prospectus.
(xxxix) The Partnership maintains insurance with
respect to its properties and business of the types and in amounts
generally deemed adequate for its business and consistent with
insurance coverage maintained by similar companies and businesses, all
of which insurance is in full force and effect.
(xl) Each of the Kinder Morgan Entities has filed all
material federal, state and foreign income and franchise tax returns
and has paid all taxes shown as due thereon, other than taxes which are
being contested in good faith and for which adequate reserves have been
established in accordance with generally accepted accounting principles
("GAAP"). There are no tax returns of any of the Kinder Morgan Entities
that are currently being audited by state, local or federal taxing
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authorities or agencies (and with respect to which any of the Kinder
Morgan Entities has received notice), where the findings of such audit,
if adversely determined, would result in a material adverse effect on
the financial condition, results of operations or business of the
Kinder Morgan Entities, taken as a whole, or subject the Partnership or
the limited partners of the Partnership to any material liability or
disability.
(xli) With respect to each employee benefit plan,
program and arrangement (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) maintained or
contributed to by the Partnership, or with respect to which the
Partnership could incur any liability under ERISA (collectively, the
"Benefit Plans"), no event has occurred, in connection with which the
Partnership could be subject to any liability under the terms of such
Benefit Plan, applicable law (including, without limitation, ERISA and
the Internal Revenue Code of 1986, as amended) or any applicable
agreement that could materially adversely affect the financial
condition, results of operations or business of the Kinder Morgan
Entities, taken as a whole, or subject the Partnership or the limited
partners of the Partnership to any material liability or disability.
(b) Each of the Selling Unitholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Partnership that:
(i) All consents, approvals, authorizations and
orders necessary for the execution and delivery by such Selling
Unitholder of this Agreement, the Power of Attorney and Custody
Agreement hereinafter referred to and the questionnaire accompanying
such Power of Attorney and Custody Agreement, and for the sale and
delivery of the Units to be sold by such Selling Unitholder hereunder,
have been obtained; and such Selling Unitholder has full right, power
and authority to enter into this Agreement and the Power of Attorney
and Custody Agreement and to sell, assign, transfer and deliver the
Units to be sold by such Selling Unitholder hereunder;
(ii) The sale of the Units to be sold by such Selling
Unitholder hereunder and the compliance by such Selling Unitholder with
all of the provisions of this Agreement and the Power of Attorney and
Custody Agreement (the "Power of Attorney and Custody Agreement"), and
the consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which such Selling Unitholder is a party or by which
such Selling Unitholder is bound, or to which any of the property or
assets of such Selling Unitholder is subject, nor will such action
result in any violation of the provisions of the certificate of
incorporation or by-laws of such Selling Unitholder if such Selling
Unitholder is a corporation, the partnership agreement of such Selling
Unitholder if such Selling Unitholder is a partnership or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Selling Unitholder or the property
of such Selling Unitholder, except where such occurrence will not
prevent the consummation of the transactions contemplated herein and in
the Power of Attorney and Custody Agreement;
(iii) Such Selling Unitholder has, and immediately
prior to the First Time of Delivery (as defined in Section 4 hereof)
such Selling Unitholder will have, good and valid title to the Units to
be sold by such Selling Unitholder hereunder, free and clear of all
liens, encumbrances, equities or claims; and, upon delivery of such
Units and payment therefor pursuant hereto and thereto, good and valid
title to such Units, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters;
(iv) Such Selling Unitholder (other than Goldman,
Sachs & Co. in its capacity as lead underwriter of the offering) has
not taken and will not take, directly or indirectly, any action which
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<PAGE> 12
is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Partnership to facilitate the sale or
resale of the Units;
(v) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto are made in reliance
upon and in conformity with written information furnished to the
Partnership by such Selling Unitholder expressly for use therein, such
Preliminary Prospectus and the Registration Statement did, and the
Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus, when they become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus or any supplement
or amendment thereto, in the light of the circumstances under which
they were made);
(vi) Certificates in negotiable form representing all
of the Units to be sold by such Selling Unitholder hereunder have been
placed in custody under the Power of Attorney and Custody Agreement, in
the form heretofore furnished to you, appointing First Chicago Trust
Company of New York, as custodian (the "Custodian"), and such Selling
Unitholder has duly executed and delivered the Power of Attorney and
Custody Agreement, appointing Richard D. Kinder, William V. Morgan and
Thomas B. King, and each of them individually, as such Selling
Unitholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority
to execute and deliver this Agreement on behalf of such Selling
Unitholder, to determine the purchase price to be paid by the
Underwriters to the Selling Unitholders as provided in Section 2
hereof, to authorize the delivery of the Units to be sold by such
Selling Unitholder hereunder and otherwise to act on behalf of such
Selling Unitholder in connection with the transactions contemplated by
this Agreement and the Power of Attorney and Custody Agreement; and
(vii) The Units represented by the certificates held
in custody for such Selling Unitholder under the Power of Attorney and
Custody Agreement are subject to the interests of the Underwriters
hereunder; the arrangements made by such Selling Unitholder for such
custody, and the appointment by such Selling Unitholder of the
Attorneys-in-Fact by the Power of Attorney and Custody Agreement, are
to that extent irrevocable; the obligations of the Selling Unitholders
hereunder shall not be terminated by operation of law, whether by the
death or incapacity of any individual Selling Unitholder or, in the
case of an estate or trust, by the death or incapacity of any executor
or trustee or the termination of such estate or trust, or in the case
of a partnership or corporation, by the dissolution of such partnership
or corporation, or by the occurrence of any other event; if any
individual Selling Unitholder or any such executor or trustee should
die or become incapacitated, or, if any such estate or trust should be
terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery
of the Units hereunder, certificates representing the Units shall be
delivered by or on behalf of the Selling Unitholders in accordance with
the terms and conditions of this Agreement and of the Power of Attorney
and Custody Agreement; and actions taken by the Attorneys-in-Fact
pursuant to the Powers of Attorney and Custody Agreement shall be as
valid as if such death, incapacity, termination, dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the
Partnership and each of the Selling Unitholders agree, severally and not
jointly, to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Partnership and each of
the Selling
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<PAGE> 13
Unitholders, at a purchase price per Unit of $__________, the number of Firm
Units (to be adjusted by you so as to eliminate fractional Units) determined by
multiplying the aggregate number of Firm Units to be sold by the Partnership and
each of the Selling Unitholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Units to be purchased by such Underwriter as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Units to be purchased by all of the Underwriters from
the Partnership and all of the Selling Unitholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Units as provided below, the Partnership agrees to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Partnership, at the purchase price per Unit set
forth in clause (a) of this Section 2, that portion of the number of Optional
Units as to which such election shall have been exercised (to be adjusted by you
so as to eliminate fractional Units) determined by multiplying such number of
Optional Units by a fraction the numerator of which is the maximum number of
Optional Units which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Units that all of the Underwriters
are entitled to purchase hereunder.
The Partnership hereby grants to the Underwriters the right to purchase
at their election up to __________ Optional Units, at the purchase price per
Unit set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Units. Any such election to purchase
Optional Units may be exercised only by written notice from you to the
Partnership, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Units to be
purchased and the date on which such Optional Units are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Partnership otherwise agree
in writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm Units, and
if applicable, the Option Units, the several Underwriters propose to offer the
Firm Units, and if applicable, the Option Units, for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Units to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Partnership and the Selling Unitholders shall be delivered by or
on behalf of the Partnership and the Selling Unitholders to Goldman, Sachs &
Co., through the facilities of The Depository Trust Company ("DTC") or otherwise
as requested by the Goldman, Sachs & Co., for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of Federal (same-day) funds to the account specified
by the Partnership and the Custodian, as their interests may appear, to Goldman,
Sachs & Co. at least forty-eight hours in advance. The Partnership will cause
the certificates representing the Units to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of DTC or its designated custodian
(the "Designated Office"). The time and date of such delivery and payment shall
be, with respect to the Firm Units, 9:30 a.m., New York City time, on
_____________, 1998 or such other time and date as Goldman, Sachs & Co., the
Partnership and the Selling Unitholders may agree upon in writing, and, with
respect to the Optional Units, 9:30 a.m., New York City time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Units, or such
other time and date as Goldman, Sachs & Co., the Partnership and the Selling
Unitholders may agree upon in writing. Such time and date for delivery of the
Firm Units is herein called the "First Time of Delivery", such time and date for
delivery of the Optional Units, if not the First Time of Delivery, is herein
called the "Second Time of Delivery", and each such time and date for delivery
is herein called a "Time of Delivery".
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<PAGE> 14
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Units and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof will be delivered at the offices of
Andrews & Kurth L.L.P., 425 Lexington Avenue, New York, New York 10017 (the
"Closing Location"), and the Units will be delivered at the Designated Office,
all at each Time of Delivery. A meeting will be held at the Closing Location at
____ p.m., New York City time, on the New York Business Day next preceding each
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. Each of the Kinder Morgan Entities agrees with each of the
Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior to
the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you copies thereof; to file promptly
all reports and any definitive proxy or information statements required to be
filed by the Partnership with the Commission pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for
so long as the delivery of a prospectus is required in connection with the
offering or sale of the Units; to advise you, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus, of
the suspension of the qualification of the Units for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Units for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Units, provided that in connection therewith the Partnership shall not be
required to qualify as a foreign partnership or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Units and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus or to file under the Exchange Act any document
incorporated by reference in the Prospectus in order to comply with the Act or
the Exchange Act, to notify you and upon your request to file such document
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<PAGE> 15
and to prepare and furnish without charge to each Underwriter and to any dealer
in securities as many copies as you may from time to time reasonably request of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Units at
any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Partnership and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of the
Partnership, Rule 158);
(e) During the period (the "Lock-Up Period") beginning from
the date hereof and continuing to and including the date 90 days after the date
of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder, any Common Units or securities of the Partnership
(or any other Kinder Morgan Entity) that are substantially similar to the Common
Units, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Common Units or any
such substantially similar securities (other than (i) in connection with the
acquisition of assets, businesses or the capital stock or other ownership
interests of businesses by any of the Kinder Morgan Entities in exchange for
Common Units, if the recipient(s) of such Common Units agree(s) not to offer,
sell, contract to sell, or otherwise dispose of during the Lock-Up Period any
Common Units received in connection with such acquisition(s) and (ii) pursuant
to employee unit option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(f) To furnish to its Unitholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, partners' capital and cash flows of the Partnership and
its consolidated subsidiaries certified by independent public accountants);
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to Unitholders, and, upon request,
to deliver to you as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Partnership is
listed.
(h) To use the net proceeds received by it from the sale of
the Units pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of
issuance, the Units on the New York Stock Exchange; and
(j) If the Partnership elects to rely upon Rule 462(b), the
Partnership shall file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date
of this Agreement, and the Partnership shall at the time of filing either pay to
the Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Kinder Morgan Entities and each of the Selling Unitholders
covenant and agree with one another and with the several Underwriters that (a)
the Kinder Morgan Entities and such Selling Unitholders will pay or cause to be
paid a pro rata share (based on the number of Units to be sold by the
Partnership and
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<PAGE> 16
such Selling Unitholder) the following: (i) the fees, disbursements and expenses
of the Kinder Morgan Entities' counsel and accountants in connection with the
registration of the Units under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing this Agreement, the Selling
Agreements, closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Units; (iii) any filing fees and expenses in connection with the qualification
of the Units for offering and sale under state securities laws as provided in
Section 5(b) hereof, but not including the fees and disbursements of counsel for
the Underwriters in connection with such qualification; (iv) all fees and
expenses in connection with listing the Units on the New York Stock Exchange;
(v) the filing fees incident to, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Units;
(vi) the cost and charges of any transfer agent or registrar and (vii) the costs
and expenses of the Partnership relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of the Units,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Partnership, travel and lodging expense of the representatives and officers of
the Partnership and any such consultants (not including any employees of the
Underwriters), and the pro rata cost of any aircraft chartered in connection
with the road show; and (b) the Kinder Morgan Entities will pay or cause to be
paid (i) the cost of preparing certificates representing Units; and (ii) all
other costs and expenses incident to the performance of the Kinder Morgan
Entities' obligations hereunder which are not otherwise specifically provided
for in this Section 6; and (c) each Selling Unitholder will pay or cause to be
paid all costs and expenses incident to the performance of such Selling
Unitholder's obligations hereunder which are not otherwise specifically provided
for in this Section 6, including (i) any fees and expenses of counsel for such
Selling Unitholder, (ii) such Selling Unitholder's pro rata share of the fees
and expenses of the Attorneys-in-Fact and the Custodian and (iii) all expenses
and taxes incident to the sale and delivery of the Units to be sold by such
Selling Unitholder to the Underwriters hereunder. In connection with Clause
(c)(iii) of the preceding sentence, Goldman, Sachs & Co. agrees to pay New York
State stock transfer tax, and the Selling Unitholder agrees to reimburse
Goldman, Sachs & Co. for associated carrying costs if such tax payment is not
rebated on the day of payment and for any portion of such tax payment not
rebated. It is understood, however, that the Kinder Morgan Entities shall bear,
and the Selling Unitholders shall not be required to pay or to reimburse the
Kinder Morgan Entities for, the cost of any other matters not directly relating
to the sale and purchase of the Units pursuant to this Agreement, and that
except as provided in this Section 6, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Units by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Units to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
each of the Kinder Morgan Entities and of the Selling Unitholders herein are, at
and as of such Time of Delivery, true and correct, the condition that each of
the Kinder Morgan Entities and the Selling Unitholders shall have performed all
of its and their obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Partnership has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
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<PAGE> 17
(b) Andrews & Kurth L.L.P., counsel for the Underwriters,
shall have furnished to you such written opinion or opinions (a draft of each
such opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to the matters covered in paragraphs (i) (insofar as it relates to
the due formation and good standing of the Partnership in Delaware and the
Partnership's power and authority to conduct its business as described in the
Registration Statement and the Prospectus, as amended or supplemented), (v),
(xv), (xvii) (insofar as it relates to the statements set forth in the
Prospectus under the caption "Underwriting") and (xxi) (insofar as it relates to
the Registration Statement and the Prospectus) of subsection (c) below and a
letter substantially similar to the letter required to be delivered by Morrison
& Hecker L.L.P. pursuant to subsection (c) below as well as such other related
matters as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to pass
upon such matters;
(c) Morrison & Hecker L.L.P., counsel for the Kinder Morgan
Entities, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) Each of the Kinder Morgan Entities has been duly
formed and is validly existing and in good standing under the laws of
the State of Delaware and each Kinder Morgan Entity has the partnership
or corporate power and authority, as the case may be, to conduct its
business as described in the Registration Statement and the Prospectus,
as amended or supplemented. To the knowledge of such counsel, each of
the Kinder Morgan Entities is duly qualified to do business and is in
good standing as a foreign corporation or foreign limited partnership,
as the case may be, in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or
leased by it makes such licensing or qualification necessary, except in
the case where the failure to be so qualified cannot reasonably be
expected to have a material adverse effect on the financial condition,
results of operations or business of the Kinder Morgan Entities, taken
as a whole, or subject the Partnership or the limited partners of the
Partnership to any material liability or disability;
(ii) The General Partner is the sole general partner
of the Partnership with a 1% general partner interest in the
Partnership; such general partner interest is duly authorized by the
Partnership Agreement and was validly issued to the General Partner;
and, to the knowledge of such counsel, the General Partner owns such
general partner interest free and clear of all liens, encumbrances,
security interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material or as described in the
Registration Statement or the Prospectus, as amended or supplemented);
(iii) The General Partner is the sole general partner
of each of the Operating Partnerships with a 1.0101% general partner
interest in each of the Operating Partnerships; such general partner
interests are duly authorized by the respective Operating Partnership
Agreements and were validly issued to the General Partner; and to the
knowledge of such counsel, the General Partner owns such general
partner interests free and clear of all liens, encumbrances, security
interests, equities charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material or as described in the
Registration Statement or the Prospectus, as amended or supplemented,
and except as provided in the Operating Partnership Agreements);
(iv) OLP-D is the sole general partner of SFPP with a
99.5% general partner interest in SFPP; such general partner interest
is duly authorized by the SFPP Agreement and was validly issued to
OLP-D; and to the knowledge of such counsel, OLP-D owns such general
partner interest free and clear of all liens, encumbrances, security
interests, equities, charges or claims as are not, individually or in
the aggregate, material or as described in the Registration Statement
or the
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<PAGE> 18
Prospectus, as amended or supplemented, or the OLP-D Agreement);
the SF Limited Partner is the sole limited partner of SFPP with a 0.5%
non-voting, limited partner interest in SFPP; and such limited partner
interest is duly authorized by the SFPP Agreement and was validly
issued to the SF Limited Partner;
(v) At the Closing Date after giving effect to the
issuance of the Firm Units, to the knowledge of such counsel, the
capitalization of the Partnership will consist of ______ Common Units
(______ Common Units if all of the Optional Units are issued); to the
knowledge of such counsel, such Common Units will be the only limited
partner interests of the Partnership that are issued and outstanding at
the Closing Date; all of such Common Units of the Partnership
(including the Units being delivered at such Time of Delivery) have
been duly and validly authorized and issued and are fully paid and
non-assessable (except as such nonassessability may be affected by
certain provisions of the Delaware Act; and the Units conform in all
material respects to the description thereof incorporated by reference
in the Prospectus as amended or supplemented;
(vi) The Partnership is the sole limited partner of
each of the Operating Partnerships with a 98.9899% limited partner
interest in each of the Operating Partnerships; such limited
partnership interests, in the case of each of the Operating
Partnerships, are duly authorized by the respective Operating
Partnership Agreements, were validly issued to the Partnership and are
fully paid and non-assessable (except as nonassessability may be
affected by certain provisions of the Delaware Act); and, to the
knowledge of such counsel, the Partnership owns such limited partner
interests free and clear of all liens, encumbrances, security
interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims (i) as
are not, individually or in the aggregate, material, (ii) as described
in the Registration Statement or the Prospectus, as amended or
supplemented or (iii) arising out of the pledge by the Partnership of
the limited partner interests of the Operating Partnerships to secure
certain indebtedness of the Partnership and OLP-B).
(vii) Based solely on such counsel's review of the
stock transfer records of KMNGL, OLP-A is the record owner of all of
the issued and outstanding capital stock of KMNGL Corp.; OLP-A is the
sole member of KM-LLC; all of such capital stock and such member
interests are duly authorized, validly issued, fully paid and
nonassessable; and, to the knowledge of such counsel, OLP-A owns all of
such capital stock and such member interests free and clear of all
liens, encumbrances, security interests, equities, charges or claims
(except for such liens, encumbrances, security interests, equities,
charges or claims as are not, individually or in the aggregate,
material or as described in the Registration Statement or the
Prospectus).
(viii) OLP-A is a general partner of Heartland with a
____% general partner interest in Heartland, KMNGL Corp. is a general
partner of Mont Belvieu with a % general partner interest in Mont
Belvieu, and KM-LLC is a limited partner of Shell CO2, with a 20%
limited partner interest in Shell CO2; such general partner interests
and such limited partner interest are duly authorized by the respective
partnership agreements of Heartland, Mont Belvieu and Shell CO2, and
were validly issued by each of Heartland, Mont Belvieu and Shell CO2,
respectively, and in the case of such limited partner interest, is
fully paid and nonassessable (except as such nonassessability may be
affected by certain provisions of the Delaware Act); and, OLP-A and
KMNGL Corp. own such general partner interests in Heartland and Mont
Belvieu, respectively, and KM-LLC owns such limited partner interest in
Shell CO2, free and clear of all liens, encumbrances, security
interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material or as described in the
Registration Statement or the Prospectus);
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(ix) None of the Units, when paid for by the
Underwriters in accordance with the terms of this Agreement, will be
subject to any preemptive or similar right under (i) the Delaware Act,
(ii) the Partnership Agreement (except for the General Partner's
preemptive right contained in Section 4.5 of the Partnership Agreement,
which has been waived with respect to the issuance and sale of the
Units to the Underwriters) or (iii) any instrument, document, contract
or agreement filed as an exhibit to or incorporated by reference in the
Registration Statement. Except as (i) described in the Registration
Statement or the Prospectus, (ii) the Partnership's Executive
Compensation Plan, and (iii) the Common Unit Option Plan, to the
knowledge of such counsel, there is no commitment or arrangement to
issue, and there are no outstanding options, warrants or other rights
calling for the issuance of, any Units or any partnership interest or
share of capital stock of any of the Kinder Morgan Entities to any
person or any security or other instrument that by its terms is
convertible into, exercisable for and exchangeable into Common Units.
(x) No consent, approval, authorization, order,
registration or qualification of or with any federal, Delaware or New
York court or governmental agency or body is required under Federal or
New York law or the Delaware Act for the issue and sale of the Units
being delivered at such Time of Delivery or the consummation by the
Partnership of the transactions contemplated by this Agreement, except
such as have been obtained under the Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws or by the Bylaws and rules of
the National Association of Securities Dealers, Inc. in connection with
the purchase and distribution of the Units by the Underwriters;
(xi) To the knowledge of such counsel, any
instrument, document, lease, license or other agreement required to be
described or referred to in the Registration Statement or the
Prospectus, as amended or supplemented, has been described or referred
to therein and any such instrument, document, lease, license or other
agreement required to be filed as an exhibit to the Registration
Statement has been filed as an exhibit thereto or has been incorporated
as an exhibit by reference in the Registration Statement;
(xii) To the knowledge of such counsel, except as
disclosed in the Registration Statement or the Prospectus, as amended
or supplemented, no person or entity has the right to require the
registration under the Act of Common Units or other securities of the
Partnership by reason of the filing or effectiveness of the
Registration Statement, which has not been waived;
(xiii) Upon delivery of the certificates evidencing
the Units against payment therefor as provided in this Agreement, the
Underwriters will acquire the Units free of all adverse claims (as such
term is defined in Section 8-302 of the Uniform Commercial Code as in
effect in the State of Delaware (the "UCC"), assuming (i) the
Underwriters are acting in good faith, (ii) the Underwriters have no
notice of any adverse claim (as such term is used in Section 8-302 of
the UCC) and (iii) the certificates evidencing the Units are registered
in the names of the Underwriters or endorsed to the Underwriters or
nominees of the Underwriters;
(xiv) To the knowledge of such counsel and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Kinder Morgan Entities or any of their
subsidiaries is a party or of which any property of the Kinder Morgan
Entities or any of their subsidiaries is the subject which, if
determined adversely to the such Kinder Morgan Entity or subsidiaries,
would individually or in the aggregate have a material adverse effect
on the current or future consolidated financial position, unitholders'
equity or results of operations of any of the Kinder Morgan Entities
and their subsidiaries; and to the knowledge of such counsel, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
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<PAGE> 20
(xv) This Agreement has been duly authorized,
executed and delivered by each of the Kinder Morgan Entities;
(xvi) The issue and sale of the Units being delivered
at such Time of Delivery and the compliance by the Kinder Morgan
Entities with all of the provisions of this Agreement and the
consummation of the transactions herein and therein contemplated will
not (a) result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument filed as
an exhibit to the Registration Statement or filed as an exhibit to any
document incorporated by reference in the Registration Statement, (b)
result in any violation of the provisions of the Certificate of
Incorporation, by-laws or other formation document, as applicable, of
any of the Kinder Morgan Entities, Mont Belvieu, Heartland or Shell
CO2, (c) breach or otherwise violate an existing obligation of any of
the Kinder Morgan Entities under any court or administrative order,
judgment or decree of which such counsel has knowledge, or (d) violate
any applicable provisions of the federal laws of the United States, the
laws of the State of New York, or the Delaware Act;
(xvii) (a) The statements set forth in the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1997 under the caption "Item 1: Business- Regulation" and (b) the
statements set forth in the Prospectus under the captions "Material
Federal Income Tax Considerations", and under the caption
"Underwriting", insofar as they purport to describe the provisions of
federal law, New York law and the Delaware Act and documents referred
to therein, in each case, are accurate summaries and fairly and
correctly present in all material respects the information called for
with respect to such matters; provided, however, that such counsel's
opinion need not cover any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the
Partnership by an Underwriter through Goldman, Sachs & Co. expressly
for use therein;
(xviii) The Units have been approved for listing on
the New York Stock Exchange, subject only to official notice of
issuance;
(xix) None of the Kinder Morgan Entities is (a) a
"holding company" or a "subsidiary company" of a "holding company" or
an "affiliate" thereof, within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or (b) an "Investment Company"
or an entity "controlled" by an "Investment Company", as such terms are
defined in the Investment Company Act;
(xx) The Registration Statement was declared
effective under the Act by the Commission [as of the date] of this
Agreement and to the knowledge of such counsel no order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or is pending,
threatened or contemplated. Any required filing of the Prospectus
relating the sale of the Units pursuant to Rule 424(b) under the Act
has been made in the manner and within the time period required by such
rule and;
(xxi) The Registration Statement and the Prospectus
(including any documents incorporated by reference in the Prospectus,
when such documents became effective or were filed with the
Commission), as amended or supplemented, comply in all material
respects as to form with the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder (other than the financial statements and related schedules
and other financial data contained therein, as to which such counsel
need express no opinion).
Such counsel shall also deliver a letter to the effect that they have
participated in conferences with officers and other representatives of the
Partnership, representatives of the Partnership's accountants, representatives
of the Underwriters and counsel for the Underwriters, at which conferences the
contents of
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<PAGE> 21
the Registration Statement and Prospectus and related matters were discussed
and, although such counsel is not passing on and does not assume any
responsibility for and shall not be deemed to have independently verified the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to in the
opinion in subsection (xvii) of this Section 7(c), and relying as to facts
necessary to the determination as to materiality, to the extent we may do so in
the exercise of our professional responsibility, upon statements of the officers
and other representatives of the Partnership, on the basis of the foregoing, no
facts have come to such counsel's attention that lead it to believe that, as of
its effective date, the Registration Statement or any further amendment thereto
made by the Partnership prior to such Time of Delivery (other than the financial
statements and related schedules and other financial data contained therein, as
to which such counsel need not comment) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; or that, as of its
date, the Prospectus as amended or supplemented or any further amendment or
supplement thereto made by the Partnership prior to such Time of Delivery (other
than the financial statements and related schedules and other financial data
contained therein, as to which such counsel need not comment) contained an
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; or that, as of such Time of
Delivery, either the Registration Statement or the Prospectus as amended or
supplemented or any further amendment or supplement thereto made by the
Partnership to such Time of Delivery (other than the financial statements and
related schedules and other financial data contained therein, as to which such
counsel need express no opinion) contains an untrue statement of a material fact
or omits to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
such counsel have no reason to believe that any documents incorporated by
reference in the Prospectus, when such documents became effective or were so
filed, as the case may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or, in the case of other documents
which were filed under the Act or the Exchange Act with the Commission, an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so filed, not
misleading; and they do not know of any amendment to the Registration Statement
required to be filed or any contracts or other documents of a character required
to be filed as an exhibit to the Registration Statement or required to be
incorporated by reference into the Prospectus as amended or supplemented or
required to be described in the Registration Statement or the Prospectus as
amended or supplemented which are not filed or incorporated by reference or
described as required.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than federal law, New York law
and the Delaware Act.
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery,
Price Waterhouse L.L.P. shall have furnished to you a letter or letters, dated
the respective dates of delivery thereof, in form and substance reasonably
satisfactory to you, to the effect set forth in Annex I hereto (the executed
copy of the letter delivered prior to the execution of this Agreement is
attached as Annex I(a) hereto and a draft of the form of letter to be delivered
on the effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b) hereto);
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m. New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery,
Arthur Andersen L.L.P. shall have furnished to you a letter or letters dated the
respective dates of delivery thereof, in form and substance reasonably
satisfactory to you, to the effect set forth in to Annex I hereto (the executed
copy of
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<PAGE> 22
the letter delivered prior to the execution of this Agreement is attached as
Annex I(c) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration Statement and
as of each Time of Delivery is attached as Annex I(d) hereto);
(f) (i) None of the Kinder Morgan Entities shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any material change in the capitalization
or long-term debt of the Partnership (or any of the other Kinder Morgan
Entities) or any change, or any development involving a prospective change, in
or affecting the general affairs, management, financial position, unitholders'
equity or results of operations of the Partnership (or any of the other Kinder
Morgan Entities) otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Units being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded to any of the Kinder Morgan Entities' debt
securities by any "nationally recognized statistical rating organization", as
that term is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that it has
under surveillance or review, with possible negative implications, its rating of
any of the Kinder Morgan Entities' debt securities;
(h) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange; (ii) a suspension or
material limitation in trading in the Partnership's securities on the New York
Stock Exchange; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York or Texas State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this Clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Units being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
(i) The Units to be sold by the Partnership and the Selling
Unitholders at such Time of Delivery shall have been approved for listing,
subject to official notice of issuance, on the New York Stock Exchange;
(j) The Kinder Morgan Entities and the Selling Unitholders
shall have complied with the provisions of Section 5(c) hereof with respect to
the furnishing of prospectuses on the New York Business Day next succeeding the
date of this Agreement; and
(k) The Kinder Morgan Entities shall have furnished or caused
to be furnished to you at such Time of Delivery certificates of officers of the
General Partner, satisfactory to you as to the accuracy of the representations
and warranties of the Kinder Morgan Entities and as to the performance by the
Kinder Morgan Entities of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other matters as
you may reasonably request, and the Kinder Morgan Entities shall have furnished
or caused to be furnished certificates as to the matters set forth in
subsections (a) and (f) of this Section, and as to such other matters as you may
reasonably request.
8. (a) Each of the Kinder Morgan Entities, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such
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<PAGE> 23
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Kinder Morgan Entities shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Partnership by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Selling Unitholder, severally and not jointly, will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Partnership by such Selling Unitholder expressly for use
therein; and will reimburse each Underwriter and the Partnership for any legal
or other expenses reasonably incurred in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that such Selling Unitholder shall not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Partnership by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the
Kinder Morgan Entities and each Selling Unitholder against any losses, claims,
damages or liabilities to which the Kinder Morgan Entities or such Selling
Unitholder may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Partnership by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Kinder Morgan Entities and each Selling Unitholder for any legal
or other expenses reasonably incurred by the Kinder Morgan Entities or such
Selling Unitholder in connection with investigating or defending any such action
or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under such subsection, notify the indemnifying
party in writing of the
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<PAGE> 24
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (which shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Kinder Morgan Entities and the Selling
Unitholders on the one hand and the Underwriters on the other from the offering
of the Units. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party failed
to give the notice required under subsection (d) above, then each such
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Kinder Morgan Entities and
the Selling Unitholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Kinder Morgan Entities and the Selling Unitholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Units purchased under this Agreement
(before deducting expenses) received by the Kinder Morgan Entities and the
Selling Unitholders bear to the total underwriting discounts and commissions
received by the Underwriters with respect to the Units purchased under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Kinder Morgan Entities or the Selling Unitholders on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Kinder Morgan Entities, each of the Selling
Unitholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (e),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Units underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or
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<PAGE> 25
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Kinder Morgan Entities and the
Selling Unitholders under this Section 8 shall be in addition to any liability
which the Kinder Morgan Entities and the respective Selling Unitholders may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 8 shall be in addition to
any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
General Partner and to each person, if any, who controls any of the Kinder
Morgan Entities or any Selling Unitholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Units which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Units on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Units, then the Partnership and the Selling Unitholders
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to you to purchase such
Units on such terms. In the event that, within the respective prescribed
periods, you notify the Partnership and the Selling Unitholders that you have so
arranged for the purchase of such Units, or the Partnership and the Selling
Unitholders notify you that they have so arranged for the purchase of such
Units, you or the Partnership and the Selling Unitholders shall have the right
to postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Partnership agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Units.
(b) If, after giving effect to any arrangements for the
purchase of the Units of a defaulting Underwriter or Underwriters by you and the
Partnership and the Selling Unitholders as provided in subsection (a) above, the
aggregate number of such Units which remains unpurchased does not exceed
one-eleventh of the aggregate number of all of the Units to be purchased at such
Time of Delivery, then the Partnership and the Selling Unitholders shall have
the right to require each non-defaulting Underwriter to purchase the number of
Units which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Units which such Underwriter
agreed to purchase hereunder) of the Units of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Units of a defaulting Underwriter or Underwriters by you and the
Partnership and the Selling Unitholders as provided in subsection (a) above, the
aggregate number of such Units which remains unpurchased exceeds one-eleventh of
the aggregate number of all of the Units to be purchased at such Time of
Delivery, or if the Partnership and the Selling Unitholders shall not exercise
the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Units of a defaulting Underwriter or Underwriters, then
this Agreement (or, with respect to the Second Time of Delivery, the obligations
of the Underwriters to purchase and of the Partnership and the Selling
Unitholders to sell the Optional Units) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Partnership or
the Selling Unitholders, except for the expenses to be borne by the Partnership
and the Selling Unitholders and the Underwriters as provided in Section 6 hereof
and
25
<PAGE> 26
\the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of each of the Kinder Morgan Entities, the Selling
Unitholders and the several Underwriters, as set forth in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement, shall remain
in full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or any of the Kinder Morgan Entities, or
any of the Selling Unitholders, or any officer or director or controlling person
of any of the Kinder Morgan Entities, or any controlling person of any Selling
Unitholder, and shall survive delivery of and payment for the Units.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
[OR IF THE UNDERWRITERS ELECT NOT TO PURCHASE THE UNITS HEREUNDER SOLELY BECAUSE
ONE OR MORE OF THE CONDITIONS IN SECTION 7(B), 7(H)(I), 7(H)(III) OR 7(H)(IV)
HAVE NOT BEEN SATISFIED,] none of the Kinder Morgan Entities nor the Selling
Unitholders shall then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason any Units are
not delivered by or on behalf of the Partnership and the Selling Unitholders as
provided herein, the Kinder Morgan Entities will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Units not so
delivered, but the Kinder Morgan Entities shall then be under no further
liability to any Underwriter in respect of the Units not so delivered except as
provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Unitholder hereunder, you
and each of the Kinder Morgan Entities shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of such Selling Unitholder
made or given by any or all of the Attorneys-in-Fact for such Selling
Unitholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives at Goldman, Sachs & Co. at
85 Broad Street, New York, New York 10004; if to any Selling Unitholder shall be
delivered or sent by mail, telex or facsimile transmission to such Selling
Unitholder c/o the Attorneys-in-Fact at the address set forth in the Power of
Attorney and Custody Agreement; and if to any of the Kinder Morgan Entities
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Partnership set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(d) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire or telex constituting such Questionnaire, which address will be
supplied to the Partnership or the Selling Unitholders by you upon request. Any
such statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, each of the Kinder Morgan Entities and the Selling
Unitholders and, to the extent provided in Sections 8 and 10 hereof, the
officers and directors of the General Partner and each person who controls any
of the Kinder Morgan Entities, any Selling Unitholder or any Underwriter, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Units from any Underwriter shall be deemed
a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
26
<PAGE> 27
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Kinder Morgan Entities and for each of the
Representatives plus one for each counsel and the Custodian, counterparts
hereof, and upon the acceptance hereof by you, on behalf of each of the
Underwriters, this letter and such acceptance hereof shall constitute a binding
agreement among each of the Underwriters, each of the Kinder Morgan Entities and
each of the Selling Unitholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Partnership and the Selling Unitholders for examination upon
request, but without warranty on your part as to the authority of the signers
thereof.
27
<PAGE> 28
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Unitholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Unitholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
KINDER MORGAN ENERGY PARTNERS, L.P.
By: Kinder Morgan G.P., Inc.
By:
------------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN OPERATING L.P. "A"
By: Kinder Morgan G.P., Inc.
By:
------------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN OPERATING L.P. "B"
By: Kinder Morgan G.P., Inc.
By:
------------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN OPERATING L.P. "C"
By: Kinder Morgan G.P., Inc.
By:
------------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
28
<PAGE> 29
KINDER MORGAN OPERATING L.P. "D"
By: Kinder Morgan G.P., Inc.
By:
-----------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN G.P., INC.
By:
-----------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
SFPP, L.P.
By: Kinder Morgan Operating L.P., "D"
By: Kinder Morgan Inc.
By:
-----------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN CO(2), L.L.C.
By: Kinder Morgan Operating L.P., "A"
By: Kinder Morgan Inc.
By:
-----------------------------------
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
KINDER MORGAN NATURAL GAS LIQUIDS
CORPORATION
By:
----------------------------------
Name:
Title:
29
<PAGE> 30
[Names of Selling Unitholders]
By:
--------------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Unitholders named in
Schedule II to this Agreement.
Goldman Sachs & Co.
Paine Webber Incorporated
Prudential Securities Incorporated
Dain Rauscher Wessels
Hoard Weil Labouisse Friedrichs Incorporated
Wheat First Union
By:
-----------------------------------------------
(Goldman, Sachs & Co.)
30
<PAGE> 31
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
UNITS TO BE
TOTAL NUMBER OF FIRM PURCHASED IF
UNITS TO BE MAXIMUM OPTION
UNDERWRITER PURCHASED EXERCISED
- ---------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Goldman, Sachs & Co.......................................
PaineWebber Incorporated..................................
Prudential Securities Incorporated........................
Dain Rauscher Wessels ....................................
Howard Weil Labouisse Friedrichs Incorporated.............
Wheat First Union.........................................
[Names of other Underwriters]
-------------------- -------------------
Total.............................................
==================== ===================
</TABLE>
31
<PAGE> 32
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
UNITS TO BE
TOTAL NUMBER OF FIRM PURCHASED IF
UNITS TO BE MAXIMUM OPTION
UNDERWRITER PURCHASED EXERCISED
- ---------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
The Partnership............................................
The Selling Unitholder(s):
[Name of Selling Unitholder].........................
[Name of Selling Unitholder].........................
[Name of Selling Unitholder].........................
[Name of Selling Unitholder].........................
[Name of Selling Unitholder].........................
-------------------- -------------------
Total..............................................
==================== ===================
</TABLE>
32
<PAGE> 33
SCHEDULE III
List of subsidiaries (as such term is defined in the rules and
regulations of the Commission under the Act and the Exchange Act) of the
Partnership or other entities in which the Partnership, any of the Operating
Partnerships or SFPP has an equity ownership interest of at least 50%:
Heartland Partnership
Mont Belvieu Associates
Kinder Morgan CO(2), L.L.C.
Kinder Morgan Natural Gas Liquids Corporation
33
<PAGE> 1
EXHIBIT 5.1
[MORRISON & HECKER, L.L.P. LETTERHEAD]
June 8, 1998
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
Re: Common Units
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3, as amended, (Registration No. 333-50431)
(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 7,475,000 Common Units ("Common Units")
representing limited partner interests in the Partnership including: (i)
5,570,578 Common Units to be issued by the Partnership and 975,000 Common Units
to be issued by the Partnership if the underwriters exercise their overallotment
option (these 6,545,578 Common Units are collectively referred to as the
"Additional Common Units") and (ii) 929,422 Common Units to be sold by the
selling unitholders set forth in the prospectus included as part of the
Registration Statement (the "Prospectus"). Capitalized terms not otherwise
defined herein shall have the meaning ascribed to them in the Prospectus.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business
law (1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only
with respect to the present status of the substantive laws of the state of
Delaware. We express no opinion as to any matter arising under the laws of any
other jurisdiction.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement, including the Prospectus; (2)
the Partnership's Second Amended and Restated Agreement of Limited Partnership
dated January 14, 1998 (the "Partnership Agreement"); and (3) such other
documents, materials, and authorities as we have deemed necessary in order to
enable us to render our opinions set forth below.
Based on and subject to the foregoing and other qualifications set forth
below, we are of the opinion that
<PAGE> 2
Kinder Morgan Energy Partners, L.P.
June 8, 1998
Page 2
1. the Additional Common Units to be issued and delivered as contemplated
by the Registration Statement and the Prospectus have been duly authorized for
issuance and when issued and delivered in accordance with the terms of the form
of Underwriting Agreement filed as an exhibit to the Registration Statement,
will be validly issued and, on the assumption that the limited partners of the
Partnership take no part in the control of the Partnership's business and
otherwise act in conformity with the provisions of the Partnership Agreement
(Articles VI and VII) regarding control and management of the Partnership, such
Common Units will be fully paid and nonassessable; and
2. the Common Units to be sold by the selling unitholders as
contemplated by the Registration Statement and the Prospectus are duly
authorized and validly issued and, on the assumption that the limited partners
of the Partnership take no part in the control of the Partnership's business
and otherwise act in conformity with the provisions of the Partnership
Agreement (Articles VI and VII) regarding control and management of the
Partnership, such Common Units are fully paid and nonassessable.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference of this firm under the heading
"Legal Matters" in the Prospectus forming part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
/s/ MORRISON & HECKER L.L.P.
KKT:mlc
<PAGE> 1
EXHIBIT 8.1
[MORRISON & HECKER L.L.P. LETTERHEAD]
June 8, 1998
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
Re: Kinder Morgan Energy Partners, L.P.: Form S-3 Registration Statement
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3, as amended, (Registration No. 333-50431)
(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 7,475,000 Common Units ("Common Units")
representing limited partner interests in the Partnership including: (i)
5,570,578 to be issued and distributed by the Partnership and 975,000 Common
Units to be issued and distributed by the Partnership if the underwriters
exercise their overallotment option, and (ii) 929,422 Common Units to be sold by
the selling unitholders set forth in the prospectus attached to the
Registration Statement (the "Prospectus"). Capitalized terms not otherwise
defined herein shall have the meaning ascribed to them in the Prospectus.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement and the attached Prospectus; (2)
the Partnership's Second Amended and Restated Agreement of Limited Partnership
dated January 14, 1998; and (3) such other documents, materials, and
authorities as we have deemed necessary in order to enable us to render our
opinions set forth below.
In addition, our opinions are based on the facts and circumstances set
forth in the Prospectus and on certain representations made by the Partnership,
Kinder Morgan G.P., Inc., the Partnership's general partner, and the selling
unitholders. We have not made an independent investigation of such facts. Our
opinion as to the matters set forth herein could change as a result of changes
in facts and circumstances, changes in the terms of the documents reviewed by
us, or changes in the law subsequent to the date hereof.
Our opinion is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), regulations under such Code, judicial authority
and current administrative rulings and practice, all as of the date of this
letter, and all of which may change at any time.
Based upon and subject to the foregoing and assuming compliance with all
provisions of the documents referenced above, we are of the opinion that for
federal income tax purposes (i)
<PAGE> 2
Kinder Morgan Energy Partners, L.P.
June 8, 1998
Page 2
the Partnership and its operating partnerships are and will continue to be
classified as partnerships and not as associations taxable as corporations; and
(ii) each purchaser of Common Units who acquires beneficial ownership of the
Partnership's Common Units, and either has been admitted or is pending
admission to the Partnership as an additional limited partner, or if the Common
Units are held by a nominee, each purchaser of such Common Units (so long as
such person has the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of such Units) will be treated as
a partner of the Partnership for federal income tax purposes.
Further, we are of the opinion that the discussion of federal income tax
consequences set forth in the Prospectus under the heading "Material Federal
Income Tax Considerations" is accurate in all material aspects as to matters of
law and legal conclusions.
This opinion may be relied upon by you, the purchasers of Common Units and
the Partnership. We hereby consent to the filing of this opinion as an Exhibit
to the Registration Statement and to all references to this firm under the
headings "Material Federal Income Tax Considerations" and "Legal Matters" in
the Prospectus forming part of the Registration Statement. This consent is not
to be construed as an admission that we are a person whose consent is required
to be filed with the Registration Statement under the provisions of the Act.
Very truly yours,
/s/ MORRISON & HECKER L.L.P.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Amendment 2 to Form S-3
(No. 333-50431) of Kinder Morgan Energy Partners, L.P. of our report dated
March 6, 1998 relating to the consolidated financial statements of Kinder Morgan
Energy Partners, L.P. appearing on page F-2 and of our report dated March 6,
1998 relating to the financial statements of Mont Belvieu Associates appearing
on page F-20 of Kinder Morgan Energy Partners, L.P.'s Annual Report on Form 10-K
for the year ended December 31, 1997. We also hereby consent to the
incorporation by reference in this Registration Statement on Amendment 2 to Form
S-3 (No. 333-50431) 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.
PRICE WATERHOUSE LLP
Houston, Texas
June 3, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 2 to the Registration Statement on Form
S-3 (file No. 333-50431) 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.
Price Waterhouse LLP
/s/ Price Waterhouse LLP
Los Angeles, California
June 3, 1998
<PAGE> 1
EXHIBIT 23.4
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
June 3, 1998
