UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 1-11234
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0380342
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1301 McKinney St.
Suite 3450
Houston, Texas 77010
------------------------------- -------------------------------
(Address of principal executive (Zip Code)
Offices)
(713) 844-9500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The Registrant had 48,851,690 Common Units outstanding at November 11, 1998.
Page 1 of 26
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KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements (Unaudited)
Consolidated Statement of Income - Three Months and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheet - September 30, 1998 and
December 31, 1997 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
ITEM 3. - Quantitative and Qualitative Disclosures about
Market Risk 25
PART II. OTHER INFORMATION
ITEM 1. - Legal Proceedings 26
ITEM 2. - Changes in Securities 26
ITEM 5. - Other Information 26
ITEM 6. - Exhibits and Reports on Form 8-K 26
Page 2 of 26
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 101,900 $ 17,385 $ 220,685 $ 52,553
Costs and Expenses
Cost of products sold 2,756 1,589 5,482 5,307
Operations and maintenance 24,959 3,726 43,781 10,803
Fuel and power 6,537 1,030 15,778 3,756
Depreciation and amortization 11,050 2,657 25,440 7,797
General and administrative 11,788 2,310 25,946 6,564
Taxes, other than income taxes 3,187 758 8,173 2,284
------------ ------------- -------------- -------------
60,277 12,070 124,600 36,511
------------ ------------- -------------- -------------
Operating Income 41,623 5,315 96,085 16,042
Other Income (Expense)
Earnings from equity investments 5,810 1,729 16,417 4,184
Interest, net (9,613) (2,899) (27,386) (9,174)
Other, net (2,089) (11) (4,631) 6
Minority Interest (447) (37) (924) (101)
------------ ------------- -------------- -------------
Income Bef. Income Taxes and Extraordinary charge 35,284 4,097 79,561 10,957
Income Tax Expense 168 343 168 909
------------ ------------- -------------- -------------
Income Before Extraordinary charge 35,116 3,754 79,393 10,048
Extraord. charge on early extinguishment of debt - - (13,611) -
============ ============= ============== =============
Net Income $ 35,116 $ 3,754 $ 65,782 $ 10,048
============ ============= ============== =============
Calculation of Limited Partners' Interest in Net Income:
Income Before Extraordinary Charge $ 35,116 $ 3,754 $ 79,393 $ 10,048
Less: General Partner's interest in Net Income (10,031) (1,072) (22,458) (2,115)
------------ ------------- -------------- -------------
Limited Partners' Net Income bef. extraord. charge 25,085 2,682 56,935 7,933
Less: Extraord. charge on early exting. of debt - - (13,611) -
============ ============= ============== =============
Limited Partners' Net Income $ 25,085 $ 2,682 $ 43,324 $ 7,933
============ ============= ============== =============
Net Income per Unit before extraordinary charge $ 0.52 $ 0.20 $ 1.53 $ 0.60
============ ============= ============== =============
Net Income per Unit $ 0.52 $ 0.20 $ 1.17 $ 0.60
============ ============= ============== =============
Number of Units used in Computation 47,837 13,482 37,180 13,176
============ ============= ============== =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 3 of 26
<PAGE>
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 48,256 $ 9,612
Accounts receivable (net of allowance
for doubtful accounts) 33,129 8,569
Inventories
Products 2,372 1,901
Materials and supplies 2,570 1,710
----------------- -----------------
86,327 21,792
----------------- -----------------
Property, Plant and Equipment, at cost 1,853,706 290,620
Less accumulated depreciation 62,558 45,653
----------------- -----------------
1,791,148 244,967
----------------- -----------------
Equity Investments 237,721 31,711
----------------- -----------------
Deferred Charges and Other Assets 19,208 14,436
================= =================
TOTAL ASSETS $ 2,134,404 $ 312,906
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 18,333 $ 4,930
Accrued liabilities 24,030 3,585
Accrued benefits 17,638 -
Accrued taxes 6,171 2,861
----------------- -----------------
66,172 11,376
----------------- -----------------
Long-Term Liabilities and Deferred Credits
Long-term debt 564,563 146,824
Other 105,929 2,997
----------------- -----------------
670,492 149,821
----------------- -----------------
Minority Interest 19,221 1,485
----------------- -----------------
Partners' Capital
Common Units 1,367,345 146,840
General Partner 11,174 3,384
----------------- -----------------
1,378,519 150,224
----------------- -----------------
================= =================
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 2,134,404 $ 312,906
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 4 of 26
<PAGE>
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by operating activities
Net income $ 65,782 $ 10,048
Extraordinary charge on early extinguishment of debt 13,611 -
Depreciation and amortization 25,440 7,797
Earnings from equity investments (16,417) (4,184)
Distributions from equity investments 12,248 6,425
Changes in components of working capital, and Other, net 12,539 5,357
El Paso Settlement (8,000) -
---------------- -------------
Net Cash Provided by Operating Activities 105,203 25,443
---------------- -------------
Cash Flows From Investing Activities
Acquisitions of assets (74,706) (22,184)
Additions to property, plant and equipment for
expansion and maintenance projects (23,529) (4,378)
Sale of property, plant and equipment 46 33
Contributions to equity investments (136,192) (1,900)
---------------- -------------
Net Cash Used in Investing Activities (234,381) (28,429)
---------------- -------------
Cash Flows From Financing Activities
Issuance of debt 415,089 38,100
Payment of debt (375,235) (58,014)
Increase in restricted cash - (5,167)
Unit registration costs (289) -
Cost of refinancing long-term debt (16,471) -
Proceeds from issuance of common units 212,303 33,919
Contributions from General Partner's Minority Interest 12,488 -
Distributions to partners
Common Units (61,624) (14,712)
General Partner (17,362) (1,163)
Minority Interest (1,077) (162)
Other, net - (661)
---------------- -------------
Net Cash Provided by (Used In) Financing Activities 167,822 (7,860)
---------------- -------------
Increase (Decrease) in Cash and Cash Equivalents 38,644 (10,846)
Cash and Cash Equivalents, Beginning of Period 9,612 14,299
================ =============
Cash and Cash Equivalents, End of Period $ 48,256 $ 3,453
================ =============
Noncash Investing and Financing Activities
Contribution of net assets to partnership investments $ 59,341 $ -
Assets acquired by the issuance of Common Units $ 1,003,202 $ -
Assets acquired by the assumption of liabilities $ 554,182 $ -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 5 of 26
<PAGE>
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The unaudited consolidated financial statements included herein have been
prepared by Kinder Morgan Energy Partners, L.P. (the "Partnership") pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they reflect all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the financial results for the
interim periods. Certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Partnership believes, however, that the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1997 ("Form 10-K").
The Limited Partners' Net Income per Unit was computed by dividing the
Limited Partners' interest in Net Income before and after the extraordinary
charge on early extinguishment of debt by the weighted average number of Common
Units outstanding during the period.
Certain reclassifications have been made to the consolidated financial
statements for the prior year to conform with the current presentation.
2. Acquisitions and Joint Ventures
Santa Fe
Kinder Morgan Operating L.P. "D" ("OLP-D"), a Delaware limited
partnership, acquired on March 6, 1998, 99.5% of SFPP, L.P. ("SFPP"), the
operating partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe").
The transaction was accounted for under the purchase method of accounting and
was valued at more than $1.4 billion inclusive of liabilities assumed. The
Partnership acquired the interest of Santa Fe's common unit holders in SFPP in
exchange for approximately 26.6 million Common Units (1.39 Common Units of the
Partnership for each Santa Fe common unit). The Partnership paid $84.4 million
to Santa Fe Pacific Pipelines, Inc. (the "former SF General Partner") in
exchange for the general partner interest in Santa Fe. The $84.4 million was
borrowed under the Loan Facility (see Note 5). Also on March 6, 1998, SFPP
redeemed from the former SF General Partner a .5% interest in SFPP for $5.8
million. The redemption was paid from SFPP's cash reserves. After the
redemption, the former SF General Partner continues to own a .5% special limited
partner interest in SFPP.
Assets acquired in this transaction comprise the Partnership's Pacific
Operations, which include over 3,300 miles of pipeline and thirteen owned and
operated terminals.
Shell CO2 Company
On March 5, 1998, the Partnership and affiliates of Shell Oil Company
("Shell") agreed to combine their CO2 activities and assets into a partnership,
Shell CO2 Company, Ltd.("Shell CO2 Company"), to be operated by a Shell
affiliate. The Partnership acquired, through a newly created limited liability
company, a 20% interest in Shell CO2 Company in exchange for contributing the
Central Basin Pipeline and approximately $25 million in cash. The $25 million
was borrowed under the Loan Facility (see Note 5). The Partnership accounts for
its partnership interest in Shell CO2 Company under the equity method as part of
the Mid-Continent Operations.
Page 6 of 26
<PAGE>
Hall-Buck Marine, Inc.
On August 13, 1998, the Partnership announced that it had completed its
acquisition of Hall-Buck Marine, Inc. ("Hall-Buck") for approximately $100
million. Hall-Buck, headquartered in Sorrento, Louisiana, is one of the nation's
largest independent operators of dry bulk terminals, operating twenty terminals
on the Mississippi River, the Ohio River, and the Pacific Coast. In addition,
Hall-Buck owns all of the common stock of River Consulting Incorporated, a
nationally recognized leader in the design and construction of bulk material
facilities and port related structures.
The $100 million of consideration consisted of approximately 2.1 million
Common Units and assumed indebtedness of $23 million. After the acquisition, the
Partnership changed the name of Hall-Buck Marine, Inc. to Kinder Morgan Bulk
Terminals, Inc. and, going forward, included its activity as part of the Bulk
Terminals business segment.
Cardlock Fuel System, Inc.
On August 26, 1998, the Partnership announced that it had signed a series
of definitive agreements to form a joint venture with Cardlock Fuels System, Inc
("CFS"), an affiliate of Southern Counties Oil Co., for the purpose of
constructing unattended, automated fueling stations adjacent to the
Partnership's terminal facilities within its Pacific Operations. The Partnership
will provide the terminal sites, and CFS will contribute its unattended,
automated fueling station expertise including marketing and electronic
transaction processing services. The joint venture will select at least three
sites to commence activity on immediately. The joint venture has a target of up
to ten sites within the next three years.
Plantation Pipe Line Company
On September 15, 1998, the Partnership announced that it had completed the
acquisition of a 24% interest in Plantation Pipe Line Company for $110 million.
Plantation Pipe Line Company owns and operates a 3,100 mile pipeline system
throughout the southeastern United States which serves as a common carrier of
refined petroleum products to various metropolitan areas, including Atlanta,
Georgia; Charlotte, North Carolina; and the Washington, D.C. area. The
Partnership will account for its investment in Plantation Pipe Line Company
under the equity method of accounting and include its activity as part of the
Mid-Continent Operations.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the nine months ended September 30, 1998 and 1997, assumes the
Partnership's acquisition of SFPP and its interest in Shell CO2 Company had
occurred as of January 1, 1997. The unaudited Pro Forma financial results have
been prepared for comparative purposes only and may not be indicative of the
results that would have occurred if the Partnership had acquired the assets of
SFPP and its interest in Shell CO2 Company on the dates indicted or which will
be attained in the future.
Net Income for each of the Pro Forma periods does not include the
annualized effects of all the cost saving measures the company has achieved
since its acquisition of SFPP. Amounts presented below are in thousands, except
for per Common Unit amounts:
Pro Forma
Nine Months Ended
September 30,
Income Statement 1998 1997
----------------------
Revenues $259,932 $235,174
Operating Income $111,226 $94,637
Net Income before extraordinary charge $88,473 $59,708
Net Income $74,862 $59,708
Net Income per Common Unit before extraord. charge $1.46 $1.34
Net Income per Common Unit $1.14 $1.34
Page 7 of 26
<PAGE>
3. Litigation
FERC Proceedings
Prior to the Partnership's acquisition of SFPP, several complaints had
been filed with the Federal Energy Regulatory Commission (FERC) challenging
SFPP's rates for the East Line, West Line, Sepulveda Line, and the Watson
station. An initial decision by the FERC Administrative Law Judge was issued on
September 25, 1997 (the "Initial Decision"). The Initial Decision upheld SFPP's
position that "changed circumstances" were not shown to exist on the West Line,
thereby retaining the just and reasonable status of all West Line rates that
were "grandfathered" under the Energy Policy Act of 1992. In addition, the
Initial Decision determined that SFPP's East Line rates were not grandfathered
under the Energy Policy Act and also included rulings that were generally
adverse to SFPP regarding certain cost of service issues.
If the Initial Decision is affirmed in current form by the FERC, the
Partnership estimates that the total reparations and interest that would be
payable approximate the reserves that have been recorded as of September 30,
1998. The Partnership also estimates that the Initial Decision, in its current
form, and if also applied to the Sepulveda Line and the Watson station rates,
would reduce prospective revenues by approximately $8 million annually, the same
rate at which the Partnership is currently accruing its reserve.
California Public Utilities Commission Proceeding
A complaint was filed on April 7, 1997 with the California Public
Utilities Commission ("CPUC") challenging rates charged by SFPP for intrastate
transportation of refined petroleum products. SFPP filed responsive testimony
defending the justness and reasonableness of its rates. On June 18, 1998, a CPUC
Administrative Law Judge issued a proposed decision, finding that the evidence
of record did not support complainants' claim that rates charged for service
within the State of California by SFPP are unjust or unreasonable under the
California Public Utilities Code. In light of his findings, the Judge dismissed
the complaints filed against SFPP. On August 6, 1998, the CPUC affirmed the
proposed decision of its Administrative Law Judge and dismissed the complaints.
On October 6, 1998, the complainants filed an application for rehearing with the
CPUC. SFPP responded to the rehearing application. The rulings are pending
before the CPUC for disposition.
Environmental
SFPP, along with several other respondents, has been involved in one
cleanup ordered by the United States Environmental Protection Agency ("EPA")
related to ground water contamination in the vicinity of SFPP's storage
facilities and truck loading terminals at Sparks, Nevada. The EPA approved the
respondent's remediation plan, which began in 1995. In addition, SFPP is
presently involved in 18 ground water hydrocarbon remediation efforts under
administrative orders issued by the California Regional Water Quality Control
Board and two other state agencies. SFPP is involved in environmental cleanup
efforts at sights not governed by administrative orders. SFPP is also involved
in environmental proceedings related to ground water and soil contamination in
Elmira, California.
The General Partner is a defendant in two proceedings (one by the State of
Illinois and one by the Department of Transportation) relating to alleged
environmental and safety violations for events relating to a fire that occurred
at the Morris storage field in September 1994.
The Partnership has recorded reserves for environmental costs which
reflect the estimated cost of completing all remediation projects presently
known to be required either by government mandate or in the ordinary course of
business. Although no assurance can be given, based upon the information
presently available, it is the opinion of management that the Partnership's
environmental costs, to the extent they exceed recorded liabilities, will not
have a material adverse effect on the Partnership's financial condition,
Page 8 of 26
<PAGE>
liquidity or ability to maintain its quarterly cash distributions at the current
level.
Other
The Partnership and SFPP, in the ordinary course of business, are
defendants in various lawsuits relating to the Partnership's assets. Although no
assurance can be given, the Partnership believes, based on its experience to
date, that the ultimate resolution of such items will not have a material impact
on its financial position or results of operations.
For more detailed information regarding litigation, refer to the
Partnership's Form 10-K, Item 3, Legal Proceedings.
4. Distributions
On August 14, 1998, the Partnership paid a cash distribution for the
quarterly period ended June 30, 1998, of $0.63 per Common Unit. The distribution
was declared on July 15, 1998, payable to unitholders of record as of July 31,
1998.
On October 14, 1998, the Partnership declared a cash distribution for the
quarterly period ended September 30, 1998, of $0.63 per Common Unit. The
distribution will be paid on or before November 13, 1998, to unitholders of
record as of October 31, 1998.
5. Long-Term Debt
In February 1998, the Partnership entered into a $325 million revolving
credit facility (Loan Facility) expiring in February 2005. The Loan Facility has
an outstanding balance of $185 million at September 30, 1998. On June 12, 1998,
the Partnership received $212.30 million from an equity offering of
approximately 6.1 million Common Units, which was primarily used to pay down
long-term debt related to the Loan Facility. The Loan Facility provides for
principal payments equal to the amount by which the outstanding balance is in
excess of the amount available, which reduces quarterly commencing in May 2000.
The Loan Facility also provides, at the Partnership's option, a floating
interest rate equal to either the administrative agent's base rate (but not less
than the Federal Funds Rate plus .5% per year) or LIBOR plus a margin ranging
from .75% to 1.5% per year based on the Partnership's ratio of funded
indebtedness to cash flow, as defined in the Loan Facility. The Loan Facility
contains certain restrictive covenants including, but not limited to, the
incurrence of additional indebtedness, the making of investments, and making
cash distributions other than quarterly distributions from available cash as
provided by the Partnership Agreement. The Partnership has used the proceeds
from the Loan Facility to refinance the existing first mortgage notes, including
a prepayment premium, to fund the cash investments in Shell CO2 Company and
Plantation Pipe Line Company, to refinance the debt associated with the
Hall-Buck acquisition, and to fund the acquisition of the general partner
interest in Santa Fe (Note 2). The prepayment premium and the write-off of the
associated unamortized debt issue costs are reflected as an extraordinary charge
in the accompanying condensed consolidated statement of income.
SFPP's long-term debt primarily consists of its Series E and Series F
first mortgage notes and a bank credit facility. At September 30, 1998, the
outstanding balances under the Series E notes, Series F notes, and bank credit
facility were $32.5 million, $244.0 million, and $78.5 million, respectively.
The annual interest rate on the Series E and Series F notes is 10.25% and
10.70%, respectively, the maturity is December 1998 and December 2004,
respectively, and interest is payable semiannually in June and December. The
Partnership intends to refinance the Series E notes on a long-term basis upon
their maturity and therefore, has included them in long-term debt. The Series F
notes are payable in annual installments of $31.5 million in 1999, $32.5 million
in 2000, $39.5 million in 2001, $42.5 million in 2002, and $37.0 million in
2003. The first mortgage notes may also be prepaid beginning in 1999 in full or
in part at a price equal to par plus, in certain circumstances, a premium. The
first mortgage notes are secured by mortgages on substantially
Page 9 of 26
<PAGE>
all of the properties of SFPP (the Mortgaged Property). The notes contain
certain covenants limiting the amount of additional debt or equity that may be
issued and limiting the amount of cash distributions, investments, and property
dispositions. The bank credit facility provides for borrowings of up to $175
million due in August 2000 and interest, at a short-term Eurodollar rate,
payable quarterly. Borrowings ($78.5 million at September 30, 1998) under this
facility are also secured by the Mortgaged Property and are generally subject to
the same terms and conditions as the first mortgage notes.
On November 6, 1998, the Partnership filed with the SEC a shelf
registration statement with respect to the sale from time to time of up to $600
million in debt and/or equity securities. The Partnership is contemplating the
issuance of up to $300 million in medium-term senior notes. These public debt
securities will be guaranteed on a full, unconditional, and joint and several
basis by all of the Partnership's consolidating subsidiaries, excluding SFPP, so
long as any other debt obligations of the Partnership are guaranteed by such
subsidiaries. SFPP, which was acquired March 6, 1998, will not be guaranteeing
the public debt securities. Kinder Morgan Energy Partners, L.P., the parent
company, has operations from only investments in its subsidiaries. The following
discloses the consolidating financial information for the Partnership:
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(In Thousands Except Per Unit Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor
Partners, LP Subs. Subs. Elims Consolidated
--------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 33,295 $ 68,605 $ - $ 101,900
Costs and Expenses
Cost of products sold - 2,756 - - 2,756
Operations and maintenance - 15,932 9,027 - 24,959
Fuel and power - 1,386 5,151 - 6,537
Depreciation and amortization - 3,427 7,623 - 11,050
General and administrative - 3,110 8,678 - 11,788
Taxes, other than income taxes - 952 2,235 - 3,187
--------------- -------------- -------------- --------------- ---------------
- 27,563 32,714 - 60,277
--------------- -------------- -------------- --------------- ---------------
Operating Income - 5,732 35,891 - 41,623
Other Income (Expense)
Earnings from equity investments 35,114 31,823 322 (61,449) 5,810
Interest, net 2 (1,802) (7,813) - (9,613)
Other, net - (157) (1,932) - (2,089)
Minority Interest - 44 - (491) (447)
--------------- -------------- -------------- --------------- ---------------
Inc Bef. Taxes and Extraord charge 35,116 35,640 26,468 (61,940) 35,284
Income Tax Expense - 168 - - 168
--------------- -------------- -------------- --------------- ---------------
Income Before Extraordinary charge 35,116 35,472 26,468 (61,940) 35,116
Extraordinary charge on early
extinguishment of debt - - - - -
=============== ============== ============== =============== ===============
Net Income $ 35,116 $ 35,472 $ 26,468 $ (61,940) $ 35,116
=============== ============== ============== =============== ===============
</TABLE>
Page 10 of 26
<PAGE>
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In Thousands Except Per Unit Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor
Partners, LP Subs. Subs. Elims Consolidated
--------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 65,821 $ 154,864 $ - $ 220,685
Costs and Expenses
Cost of products sold - 5,482 - - 5,482
Operations and maintenance - 23,502 20,279 - 43,781
Fuel and power - 4,319 11,459 - 15,778
Depreciation and amortization - 8,042 17,398 - 25,440
General and administrative - 7,507 18,439 - 25,946
Taxes, other than income taxes - 2,200 5,973 - 8,173
--------------- -------------- -------------- --------------- ---------------
- 51,052 73,548 - 124,600
--------------- -------------- -------------- --------------- ---------------
Operating Income - 14,769 81,316 - 96,085
Other Income (Expense)
Earnings from equity investments 65,745 74,915 498 (124,741) 16,417
Interest, net 41 (9,312) (18,115) - (27,386)
Other, net - (225) (4,406) - (4,631)
Minority Interest - 43 - (967) (924)
--------------- -------------- -------------- --------------- ---------------
Inc Bef. Taxes and Extraord charge 65,786 80,190 59,293 (125,708) 79,561
Income Tax Expense - 168 - - 168
--------------- -------------- -------------- --------------- ---------------
Income Before Extraordinary charge 65,786 80,022 59,293 (125,708) 79,393
Extraordinary charge on early
extinguishment of debt (4) (13,607) - - (13,611)
=============== ============== ============== =============== ===============
Net Income $ 65,782 $ 66,415 $ 59,293 $ (125,708) $ 65,782
=============== ============== ============== =============== ===============
</TABLE>
Page 11 of 26
<PAGE>
CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor
Partners, LP Subs. Subs. Elims Consolidated
---------------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 48 $ 21,449 $ 26,759 $ - $ 48,256
Accounts receivable (net of
allow. for doubtful accts) 11,718 17,682 34,484 (30,755) 33,129
Inventories
Products - 1,583 789 - 2,372
Materials and supplies - 1,780 790 - 2,570
---------------- ---------------- ---------------- ------------------ ----------------
11,766 42,494 62,822 (30,755) 86,327
---------------- ---------------- ---------------- ------------------ ----------------
Prop., Plant and Equip, at cost - 332,393 1,521,313 - 1,853,706
Less accumulated deprec. - 43,148 19,410 - 62,558
---------------- ---------------- ---------------- ------------------ ----------------
- 289,245 1,501,903 - 1,791,148
---------------- ---------------- ---------------- ------------------ ----------------
Equity Investments 1,370,377 1,278,523 10,164 (2,421,343) 237,721
---------------- ---------------- ---------------- ------------------ ----------------
Long-Term note receivables 185,231 - - (185,231) -
---------------- ---------------- ---------------- ------------------ ----------------
Def. Charges and Other Assets 2,621 13,320 3,267 - 19,208
================ ================ ================ ================== ================
TOTAL ASSETS $ 1,569,995 $ 1,623,582 $ 1,578,156 $ (2,637,329) $ 2,134,404
================ ================ ================ ================== ================
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 5,478 $ 22,242 $ 21,368 $ (30,755) $ 18,333
Accrued liabilities 998 1,694 21,338 - 24,030
Accrued benefits - - 17,638 - 17,638
Accrued taxes - 867 5,304 - 6,171
---------------- ---------------- ---------------- ------------------ ----------------
6,476 24,803 65,648 (30,755) 66,172
---------------- ---------------- ---------------- ------------------ ----------------
Long-Term Liabilities and Def. Credits
Long-term debt 185,000 209,245 355,549 (185,231) 564,563
Other - 5,218 100,711 - 105,929
---------------- ---------------- ---------------- ------------------ ----------------
185,000 214,463 456,260 (185,231) 670,492
---------------- ---------------- ---------------- ------------------ ----------------
Minority Interest - - - 19,221 19,221
---------------- ---------------- ---------------- ------------------ ----------------
Partners' Capital
Limited Partner Interests - 1,370,376 - (1,370,376) -
General Partner Interests - - 1,050,967 (1,050,967) -
Special LP Interests - - 5,281 (5,281) -
Common Units 1,367,345 - - - 1,367,345
Kinder Morgan General Partner 11,174 13,940 - (13,940) 11,174
---------------- ---------------- ---------------- ------------------ ----------------
1,378,519 1,384,316 1,056,248 (2,440,564) 1,378,519
---------------- ---------------- ---------------- ------------------ ----------------
================ ================ ================ ================== ================
TOTAL LIAB. AND CAPITAL $ 1,569,995 $ 1,623,582 $ 1,578,156 $ (2,637,329) $ 2,134,404
================ ================ ================ ================== ================
</TABLE>
Page 12 of 26
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Kinder Morgan Combined Combined
Energy Guarantor Nonguarantor
Partners, LP Subs. Subs. Elims Consolidated
--------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by operating activities
Net income $ 65,782 $ 66,415 $ 59,293 $ (125,708) $ 65,782
Extraordinary charge on early
extinguishment of debt 4 13,607 - - 13,611
Depreciation and amortization - 8,042 17,398 - 25,440
Earnings from equity investments (65,745) (74,915) (498) 124,741 (16,417)
Distributions from equity investments 77,636 69,005 - (134,393) 12,248
Changes in components
of working capital, and Other, net (187,356) 194,442 4,486 967 12,539
El Paso Settlement - - (8,000) - (8,000)
Net Cash Provided by (Used in)
--------------- --------------- -------------- --------------- ---------------
Operating Activities (109,679) 276,596 72,679 (134,393) 105,203
--------------- --------------- -------------- --------------- ---------------
Cash Flows From Investing Activities
Acquisitions of assets (225) (95,980) 21,499 - (74,706)
Adds to prop, plant and equip. for
expansion and maintenance projects - (13,683) (9,846) - (23,529)
Sale of property, plant and equipment - 26 20 - 46
Contributions to equity investments - (135,701) (491) - (136,192)
Net Cash Provided by (Used in)
--------------- --------------- -------------- --------------- ---------------
Investing Activities (225) (245,338) 11,182 - (234,381)
--------------- --------------- -------------- --------------- ---------------
Cash Flows From Financing Activities
(Incr)/Decr in notes receivables (205,262) - - 205,262 -
Issuance of debt 407,000 218,038 89 (210,038) 415,089
Payment of debt (222,000) (157,863) (148) 4,776 (375,235)
Unit registration costs (289) - - - (289)
Cost of refinancing long-term debt (2,864) (13,607) - - (16,471)
Proceeds from issuance of common units 212,303 - - - 212,303
Contributions from GP's Interest - 12,488 - - 12,488
Distributions to partners -
Limited Partner Interests - (77,635) - 77,635 -
General Partner Interests - - (56,758) 56,758 -
Special LP Interests - - (285) 285 -
Common Units (61,624) - - - (61,624)
Kinder Morgan General Partner (17,362) (792) - 792 (17,362)
Minority Interest - - - (1,077) (1,077)
Net Cash Provided by (Used in)
--------------- --------------- -------------- --------------- ---------------
Financing Activities 109,902 (19,371) (57,102) 134,393 167,822
--------------- --------------- -------------- --------------- ---------------
Incr/(Decr) in Cash and Cash Equivs. (2) 11,887 26,759 - 38,644
Cash and Cash Equivs., Beg. of Per. 50 9,562 - - 9,612
=============== =============== ============== =============== ===============
Cash and Cash Equivs., End of Per. $ 48 $ 21,449 $ 26,759 $ - $ 48,256
=============== =============== ============== =============== ===============
</TABLE>
Page 13 of 26
<PAGE>
6. Partners' Capital
At December 31, 1997 and September 30, 1998, Partners' capital consisted
of 13,249,200 and 47,989,690 Common Units, respectively, held by third parties
and 862,000 Common Units held by the General Partner. Together, these 14,111,200
Common Units at December 31, 1997 and 48,851,690 Common Units at September 30,
1998 represent the limited partners' interest and an effective 98% economic
interest in the Partnership, exclusive of the incentive distribution. On June
12, 1998, the Partnership issued 6,070,578 Common Units in a public offering and
on August 13, 1998, the Partnership issued 2,121,033 Common Units to acquire
Hall-Buck Marine, Inc. In connection with the Hall-Buck acquisition, the General
Partner contributed $750,748 to OLP-C.
For the purposes of maintaining partner capital accounts, the Partnership
Agreement specifies that items of income and loss shall be allocated among the
partners in accordance with their respective interests. Normal allocations
according to percentage interests are done only, however, after giving effect to
any priority income allocations in an amount equal to incentive distributions
allocated 100% to the General Partner.
Incentive distributions paid to the General Partner are determined by the
amount quarterly distributions to unitholders exceed certain specified target
levels. The Partnership's cash distribution of $0.63 per Common Unit paid on
August 14, 1998 for the second quarter of 1998 required an incentive
distribution to the General Partner of $9,352,984. The Partnership's cash
distribution of $0.50 per Common Unit for the same period of the prior year
required an incentive distribution to the General Partner of $964,600. The
increased incentive distribution reflects the increased distribution of $0.13
per Common Unit and the issuance of additional Common Units since June 30, 1997.
The Partnership's declared distribution for the third quarter of 1998 of
$0.63 per Common Unit will result in an incentive distribution to the General
Partner of $9,777,501. This compares to the Partnership's cash distribution of
$0.50 per Common Unit and incentive distribution to the General Partner of
$1,045,442 for the third quarter of 1997. The increase in the 1998 third quarter
incentive distribution over the distribution paid for the third quarter of 1997
is a result of the $0.13 increase in the distribution per Common Unit as well as
the higher number of Common Units outstanding on September 30, 1998.
7. Subsequent Events
On October 1, 1998, the Partnership announced that it had acquired ST
Services' ("ST") Imperial, California refined petroleum products terminal for
$1.1 million in cash, effective July 1, 1998. As part of the transaction, ST
will acquire the Partnership's idled Stockton, California terminal.
The Partnership, prior to the acquisition, owned and operated twenty
refined petroleum product tanks at the Imperial Site with a combined capacity of
339,000 barrels together with two truck loading racks. The Imperial Terminal
acquisition will add six refined petroleum product tanks with a combined
capacity of 120,000 barrels and two additional loading racks.
Page 14 of 26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
The Partnership's net income increased to $35.12 million in the third
quarter of 1998 compared to $3.75 million in the third quarter of 1997. The
increase resulted primarily from the inclusion of earnings attributable to the
Pacific Operations (formerly Santa Fe Pacific Pipeline Partners, "SFPP"), which
were acquired March 6, 1998. In addition, the Partnership reported higher
earnings from each of the other two reportable business segments: Mid-Continent
Operations and Bulk Terminals. Higher overall quarterly earnings were partially
offset by higher debt expense and higher general and administrative expenses.
Increases in both categories of expense were likewise related to new
acquisitions and investments made by the Partnership.
The Pacific Operations reported quarterly net income of $42.96 million
from total revenues of $68.61 million. The amounts reflect strong demand for
gasoline, jet fuel, and diesel fuel in the Partnership's West Coast markets.
The Mid-Continent Operations' earnings increased 27% to $7.68 million in
1998 compared to $6.04 million in 1997. Mid-Continent Operations consist of the
North System, the Cypress Pipeline, the Partnership's equity investments in
Shell CO2 Company, Plantation Pipe Line Company, and Mont Belvieu Associates,
and the operating lease agreement at the Painter Plant. Earnings attributable to
CO2 activity increased 63% to $3.76 million in the third quarter of 1998
compared to the same period last year. This was due to higher returns from the
Partnership's equity investment in Shell CO2 Company. Third quarter earnings
attributable to the Partnership's other Mid-Continent equity investments
increased 70% over the amounts reported from the third quarter last year. Third
quarter 1998 pipeline earnings and revenues were down compared to the third
quarter of 1997 due to a 4% decrease in average tariff rates and a slight
decrease (1%) in barrels transferred. Total quarterly revenues for the segment
were $8.49 million in 1998 compared to $12.44 million last year. The decrease
was chiefly due to Central Basin Pipeline being accounted for under the equity
method in 1998.
Earnings from the Bulk Terminals segment for the third quarter of 1998
were $6.24 million compared to $2.83 million in the comparable period in 1997.
The Bulk Terminals segment includes dry bulk terminal activity, the Cora and
Grand Rivers coal terminal facilities, and the energy services provided by the
Red Lightning business unit. The 1998 results include the earnings of the coal
and dry bulk terminal activity acquired from Hall-Buck Marine, Inc. on August
13, 1998. Excluding this acquisition, third quarter income from the
Partnership's coal terminals increased 19% over the same period last year.
Higher overall segment earnings were partially offset by lower operating margins
from coal marketing activity. The segment reported revenues of $24.81 million in
1998 compared to revenues of $4.97 million in the third quarter of 1997.
Excluding the results of the acquired business, segment revenues increased $3.66
million (74%) in the third quarter of 1998 over the same quarter of 1997. This
was primarily due to a 69% increase in coal tons transferred, the inclusion of a
full quarter of operations from the Grand Rivers coal terminal, and higher coal
marketing revenues.
Page 15 of 26
<PAGE>
Operating statistics for the third quarter are as follows:
Third Quarter
1998 1997
----------------
Pacific Operations
Delivery Volumes(MMBbls) 99.4 -
Average Tariff ($/Bbl) $0.63 -
Mid-Continent Operations *
Delivery Volumes (MMBbls) 10.4 10.5
Average Tariff ($/Bbl) $0.67 $0.70
Bulk Terminals
Transport Volumes (MM Tons) 8.8 2.3
Earnings contribution by business segment for the third quarter is as
follows:
Earnings Contribution by Business Segment**
(Unaudited)
(In Thousands)
Third Quarter
1998 1997
----------------
Pacific Operations $42,959 -
Mid-Continent Operations $7,681 $6,041
Bulk Terminals $6,242 $2,826
------------------------------------------------------------------------
* North System and Cypress only.
** Excludes general and administrative expenses, debt costs, and
minority interest. Includes the results of acquired operations from
the date of acquisition.
Cost of products sold increased to $2.76 million in the quarter ended
September 30, 1998 compared to $1.59 million in the same period of 1997. The 74%
increase was the result of increased purchase/sale contracts from coal marketing
activities. Overall higher cost of products sold was partially offset by
excluding costs related to the Central Basin Pipeline, which was transferred to
Shell CO2 Company in March 1998 and subsequently accounted for under the equity
method.
Fuel and power expenses increased to $6.54 million in 1998 compared to
$1.03 million in 1997. Excluding the $5.24 million in expense reported by the
assets acquired in 1998 (Pacific Operations and dry bulk terminals), fuel and
power expense increased 26% in 1998, primarily due to higher average electricity
rates and higher coal volumes transferred by the Bulk Terminals segment.
Operating and maintenance expenses, combined with general and
administrative expenses, were $36.75 million in the third quarter of 1998. This
amount compares to $6.04 million in the third quarter of 1997. The increase was
attributable to higher operating expenses resulting from increased coal activity
and to general and administrative costs associated with new acquisitions made by
the Partnership.
Depreciation and amortization expense increased to $11.05 million in 1998
compared to $2.66 million in 1997. The increase was attributable to the
Page 16 of 26
<PAGE>
expenses associated with acquired assets, which reported depreciation and
amortization expense of $8.58 million in the quarter.
Taxes, other than income taxes, increased $2.43 million in the third
quarter of 1998 compared to the same quarter last year. The increase was
attributable to the inclusion of the Pacific Operations and the dry bulk
terminals, which reported taxes, other than income of $2.24 million and $0.27
million, respectively, in the quarter ended September 30, 1998.
Equity in earnings of partnerships for the quarter ended September 30,
1998 increased $4.08 million over the amount reported in the third quarter of
1997. This resulted primarily from the recognition of $3.63 million of earnings
from the Partnership's equity investment in Shell CO2 Company and $0.62 million
of earnings from the Partnership's equity investment in Plantation Pipe Line
Company.
Net interest expense increased $6.71 million in the third quarter of 1998
compared to last year primarily due to debt assumed by the Partnership as part
the acquisition of the Pacific Operations.
Other net income and expense decreased $2.08 million in 1998 compared to
1997. The decrease was primarily due to expense accruals made for the FERC Rate
Case reserve established for the Pacific Operations.
Minority interest expense increased $0.41 million for the quarter ended
September 30, 1998 when compared to the same quarter of 1997. The increase was
the result of earnings attributable to SFPP (Pacific Operations) as well as to
higher overall Partnership net income.
Income tax expense decreased $0.18 million in the third quarter of 1998
when compared to the third quarter of 1997. This was due to a $0.36 million tax
benefit resulting from the change in ownership of the Mont Belvieu Fractionator
interest to a non-corporate entity, partially offset by $0.23 million in taxes
realized from the equity investment in Plantation Pipe Line Company.
Page 17 of 26
<PAGE>
Nine Months Ended Sept. 30, 1998 Compared With Nine Months Ended Sept. 30, 1997
For the nine months ended September 30, 1998, the Partnership reported
$79.39 million as net income before extraordinary charge. This amount compares
to $10.05 million reported as net income for the same period of 1997.
The Pacific Operations business segment reported earnings of $95.85
million since March 6, 1998. Business segment earnings do not include
Partnership expenses related to general and administrative costs or debt costs.
Excluding the Pacific Operations' segment income (from revenue of $154.86
million), the Partnership reported a 48% increase in earnings from its remaining
business segments: Mid-Continent Operations and Bulk Terminals. Higher overall
earnings in the first nine months of 1998 were partially offset by higher debt
expense and higher general and administrative expenses.
The Mid-Continent Operations reported earnings of $24.97 million for the
first nine months of 1998 compared to $17.32 million for the same period last
year. The increase was mainly due to higher earnings from CO2 activities. Due to
the Partnership's investment in Shell CO2 Company, earnings from CO2 operations
were $11.83 million in 1998 compared to $5.51 million in 1997. In addition, nine
month earnings from the Partnership's investment in the Mont Belvieu
Fractionator increased 70% ($1.51 million) over last year primarily due to
favorable income tax adjustments. The overall increase in segment earnings was
partially offset by a decrease in pipeline income from last year. Warmer weather
resulted in lower transport volumes and lower average tariff rates. Excluding
the results of the Central Basin Pipeline, which were reported under the equity
method in 1998, pipeline revenue and income were $25.09 million and $9.20
million, respectively, for the first nine months of 1998. This compared to
revenues and income of $28.44 million and $10.22 million, respectively, for the
same period last year.
Earnings from the Bulk Terminals segment equaled $12.60 million in the
first nine months of 1998 compared to $8.06 million in the same period of 1997.
Amounts for 1998 include the dry bulk terminal businesses acquired from
Hall-Buck Marine Inc. on August 13, 1998. Excluding these acquired assets, the
segment's 1998 earnings increase was primarily due to the inclusion of the Grand
Rivers coal terminal, which was acquired in September, 1997, as well as
increased earnings from coal marketing activity. Segment revenues, excluding the
acquired assets, were $22.80 million for the first nine months of 1998 versus
$12.95 million for the same period in 1997. This 76% increase reflects the
addition of the Grand Rivers terminal as well as higher operating revenues
realized from marketing activity.
Page 18 of 26
<PAGE>
Operating statistics for the first nine months of 1998 and 1997 are as
follows:
Nine Months Ended September 30,
1998 1997
----------------
Pacific Operations
Delivery Volumes(MMBbls) 228.7 -
Average Tariff ($/Bbl) $0.63 -
Mid-Continent Operations *
Delivery Volumes (MMBbls) 32.7 32.1
Average Tariff ($/Bbl) $0.69 $0.75
Bulk Terminals
Transport Volumes (MM Tons) 14.9 6.2
Earnings contribution by business segment for the first nine months of 1998
and 1997 is as follows:
Earnings Contribution by Business Segment**
(Unaudited)
(In Thousands)
Nine Months Ended September 30,
1998 1997
----------------
Pacific Operations ** $95,847 -
Mid-Continent Operations $24,971 $17,315
Bulk Terminals $12,601 $8,063
------------------------------------------------------------------------
* North System and Cypress only.
** Excludes general and administrative expenses, debt costs, and
minority interest. Includes the results of acquired operations
from the date of acquisition.
Cost of products sold increased 3% to $5.48 million in 1998 compared to
$5.31 million in 1997. Lower purchase/sale contracts reported by the
Mid-Continent segment were offset by higher cost of goods sold incurred by the
Bulk Terminals segment. 1998 amounts exclude the product costs incurred by the
Central Basin Pipeline, which was accounted for under the equity method. Higher
product costs incurred by the Bulk Terminals segment reflect an increase in
purchase contracts relating to coal marketing transactions.
Page 19 of 26
<PAGE>
Excluding the $11.55 million in expense incurred by the Pacific Operations
and dry bulk terminals (the 1998 acquired assets), year-to-date fuel and power
expense increased 13% in 1998 as compared to 1997. The increase was primarily
due to higher average electricity rates and higher coal volumes.
Operating and maintenance expenses, combined with general and
administrative expenses, totaled $69.73 million for the first nine months of
1998. This compares to $17.37 million for the first nine months of 1997. The
1998 increase reflects the addition of the Grand Rivers coal terminal and
overall higher expense from the Coal Operations segment because of higher coal
transfer volumes. The net increase was partially offset by lower operations and
maintenance expenses from the Mid-Continent segment due to lower transportation
volumes on the North System and accounting for the Central Basin Pipeline under
the equity method. Higher general and administrative expenses relate to the
acquisition of the Pacific Operations.
Depreciation and amortization expense increased to $25.44 million for the
first nine months of 1998 compared to $7.80 million for the same period of 1997.
The increase was attributable to the inclusion of the Pacific Operations and the
dry bulk terminals, which reported combined depreciation expense of $18.36
million for the first nine months of 1998.
Excluding the $6.32 million in expense incurred by the acquired assets,
taxes, other than income taxes, decreased 19% in the first nine months of 1998
versus the same period a year ago. Lower tax expenses were reported by the
Mid-Continent Operations as a result of the CO2 joint venture with Shell and
lower property tax valuations on the North System.
Equity in earnings of partnerships increased $12.23 million in the first
nine months of 1998 compared to the first nine months of 1997. This resulted
from the recognition of $10.88 million of earnings from the Partnership's equity
investment in Shell CO2 Company and higher earnings from the Partnership's
equity investments in Plantation Pipe Line Company, the Colton Transmix
Processing Facility, and the Heartland Partnership.
Net interest expense increased $18.21 million in the nine month period
ended September 30, 1998 over the same period of 1997. This was principally due
to debt assumed by the Partnership as part of the acquisition of the Pacific
Operations as well as expenses related to the financing of the Partnership's
investment in Plantation Pipe Line Company and the bulk terminals acquisition.
Other net income and expense decreased $4.64 million in the first nine
months of 1998 compared to last year. The decrease was primarily due to expense
relating to the FERC Rate Case reserve for the Pacific Operations.
Minority interest expense increased $0.82 million in the nine month period
ended September 30, 1998 when compared to the same period of 1997. The increase
was the result of earnings attributable to SFPP (Pacific Operations) as well as
to higher overall Partnership net income.
Income tax expense decreased $.74 million in the first nine months of 1998
when compared to the first nine months of 1997. This resulted primarily from tax
benefits resulting from the change in ownership of the Mont Belvieu Fractionator
interest to a non-corporate entity.
Financial Condition
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
Page 20 of 26
<PAGE>
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 issuance of additional limited partner interests. Interest payments are
expected to be paid from cash flows from operating activities and debt principal
payments will be met by additional borrowings as they become due or by issuance
of additional limited partner interests.
Cash Provided by Operating Activities
Net cash provided by operating activities was $105.20 million for the nine
months ended September 30, 1998, versus $25.44 million in the comparable period
of 1997. The period-to-period increase in cash flow from operations was
primarily a result of higher net earnings and non-cash depreciation and
amortization charges. Higher earnings, chiefly due to the acquisition of the
Pacific Operations, accounted for $55.73 million of the increase. Higher
depreciation, directly attributable to the Pacific Operations and the
acquisition of dry bulk terminal activity, accounted for $17.64 million of the
increase.
Cash Used in Investing Activities
Net cash used in investing activities was $234.38 million for the nine
month period ended September 30, 1998, compared to $28.43 million in the
comparable 1997 period. The $205.95 million increase includes the result of
$74.71 million used for the March 6, 1998 acquisition of the Pacific Operations.
Additionally, contributions to partnership investments of $25 million and $110
million, respectively, were made for the Partnership's investments in Shell CO2
Company and Plantation Pipe Line Company, respectively.
Excluding the effect of assets purchased in the acquisition of the Pacific
Operations, additions to property, plant, and equipment, were $23.53 million in
the first nine months of 1998 compared to $4.38 million for the first nine
months of 1997. These additions of property, plant and equipment include both
expansion and maintenance projects. The 1998 increase was mainly due to property
additions for the Pacific Operations since the date of acquisition and property
additions related to the Bulk Terminals operating segment.
Cash Provided by Financing Activities
Net Cash provided by financing activities amounted to $167.82 million for
the nine month period ended September 30, 1998. The 1998 net cash provided by
financing activities represents a $175.68 million increase over the $7.86
million net cash used in financing activities for the nine month period ended
September 30, 1997. The increase was chiefly the result of $212.30 million in
proceeds received from the June 1998 issuance of approximately 6.1 million
Common Units and a $59.77 million increase in overall debt financing activities.
In addition, $12.49 million was received as a result of General Partner
contributions made to maintain its minority interest in the operating
partnerships. The overall net increase in cash provided by financing activities
was partially offset by an increase of $64.02 million in distributions to
partners and $16.47 million used for refinancing long-term debt.
The Partnership's debt instruments generally require the Partnership to
maintain a reserve for current debt service obligations. The purpose of the
reserve is to lessen differences in the amount of Available Cash from quarter to
quarter due to 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.
Distributions to partners increased to $80.06 million in the nine month
period ended September 30, 1998, compared to $16.04 million in the comparable
1997 period. This increase was attributable to increased distributions paid to
Page 21 of 26
<PAGE>
Common Unitholders of $1.755 per Common Unit in the first nine months of 1998
compared to $1.13 per Common Unit for the comparable period in 1997, the
issuance of additional Common Units since September 30, 1997, and increased
incentive distributions paid to the General Partner.
The Partnership believes that the increase in paid distributions per Unit
resulted from favorable operating results in 1998. On October 14, 1998, the
Partnership declared a distribution of $0.63 per Common Unit for the third
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 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 changes 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 approximately 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 to the General Partner that are in
excess of 2% of the aggregate amount of cash being distributed. The General
Partner's incentive distribution declared by the Partnership for the third
quarter of 1998 was $9,777,501.
Year 2000
The Partnership is currently implementing a five phase program to achieve
Year 2000 compliance. The Partnership is evaluating both information technology
systems ("IT") and non-IT systems such as those that include embedded
technology. The System Inventory Phase is substantially complete. In the System
Inventory Phase, all hardware and software is inventoried and a database of
systems that need further assessment is created. The Partnership anticipates
completing the System Inventory Phase by the end of the fourth quarter of 1998.
The Partnership has begun the Assessment phase. In the Assessment Phase,
specific Year 2000 issues and solutions are identified. The Partnership
anticipates completing the Assessment Phase by the end of the first quarter of
1999. The Partnership has begun the System Testing Phase. In the System Testing
Phase, real world tests on critical systems are run to insure that they will
operate properly after the Year 2000. The Partnership anticipates completing the
System Testing Phase by the end of the second quarter of 1999. The Partnership
has begun the Remediation Phase. In the Remediation Phase, problems that arise
in our Assessment and System Testing Phases are fixed. The Partnership
anticipates completing the Remediation Phase by the end of the third quarter of
1999. The Partnership has not yet begun the Contingency Planning Phase. The
Partnership currently has plans in place for non-Year 2000 related contingencies
and will modify these plans to address any specific contingencies related to the
Year 2000 problem. The Partnership anticipates completing the Contingency
Planning Phase by the end of the fourth quarter of 1999.
Page 22 of 26
<PAGE>
The Partnership does not believe it has material exposure to third
parties' failures to remediate the Year 2000 problem. The Partnership has not
sought and does not intend to seek information from material suppliers,
customers, or service providers to determine the exact extent to which the
Partnership would be effected by third parties' failures to remediate the Year
2000 problem. While the Partnership has budgeted funds to address the Year 2000
problem, the Partnership does not believe that any material expenditures to
address the Year 2000 problem as it relates to existing systems will be
required. However, uncertainty exists concerning the potential costs and effects
associated with any Year 2000 compliance. Therefore, the Partnership cannot give
any assurances that unexpected Year 2000 compliance problems of either the
Partnership or its vendors, customers, and service providers would not
materially and adversely affect the Partnership's business, financial condition
or operating results.
Information Regarding Forward Looking Statements
This filing includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are identified as any
statement that does not relate strictly to historical or current facts. They use
words such as plans, expects, anticipates, estimates, will and other words and
phrases of similar meaning. Although the Partnership believes that its
expectations are based on reasonable assumptions, it can give no assurance that
its goals will be achieved. Such forward looking statements involve known and
unknown risks and uncertainties. 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:
o price trends and overall demand for NGLs, refined petroleum products,
CO2, coal, and other bulk materials in the United States (which may be
affected by general levels of economic activity, weather, alternative
energy sources, conservation and technological advances);
o changes in the Partnership's tariff rates set by FERC and the
California Public Utilities Commission;
o the Partnership's ability to integrate recent acquisitions and other
future acquisitions into its existing operations;
o with respect to the bulk terminals, the ability of railroads to
deliver bulk products to the terminals on a timely basis;
o the Partnership's ability to successfully identify and close strategic
acquisitions and realize cost savings;
o the discontinuation of operations at major end-users of the products
transported by its liquids pipelines (such as refineries,
petrochemical plants, or military bases) or handled by its bulk
terminals; and
o the condition of the capital markets in the United States.
See Items 1 and 2 "Business and Properties - Risk Factors" of the Annual
Report filed on Form 10-K with the Securities and Exchange Commission on March
31, 1998 for a more detailed description of these and other factors that may
affect the forward looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
Page 23 of 26
<PAGE>
PART II. OTHER INFORMATION
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
See Part I, Item 1, Note 3 to Consolidated Financial Statements entitled
"Litigation" which is incorporated herein by reference.
ITEM 2. Changes in Securities
The Partnership issued 2,121,033 Common Units in connection with the
acquisition of Hall-Buck Marine, Inc., a Louisiana corporation, on August
13, 1998. The form of the transaction was an exchange of all of the
outstanding common stock of Hall-Buck for a combination of accrued
indebtedness of $23 million and the 2,121,033 Common Units.
The Common Units were issued and sold without registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the
Securities Act.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
*3.1 Second Amended and Restated Agreement of Limited Partnership
dated as of February 14, 1997 (Exhibit 3.1 to Amendment No. 1 to
the Partnership's Registration Statement on Form S-4 (File No.
333-44519)) Filed February 4, 1998 ("1998 S-4")
*4.1 Credit Agreement dated February 17, 1998 among Kinder Morgan
Energy Partners, L.P., Kinder Morgan Operating L.P. "B", the
Subsidiary Guarantors, the Lenders, Goldman Sachs Credit
Partners, L.P. and First Union National Bank (Exhibit 4.9 to the
Partnership's 1997 Form 10-K)
*4.2 Pledge Agreement dated February 17, 1998 among Kinder Morgan
Energy Partners, L.P., the Lenders, Goldman Sachs Credit
Partners, L.P. and First Union National Bank (Exhibit 4.10 to
1997 Form 10-K)
*4.3 Pledge Agreement dated February 17, 1998 among Kinder Morgan
Operating L.P. "A", the Lenders, Goldman Sachs Credit Partners,
L.P. and First Union National Bank (Exhibit 4.11 to 1997 Form
10-K)
*4.4 Pledge Agreement dated February 17, 1998 among Kinder Morgan
Operating L.P. "D" the Lenders, Goldman Sachs Credit Partners,
L.P. and First Union National Bank (Exhibit 4.12 to 1997 Form
10-K)
*4.5 Pledge Agreement dated February 17,1998 among Kinder Morgan
Natural Gas Liquids Corporation, the Lenders, Goldman Sachs
Credit
Page 24 of 26
<PAGE>
Partners, L.P. and First Union National Bank (Exhibit 4.13 to
1997 Form 10-K)
*4.6 First Mortgage Note Agreement dated December 8, 1988 among
Southern Pacific Pipe Lines Partnership, L.P. (now known as
SFPP,L.P.) and the Purchasers listed on Schedule A (a conformed
composite of 54 separate agreements, identical except for
signatures) (Exhibit 4.2 to Form 10-K for Santa Fe Pacific
Pipelines, L.P. for 1988 ("Santa Fe 1988 Form 10-K")
*4.6.1 Consent and Amendment dated as of December 19, 1997 between the
noteholders and SFPP,L.P. (a conformed composite of the separate
agreements with each noteholder, identical except for
signatures)(Exhibit 4.14.1 to 1997 Form 10-K)
*4.7 Deed of Trust, Security Agreement and Fixture Filing, dated
December 8, 1988, between SFPP, L.P., its general partner,
Chicago Title Insurance Company and Security Pacific National
Bank (Exhibit 4.3 to Santa Fe 1988 Form 10-K)
*4.8 Trust Agreement dated December 19, 1988, between SFPP., its
general partner and Security Pacific National Bank (Exhibit 4.4
to Santa Fe 1988 Form 10-K)
*4.9 Amended and Restated Credit Agreement dated as of August 11, 1997
among SFPP, L.P., Bank of America National Trust and Savings
Association, as agent, Texas Commerce Bank National Association,
as syndication agent, Bank of Montreal, as documentation agent,
BancAmerica Securities, Inc., as arranger, and the lenders that
are signatories thereto. As the maximum allowable borrowings
under this facility do not exceed 10% of the Registrant's total
assets, this instrument is not filed as an exhibit to this
Report, however, the Registrant hereby agrees to furnish a copy
of such instrument to the Securities and Exchange Commission upon
request.
27 Financial Data Schedule as of and for the nine months ended
September 30, 1998
*Incorporated by reference.
(b) Reports on Form 8-K.
None.
Page 25 of 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: Kinder Morgan G.P., Inc.
as General Partner
Date: November 11, 1998 By: /s/ David G. Dehaemers, Jr.
------------------------------
David G. Dehaemers, Jr.
Vice President, Treasurer and
Chief Financial Officer
Page 26 of 26
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