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 March 31, 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 40,727,126 Common Units outstanding at May 8, 1998.
Page 1 of 20
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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 Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 4
Consolidated Statement of Cash Flows - Three
Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Page 2 of 20
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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)
Three Months Ended
March 31,
1998 1997
----------------------
Revenues $ 36,741 $ 19,132
Costs and
Expenses
Cost of products sold
853 2,161
Operations and
maintenance 6,360 3,817
Fuel and
power 3,145 1,705
Depreciation and
amortization 4,719 2,555
General and
administrative 5,094 2,045
Taxes, other than
income taxes 1,479 922
---------- ----------
21,650 13,205
---------- ----------
Operating
Income 15,091 5,927
Other Income
(Expense)
Equity in earnings of
partnerships 5,282 839
Interest
expense (5,903) (3,283)
Interest income and
Other, net (444) 155
Minority
Interest (62) (35)
---------- ----------
Income Before IncomeTaxes
and Extraordinary charge 13,964 3,603
Income Tax
Expense - 175
Income Before Extraordinary
charge 13,964 3,428
Extraordinary charge on
early extinguishment of debt (13,611) -
========== ==========
Net Income $ 353 $ 4,428
========== ==========
Calculation of Limited Partners' Interest:
Net Income before $ 13,964 $ 3,428
extraordinary charge
Less: General
Partner's Interest in (2,865) (59)
Net Income
---------- ----------
Limited Partners' Net Income
before extraordinary charge 11,099 3,369
Less : Extraordinary charge
on early extinguishment of (13,611) -
debt
---------- ----------
Limited Partners' Net Income (Loss) $ (2,512) $ 3,369
========== ==========
Net Income per Unit before extraordinary charge $ .052 $ 0.26
========== ==========
Net Income (Loss) per Unit $ (0.12) $ 0.26
========== ==========
Number of Units used in Computation 21,505 13,020
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
Page 3 of 20
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PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31, December 31,
1998 1997
-------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 57,306 $ 9,612
Accounts receivable (net of allowance for 39,441 8,569
doubtful accounts of $5,400 for 1998)
Inventories
Products 2,983 1,901
Materials 2,420 1,710
and supplies
---------- ----------
102,150 21,792
---------- ----------
Property, Plant and Equipment, at cost 1,705,095 290,620
Less accumulated depreciation 40,881 45,653
---------- ----------
1,664,214 244,967
---------- ----------
Investments in Partnerships 120,199 31,711
---------- ----------
Deferred Charges and Other Assets 24,614 14,436
========== ==========
TOTAL ASSETS $ 1,911,177 $ 312,906
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable 17,139 4,930
Accrued liabilities 38,224 3,585
Accrued benefits 17,668 -
Accrued taxes 4,892 2,861
---------- ----------
77,923 11,376
---------- ----------
Long-Term Liabilities and Deferred Credits
Long-term debt 636,652 146,824
Other 96,732 2,997
---------- ----------
733,384 149,821
---------- ----------
Minority Interest 16,234 1,485
---------- ----------
Partners' Capital
Common Units 1,079,370 146,840
General Partner 4,266 3,384
---------- ----------
1,083,636 150,224
---------- ----------
TOTAL LIABILITIES AND PARTNES' CAPITAL $ 1,911,177 $ 312,906
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 20
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PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------------------
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by operating activities
Net income $ 353 $ 3,428
Extraordinary charge on
early extinguishment of debt 13,611 -
Depreciation and amortization 4,719 2,555
Equity in earnings of
partnerships (5,282) (839)
Distributions from investments in partnerships 1,298 1,545
Changes in components of working capital 5,600 2,219
Other, net 1,164 (737)
---------- ---------
Net Cash Provided by Operating Activities 21,463 8,171
---------- ---------
Cash Flows From Investing Activities
Acquisitions of assets (61,784) -
Additions to property, plant and equipment (4,359) (713)
Sale of property, plant and equipment 19 -
Contributions to partnership investments (25,213) (1,293)
---------- ---------
Net Cash Used in Investing Activities (91,337) (2,006)
---------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 265,020 14,600
Payment of long-term debt (130,800) (14,597)
Cost of refinancing
long-term debt (16,257) -
Increase in short-term debt - 139
Contributions from General Partner's
Minority Interest 9,624 -
Distributions to partners
Common Units (7,937) (4,101)
General Partner (1,981) (67)
Minority interest (101) (42)
---------- ---------
Net Cash Provided by (Used In) Financing Activities 117,568 (4,068)
---------- ---------
Increase in Cash and Cash
Equivalents 47,694 2,097
Cash and Cash Equivalents,
Beginning of Period 9,612 14,299
========== =========
Cash and Cash Equivalents, End of Period $ 57,306 $ 16,396
========== =========
Noncash Investing and Financing Activities
Contribution of net property, plant,
and equipment to partnership investment $ 56,563
Pacific Operations assets acquired
by the issuance of Common Units $ 943,202
Pacific Operations assets acquired
by the assumption of liabilities $ 512,706
The accompanying notes are an integral part of
these consolidated financial statements.
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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") without
audit 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. However, the Partnership believes 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 period to conform with the current presentation.
2. Acquisitions
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 "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 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 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.
Page 6 of 20
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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). Shell contributed its
approximate 45% interest in the McElmo Dome CO2 reserves, and its 11% interest
in the Bravo Dome CO2 reserve, its indirect 50% interest in the Cortez pipeline,
and its indirect 13% interest in the Bravo pipeline and other related assets in
exchange for an 80% interest in Shell CO2 Company. The Cortez and Bravo
pipelines connect CO2 reserves in the McElmo and Bravo Domes principally to
Denver City, Texas, where they interconnect with the Central Basin Pipeline,
among others.
Unaudited Proforma Combined Summarized Income Statement information for the
three months ended March 31, 1998 and March 31, 1997 has been prepared assuming
the acquisition of Santa Fe had been consummated on January 1, 1998 and January
1, 1997, respectively, and is presented below in thousands, except for per Unit
amounts.
Pro Forma
Three Months Ended
March 31,
1998 1997
Income Statement ------- -------
Revenues $75,988 $75,222
Operating Income $30,231 $30,719
Net Income before extraordinary charge $23,105 $12,855
Net Income $ 9,494 $12,855
Net Income Per Unit before extraordinary charge $0.43 $.32
Net Income per Unit $0.10 $.32
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 $30 million in reserves that have been recorded as of
December 31, 1997. The Partnership also estimates that the Initial Decision, in
its current form, and if also applied to the Sepulveda Line rates would reduce
prospective revenues by approximately $8 million annually. Under the rulings in
the Initial Decision, reparations and interest would continue to accrue at
approximately $8 million per annum until new rates become effective
prospectively.
Page 7 of 20
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California Public Utilities Commission Proceeding
A complaint was filed on April 7, 1997 with the California Public
Utilities Commission challenging rates charged by SFPP for intrastate
transportation of refined petroleum products. SFPP filed responsive testimony
defending the justness and reasonableness of its rates. The rebuttal testimony,
hearings before the Administrative Law Judge, and oral arguments have been
completed as of March 1998. A decision from the Commission is expected in the
third quarter of 1998.
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.
Although no assurance can be given, the Partnership believes that the
ultimate resolution of these matters will not have a material effect on its
financial position or results of operations.
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.
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, liquidity or ability to maintain its quarterly cash
distributons at the current level.
Other
Under a settlement agreement of previous litigation matters between SFPP
and El Paso Refinery L.P. ("El Paso")and its general partner, SFPP is obligated
to pay a final payment of $8 million. Such amount is included in accrued
liabilities as of March 31, 1998.
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.
Page 8 of 20
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4. Distributions
On February 17, 1998, the Partnership paid a cash distribution for the
quarterly period ended December 31, 1997, of $0.5625 per Unit. The distribution
was declared on January 14, 1998, payable to unitholders of record as of January
31, 1998.
On April 21, 1998, the Partnership declared a cash distribution for the
quarterly period ended March 31, 1998, of $0.5625 per Unit. The distribution
will be paid on May 15, 1998, to unitholders of record as of April 30, 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 $269 million at March 31, 1998 and 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, making investments and making cash
distributions other than quarterly distributions from available cash as provided
by the Partnership Agreement. The Partnership used the proceeds from the Loan
Facility to refinance the existing first mortgage notes, including a prepayment
premium, to fund the cash investment in Shell CO2 (note 2) 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 consists of its Series E and Series F first mortgage
notes and a bank credit facility. At March 31, 1998, the outstanding balance
under the Series E notes, Series F notes, and bank credit facility was $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 and $42.5 million in 2002. 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 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 March 31, 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.
Page 9 of 20
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6. Partners' Capital
At December 31, 1997 and March 31, 1998, Partners' capital consisted of
13,249,200 and 39,865,126 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 40,727,126 Common Units at March 31, 1998
represent the limited partners' interest and an effective 98% economic interest
in the Partnership exclusive of the incentive distribution.
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 $.5625 per Unit paid on February
17, 1998 for the 1997 fourth quarter required an incentive distribution to the
General Partner of $1,900,667. The Partnership's cash distribution of $.315 per
Unit for the same period of the prior year required an incentive distribution to
the General Partner of $25,143. The increased incentive distribution reflects
the increased distribution of $.2475 per Unit and the issuance of an additional
1,091,200 units in the fourth quarter of 1997.
The Partnership's declared distribution for the first quarter of 1998 of
$.5625 per Unit will result in an incentive distribution to the General Partner
of $5,485,621. The increase in the incentive distribution over the fourth
quarter of 1997 is due to the additional 26,615,926 Units issued on March 6,
1998 as part of the Santa Fe acquisition.
Page 10 of 20
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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 results
primarily from earnings attributable to the Pacific Operations, (formerly Santa
Fe Pacific Pipeline), which were acquired March 6, 1998. In addition, earnings
increased significantly in all the other business segments which include the
Mid-Continent Operations, Coal Operations, and Fractionation & Processing.
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, Cypress Pipeline, and CO2 activities. Earnings increased
primarily as a result of the CO2 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 the Coal Operations 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 Fractionation and Processing business segment 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 Operations totaled $5.84
million, up 136%. These increased revenues were partially offset by a decrease
of $5.40 million in the Mid-Continent Operations. This decrease was primarily a
result of lower product sales and lower petrochemical and refinery volumes due
to warmer than normal weather. Revenues from the Central Basin Pipeline are not
recorded by the Partnership due to its contribution of this pipeline to Shell
CO2 Company. The Partnership recorded its share of equity earnings in Shell CO2
Company as Other Income which is included in the Mid-Continent Operations
earnings.
Page 11 of 20
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Operating statistics for the first quarter are as follows:
First Quarter
1998 1997
Pacific Operations **
Delivery Volumes (MMBbls) 29.9 -
Average Tariff ($/Bbl) $.66 -
Mid-Continent Operations
Delivery Volumes (MMBbls) 11.8 12.0
Average Tariff ($/Bbl) $.78 $.86
Coal Operations
Transport Volumes (MM Tons) 3.0 1.7
Average Revenues ($/Ton) $1.28 $1.41
Earnings contribution by business segment for the first quarter is as
follows:
Earnings Contribution by Business Segment*
(Unaudited)
(In Thousands)
First Quarter
1998 1997
Pacific Operations ** $12,865 -
Mid-Continent Operations $8,128 $6,508
Coal Operations $2,450 $1,657
Fractionation and Processing $1,281 $290
- ------------------------------------------------------------------------
* Excludes general and administrative expenses, debt costs and minority
interest.
** Pacific Operations were acquired on March 6, 1998.
Page 12 of 20
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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 cost of products
for the Coal Operations 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 was $4.85 million and $1.27 million, respectively.
Higher operating and general and administrative expenses were partially offset
by lower expenses from the Fractionation and Processing Operations due to the
assignment of the Mobil agreement and the leasing of the Painter facility.
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 CO2
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 CO2 Company and an 80%
increase in equity in earnings from the 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.
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 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.
Cash Used in 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.
Page 13 of 20
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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.
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.
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 CO2 Company,
partially offset by a decrease in capital funding for the Mont Belvieu
Fractionator.
Cash Provided from 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 CO2 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.
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 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.
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 Common Unitholders of $.5625 per Common Unit in
1998 compared to $.315 per Common Unit in 1997, the issuance of 26.6 million
additional Common Units 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 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. 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.
Page 14 of 20
<PAGE>
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 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 $.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 $.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 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 first quarter of 1998 was
$5,485,621.
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:
* price trends and overall demand for NGLs, refined petroleum products,
CO2, and coal in the United States (which may be affected by general
levels of economic activity, weather, alternative energy sources,
conservation and technological advances);
* changes in the Partnership's tariff rates set by FERC and the
California Public Utilities Commission:
* the Partnership's ability to integrate the operations of Santa Fe (and
other future acquisitions) into its existing operations;
* with respect to the 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;
Page 15 of 20
<PAGE>
* the discontinuation of operations at major end-users of the products
transported by the Liquids Pipelines (such as refineries,
petrochemical plants, or military bases); and
* 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 16 of 20
<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 4. Submission of Matters to a Vote of Security Holders
On March 6, 1998, the Partnership held a Special Meeting of Common Unit
Holders to consider and vote upon the Partnership's issuance of Common
Units pursuant to a Purchase Agreement, dated as of October 18, 1998, among
the Partnership, the General Partner, Santa Fe Pacific Pipeline Partners,
L.P., the SF General Partner and SFP Pipeline Holdings, Inc. The Common
Unit Holders voted in favor of the proposal at the March 6, 1998 Special
Meeting with 9,754,579 Common Units voting in favor of the proposal, 47,846
Common Units against the proposal, and 4,308,775 Common Units abstaining.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
* 2.1 Master Agreement dated as of January 1, 1998 among Shell Western E&P
Inc., Shell Western Pipelines Inc., Shell Cortez Pipeline Company,
Shell C02, LLC, Shell C02 General LLC, Shell Land & Energy Company,
Kinder Morgan Operating L.P. "A" and Kinder Morgan C02 LLC (Exhibit
2.2 to the Partnership's Current Report on Form 8-K dated March 5,
1998 (the "March 5 1998 Form 8-K"))
* 2.2 First Amended and Restated Agreement of Limited Partnership dated as
of March 5, 1998, by and between Shell C02 General LLC, Kinder Morgan
C02, LLC and Shell C02 LLC. (Exhibit 2.3 to the March 5, 1998 Form
8-K)
* 2.3 Assumption and Indemnification Agreement dated as of January 1, 1998
among Shell C02 General LLC, Shell Western E&P Inc., Shell Western
Pipelines Inc., Shell Cortez Pipeline Company, Shell Land & Energy
Company, Kinder Morgan C02 LLC, Kinder Morgan Operating L.P. "A" and
Shell C02 Company, Ltd. (Exhibit 2.4 to the March 5 1998 Form 8-K)
* 2.4 Guaranty and Indemnification Agreement dated as of January 1, 1998
between Shell Western E&P Inc. and Kinder Morgan Energy Partners, L.P.
(Exhibit 2.5 to the March 5, 1998 Form 8-K)
Page 17 of 20
<PAGE>
* 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 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 10K)
* 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 10K)
* 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
Page 18 of 20
<PAGE>
Report, however, the Registrant hereby agrees to furnish a copy of
such instrument to the Securities and Exchange Commission upon
request.
* 10.1 Kinder Morgan Energy Partners, L.P. Common Unit Option Plan (Exhibit
10.6 to 1997 Form 10-K)
27 Financial Data Schedule as of and for the three months ended March
31, 1998
* Incorporated by reference.
(b) Reports on Form 8-K.
Current Report dated March 5, 1998, on Form 8-K, as amended. The
acquisition of SFPP,L.P., the operating partnership of Santa Fe Pacific
Pipeline Partners, L.P. and the formation of Shell CO2 Company were
disclosed in Item 2 of this report. The purchase agreement for the Santa
Fe acquisition and the principal documents related to the formation of
Shell CO2 Company were filed as Exhibits pursuant to Item 7. The financial
statements of Santa Fe Pacific Pipeline Partners, L.P., as of December 31,
1996 and 1997 and for each of the three years in the period ended December
31, 1997, were included under Item 7. Also disclosed in Item 7 were the
pro forma financial statements of the Registrant giving effect to the
acquisition of Santa Fe Pacific Pipeline Partners, L.P. and the formation
of Shell CO2 Company as of December 31, 1997 and for the year ended
December 31, 1997.
Page 19 of 20
<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: May 15, 1998 By: /s/ David G. Dehaemers, Jr.
-----------------------------
David G. Dehaemers, Jr.
Vice President, Treasurer and
Chief Financial Officer
Page 20 of 20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S><C>
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 57,306
<SECURITIES> 0
<RECEIVABLES> 44,841
<ALLOWANCES> 5,400
<INVENTORY> 5,403
<CURRENT-ASSETS> 102,150
<PP&E> 1,705,035
<DEPRECIATION> 40,881
<TOTAL-ASSETS> 1,911,177
<CURRENT-LIABILITIES> 77,923
<BONDS> 636,652
0
0
<COMMON> 0
<OTHER-SE> 1,083,636
<TOTAL-LIABILITY-AND-EQUITY> 1,911,177
<SALES> 36,741
<TOTAL-REVENUES> 36,741
<CGS> 853
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,776)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,903
<INCOME-PRETAX> 13,964
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,964
<DISCONTINUED> 0
<EXTRAORDINARY> (13,611)
<CHANGES> 0
<NET-INCOME> 353
<EPS-PRIMARY> (0.12) <F1>
<EPS-DILUTED> (0.12) <F1>
<FN>
<F1> A 2-for-1 stock split occurred effective as of October 1, 1997. Prior
Financial Data Schedules have not been restated to reflect this
stock split.
</FN>
</TABLE>
