<PAGE> 1
Filed Pursuant to Rule No. 424(b)(2)
Registration No. 333-66931
Prospectus Supplement to Prospectus dated January 26, 1999.
4,500,000 Common Units
Representing Limited Partner Interests
[KINDER MORGAN ENERGY PARTNERS, L.P. LOGO]
----------------------
The units are listed on the New York Stock Exchange under the symbol "KMP."
The last reported sale price of the units on the New York Stock Exchange on
March 28, 2000 was $39.75 per unit.
See "Risk Factors" beginning on page 2 of the accompanying prospectus to
read about factors you should consider before buying units.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Unit Total
-------- -----
<S> <C> <C>
Initial price to public..................................... $ 39.75 $178,875,000
Underwriting discount....................................... $ 1.69 $ 7,605,000
Proceeds, before expenses, to Kinder Morgan Energy Partners,
L.P....................................................... $ 38.06 $171,270,000
</TABLE>
----------------------
To the extent that the underwriters sell more than 4,500,000 units, the
underwriters have the option to purchase up to an additional 675,000 units from
Kinder Morgan Energy Partners, L.P. at the initial price to public less the
underwriting discount.
----------------------
The underwriters expect to deliver the units against payment in New York,
New York on April 3, 2000.
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
----------------------
Prospectus Supplement dated March 28, 2000.
<PAGE> 2
[BAR GRAPH OF DISTRIBUTIONS PER UNIT, 1996 THROUGH 1999]
[BAR GRAPH OF NET INCOME 1996 THROUGH 1999]
[MAP OF KINDER MORGAN ENERGY PARTNERS, L.P. PROPERTIES]
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information appearing in other sections of this
prospectus supplement or the accompanying prospectus. It may not contain all of
the information that is important to you. This prospectus supplement and the
accompanying prospectus include or incorporate by reference information about
this offering, our business and our financial and operating data. Before making
an investment decision, we encourage you to read the entire prospectus
supplement and the accompanying prospectus carefully, including the "Risk
Factors" section and the financial statements and the footnotes to those
statements which are incorporated by reference.
KINDER MORGAN ENERGY PARTNERS, L.P.
We are a Delaware limited partnership formed in August 1992. We are the
largest publicly-traded pipeline master limited partnership in the United States
and have the second largest products pipeline system based on volumes delivered.
Our operations are grouped into four reportable business segments. These
segments and their major assets are as follows:
- Pacific operations, consisting of:
- approximately 3,300 miles of pipelines which transport over one
million barrels per day of refined petroleum products to some of the
faster growing population centers in the United States, including
Los Angeles, San Diego and Orange County, California; the San
Francisco Bay area; Las Vegas, Nevada and Tucson and Phoenix,
Arizona;
- 13 truck-loading terminals with an aggregate usable tankage capacity
of approximately 8.2 million barrels; and
- a 50% interest in the Colton Processing Facility, a petroleum
pipeline transmix processing facility located in Colton, California;
- Mid-Continent operations, consisting of products pipelines and joint
venture projects including:
- the North System, a 1,600 mile pipeline that transports natural gas
liquids and refined petroleum products between south central Kansas
and the Chicago area and various intermediate points, including
eight terminals;
- a 51% interest in Plantation Pipe Line Company, which owns and
operates a 3,100 mile refined petroleum products pipeline system
throughout the southeastern United States;
- a 20% limited partner interest in Shell CO(2) Company, Ltd. which
transports, markets and produces carbon dioxide for use in enhanced
oil recovery operations in the continental United States; on March
9, 2000, we announced a definitive agreement to acquire the
remaining 80% interest in Shell CO(2) Company;
- the Cypress Pipeline, which transports natural gas liquids from Mont
Belvieu, Texas to a major petrochemical producer in Lake Charles,
Louisiana;
- transmix operations, which include the processing and marketing of
petroleum pipeline transmix along the Atlantic Coast via two
transmix processing plants;
- a 50% interest in the Heartland Pipeline Company, which ships
refined petroleum products in the Midwest; and
- the Painter Gas Processing Plant, a natural gas processing plant,
fractionator and natural gas liquids terminal with truck and rail
loading facilities; the Painter Plant is
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<PAGE> 4
leased to BP Amoco under a long-term arrangement;
- Natural gas operations, consisting of assets acquired in late 1999,
including:
- Kinder Morgan Interstate Gas Transmission LLC, which owns a 6,700
mile natural gas pipeline, including the Pony Express pipeline
facilities, that extends from northwestern Wyoming east into
Nebraska and Missouri and south through Colorado and Kansas;
- a 66 2/3% interest in Trailblazer Pipeline Company, which transmits
natural gas from Colorado through southeastern Wyoming to Beatrice,
Nebraska; and
- a 49% interest in Red Cedar Gathering Company, which gathers natural
gas in La Plata County, Colorado and owns and operates a carbon
dioxide processing plant;
and
- Bulk terminals, consisting of over 20 owned or operated bulk terminal
facilities, including:
- coal terminals located in Cora, Illinois; Paducah, Kentucky; Newport
News, Virginia; Mount Vernon, Indiana; and Los Angeles, California;
- petroleum coke terminals located on the lower Mississippi River and
along the west coast of the United States; and
- other bulk terminals handling alumina, cement, salt, soda ash,
fertilizer and other dry bulk materials.
BUSINESS STRATEGY
Management's objective is to operate Kinder Morgan Energy Partners as a
low-cost, growth-oriented master limited partnership by:
- reducing operating expenses;
- better utilizing and expanding our asset base; and
- making selective, strategic acquisitions that will increase unitholder
distributions. Management has announced that we intend to spend
approximately $1 billion for acquisitions annually.
Kinder Morgan Energy Partners primarily transports and/or handles products
for a fee and largely is not engaged in the purchase and resale of commodity
products. As a result, Kinder Morgan Energy Partners does not face significant
risks relating directly to shifts in commodity prices.
Pacific Operations. We plan to continue to expand our presence in the
rapidly growing refined products market in the western United States through
incremental expansions of the Pacific operations and through acquisitions that
increase unitholder distributions. In May 1999, we completed an expansion of our
southern California products pipeline system. The expansion involved
construction of 13 miles of 16-inch diameter pipeline from Carson, California to
Norwalk, California, and increased the capacity of the West Line Southern
California products pipeline system from 340,000 barrels per day to 520,000
barrels per day, an increase of over 50%.
Mid-Continent Operations. Because the North system serves a relatively
mature market, we intend to focus on increasing throughput within the system by
remaining a reliable, cost-effective provider of transportation services and by
continuing to increase the range of products transported and services offered.
Management believes favorable demographics in the southeastern United States
will serve as a platform for increased use and expansion of Plantation's
pipeline system, which serves major metropolitan areas including Birmingham,
Alabama; Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C.
area.
S-2
<PAGE> 5
For the Shell CO(2) Company, our Permian Basin strategy is to offer
customers "one-stop shopping" for carbon dioxide supply, transportation and
technical support service. Outside the Permian Basin, Shell CO(2) Company
intends to compete aggressively for new supply and transportation projects.
Management believes these projects will arise as other U.S. oil producing basins
mature and make the transition from primary production to enhanced recovery
methods.
The acquisition of the transmix operations, in September 1999, strengthened
our existing transmix processing business and added fee-based services related
to our core refined products pipeline business.
Natural Gas Operations. Kinder Morgan Interstate Gas Transmission also
serves a stable, mature market, and thus we are focused on reducing costs and
securing throughput for this pipeline. New measurement systems and other
improvements will aid in managing expenses. We will explore expansion and
storage opportunities to increase utilization levels. Shippers have expressed
interest in expanding the Trailblazer Pipeline Company pipeline, which we will
pursue if we can obtain commitments for the additional capacity. Red Cedar
Gathering Company, a partnership with the Southern Ute Indian Tribe, is pursuing
gathering and processing opportunities on tribal land.
Bulk Terminals. We are dedicated to growing our bulk terminal business and
have a target of investing $100 to $200 million annually in our bulk terminals
business. We will make investments to expand and improve existing facilities,
particularly those facilities that handle low-sulfur western coal. We will also
consider making selective acquisitions that increase unitholder distributions.
Additionally, we plan to design, construct and operate new facilities for
current and prospective customers. Management believes we can use newly acquired
or developed facilities to leverage our operational expertise and customer
relationships.
The address of our principal executive offices is 1301 McKinney Street,
Suite 3450, Houston, Texas 77010 and our telephone number at this address is
(713) 844-9500. Our limited partner interests trade under the New York Stock
Exchange symbol "KMP."
RECENT DEVELOPMENTS
SHELL CO(2) COMPANY
On March 9, 2000, we announced we had reached a definitive agreement to
increase our interest in Shell CO(2) Company to 100% by acquiring a 78% limited
partner interest and a 2% general partner interest from affiliates of Shell
Exploration & Production Company. We currently own a 20% limited partner
interest in Shell CO(2) Company. The transaction price is $185.5 million, and
closing is expected to occur in April 2000. After the transaction closes, we
will change the name of Shell CO(2) Company to Kinder Morgan CO(2) Company.
Shell CO(2) Company is the largest transporter and marketer of carbon dioxide in
the United States, currently delivering approximately 400 million cubic feet per
day. Carbon dioxide flooding is a proven technology for increasing the
production of oil reserves.
MILWAUKEE AND DAKOTA BULK TERMINALS
On February 7, 2000, we announced our acquisition of all of the shares of
the capital stock of Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal,
Inc., both Wisconsin corporations, for 574,172 units. The effective date of the
acquisitions was January 1, 2000, and going forward from that date, we will
include the activities of these two terminals as part of our bulk terminals
business segment.
TRANSFERRED ASSETS
Effective December 31, 1999, Kinder Morgan, Inc. transferred over $700
million of assets to us for $330 million and the issuance of 9.81 million of our
units representing limited partner interests. We financed a portion of the $330
million through Kinder Morgan, Inc. and we plan to repay that amount by the end
of the first quarter of
S-3
<PAGE> 6
2000. Assets included in the transfer were Kinder Morgan Interstate Gas
Transmission LLC, formerly K N Interstate Gas Transmission Co., an additional
33 1/3% interest in Trailblazer Pipeline Company and a 49% interest in Red Cedar
Gathering Company. We agreed as part of the asset transfer to fund the $330
million through debt incurred by us and to not take certain actions with respect
to the debt that could cause adverse tax consequences to Kinder Morgan, Inc.
Effective November 30, 1999, we acquired our initial 33 1/3% interest in
Trailblazer Pipeline Company for $37.6 million.
TRANSMIX FACILITIES
On September 10, 1999, we acquired certain net assets, including two
transmix processing plants, for $18.25 million and the issuance of 510,147
units. The acquired transmix processing facilities are located in Richmond,
Virginia and Dorsey Junction, Maryland. These assets currently comprise our
Mid-Continent operations' transmix operations.
DEBT OFFERING
In a separate offering that closed on March 22, 2000, we sold only to
qualified institutional buyers, as defined in Rule 144A under the Securities
Act, a total of $400 million of our senior debt securities.
S-4
<PAGE> 7
OUR STRUCTURE
The following chart depicts our organization and ownership. Kinder Morgan
G.P., Inc. holds a 1.0101% general partner interest and we hold a 98.9899%
limited partnership interest in each entity marked with an asterisk. Santa Fe
Pacific Pipelines, Inc. owns a 0.5% special limited partnership interest in
SFPP, L.P.
[GRAPH DEPICTING ORGANIZATION AND OWNERSHIP STRUCTURE]
<TABLE>
<S> <C> <C> <C>
o Mid-Continent operations o Cora coal terminal o Bulk terminals o Pacific operations
o Natural gas operations o Painter plant
</TABLE>
Although owned by Kinder Morgan Operating L.P. "B":
- the Cora coal terminal is part of our bulk terminals; and
- the Painter plant is part of our Mid-Continent operations.
S-5
<PAGE> 8
THE OFFERING
Title...................... Common units representing limited partner
interests.
Securities Offered......... 4,500,000 units assuming the underwriters'
over-allotment option is not exercised.
Units Outstanding after the
Offering................. 64,212,109 units if the underwriters'
over-allotment option is not exercised.
If the underwriters' over-allotment is exercised in
full:
- 675,000 additional units will be issued; and
- 64,887,109 units will be outstanding.
Price...................... $39.75 for each common unit representing a limited
partner interest.
New York Stock Exchange
Trading Symbol........... KMP
Use of Proceeds............ We estimate that we will receive approximately $171
million from the sale of the units or $196 million
if the underwriters' over-allotment option is
exercised in full, in each case, after deducting
underwriting discounts and commissions and offering
expenses. We intend to use the net proceeds:
- to partially fund our acquisition of Shell
CO(2) Company;
- to reduce borrowings under our commercial
paper program; and
- for other general partnership purposes.
S-6
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
Our summary historical consolidated income statement and balance sheet data
shown below are derived from our financial statements and the notes to the
financial statements.
Our summary historical consolidated financial data should be read:
- with the understanding that the current management of Kinder Morgan G.P.,
Inc. was elected after the acquisition of Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc., in February 1997 and was
unable to influence our activities prior to that date;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, incorporated by
reference; and
- together with our financial statements and their notes included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
incorporated by reference.
Net income per unit before extraordinary charge is adjusted for the
two-for-one split of units on October 1, 1997. Net income before extraordinary
charge per unit was computed by dividing the net income before extraordinary
charge allocated to holders of units by the weighted average number of units
outstanding during the period. The Pacific operations' volumes reflect Kinder
Morgan Energy Partners' acquisition of its Pacific operations on March 6, 1998.
The Mid-Continent operations' volumes include only the volumes for the North
system and the Cypress pipeline. The bulk terminals' transport volumes represent
the volumes:
- of the Cora terminal, excluding ship or pay volumes of 252 thousands tons
for 1996;
- of the Grand Rivers terminal from September 1997;
- of Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- of the Pier IX and Shipyard River terminals from December 18, 1998.
The financial data for the year ended December 31, 1999, includes the
results of operations for:
- our increase to a 51% interest in Plantation Pipe Line Company from June
16, 1999;
- Mid-Continent's transmix operations from September 10, 1999; and
- our initial 33 1/3% interest in Trailblazer Pipeline Company from
November 30, 1999.
The financial data for the year ended December 31, 1999, includes the
balance sheet data, but not the results of operations since these assets were
acquired effective as of December 31, 1999, for:
- Kinder Morgan Interstate Gas Transmission LLC;
- our additional 33 1/3% interest in Trailblazer Pipeline Company; and
- our 49% interest in Red Cedar Gathering Company.
The financial data for the year ended December 31, 1998, includes the
results of operations for:
- the Pacific operations from March 6, 1998;
- Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- our initial 24% interest in Plantation Pipe Line Company from September
15, 1998.
S-7
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues...................................... $ 428,749 $ 322,617 $ 73,932 $ 71,250 $ 64,304
Cost of product sold.......................... 16,241 5,860 7,154 7,874 8,020
Operating expense............................. 111,275 77,162 17,982 22,347 15,928
Fuel and power................................ 31,745 22,385 5,636 4,916 3,934
Depreciation and amortization................. 46,469 36,557 10,067 9,908 9,548
General and administrative.................... 35,612 39,984 8,862 9,132 8,739
---------- ---------- -------- -------- --------
Operating income.............................. 187,407 140,669 24,231 17,073 18,135
Earnings from equity investments.............. 42,918 25,732 5,724 5,675 5,755
Amortization of excess cost of equity
investments................................. (4,254) (764) -- -- --
Interest expense.............................. (54,336) (40,856) (12,605) (12,634) (12,455)
Interest income and other, net................ 22,988 (5,992) (353) 3,129 1,311
Income tax (provision) benefit................ (9,826) (1,572) 740 (1,343) (1,432)
---------- ---------- -------- -------- --------
Net income before extraordinary charge........ 184,897 117,217 17,737 11,900 11,314
Extraordinary charge.......................... (2,595) (13,611) -- -- --
---------- ---------- -------- -------- --------
Net income.................................... $ 182,302 $ 103,606 $ 17,737 $ 11,900 $ 11,314
========== ========== ======== ======== ========
Net income per unit before extraordinary
charge...................................... $ 2.63 $ 2.09 $ 1.02 $ 0.90 $ 0.85
========== ========== ======== ======== ========
Net income per unit........................... $ 2.57 $ 1.75 $ 1.02 $ 0.90 $ 0.85
========== ========== ======== ======== ========
Per unit cash distribution paid............... $ 2.78 $ 2.39 $ 1.63 $ 1.26 $ 1.26
========== ========== ======== ======== ========
Additions to property, plant and equipment.... $ 82,725 $ 38,407 $ 6,884 $ 8,575 $ 7,826
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and equipment............. $2,578,313 $1,763,386 $244,967 $235,994 $236,854
Total assets.................................. $3,228,738 $2,152,272 $312,906 $303,603 $303,664
Long-term debt, including current portion..... $1,198,301 $ 611,571 $146,824 $160,211 $156,938
Partners' capital............................. $1,774,798 $1,360,663 $150,224 $118,344 $123,116
OPERATING DATA:
Pacific operations -
Mainline delivery volumes (thousands of
barrels)................................ 375,663 307,997 -- -- --
Other delivery volumes (thousands of
barrels)................................ 10,025 17,957 -- -- --
Mid-Continent operations -
Delivery volumes (thousands of barrels)... 50,124 44,783 46,309 46,601 41,613
Bulk terminals -
Transport volumes (thousands of tons)..... 39,190 24,016 9,087 6,090 6,486
</TABLE>
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<PAGE> 11
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF INCOME
The following unaudited pro forma combined statements of income have been
prepared from our historical financial statements to give effect to:
- our acquisition from Kinder Morgan, Inc. effective as of December 31,
1999, of Kinder Morgan Interstate Gas Transmission LLC, a 33 1/3%
interest in Trailblazer Pipeline Company and a 49% interest in Red Cedar
Gathering Company in exchange for 9,810,000 common units and $330 million
in cash; and
- our acquisition from Columbia Gulf Transmission Company on November 30,
1999, of a 33 1/3% interest in Trailblazer Pipeline Company for $37.6
million in cash.
The unaudited pro forma combined statements of income reflect adjustments
as if the above acquisitions had occurred on January 1, 1999. The pro forma
adjustments reflected in the accompanying unaudited pro forma combined
statements of income were prepared using the purchase method of accounting. The
pro forma adjustments are based on preliminary estimates, contractual
obligations and certain assumptions that we believe are reasonable under the
circumstances.
The column entitled "Kinder Morgan Energy Partners Historical" includes
earnings from equity investments from our 33 1/3% interest in Trailblazer
Pipeline Company acquired on November 30, 1999.
The column entitled "Acquired Assets Historical" consists of the historical
results of operations of Kinder Morgan Interstate Gas Transmission LLC, a
33 1/3% equity interest in Trailblazer Pipeline Company and a 49% equity
interest in Red Cedar Gathering Company for the year ended December 31, 1999.
The Trailblazer consolidating adjustments consist of the adjustments
required to consolidate the results of operations of Trailblazer.
The pro forma adjustments to operating expenses and general and
administrative expenses reflect reductions that are contractually guaranteed
under the terms of an agreement whereby Kinder Morgan, Inc. will continue to
operate, on our behalf, Kinder Morgan Interstate Gas Transmission LLC.
The pro forma adjustments to depreciation and amortization reflect:
- the reductions in estimated depreciation expense as a result of the
reduced cost of property, plant and equipment; and
- an adjustment to include a full year of depreciation for Kinder Morgan
Interstate Gas Transmission LLC, because Kinder Morgan Interstate Gas
Transmission LLC was accounted for as a discontinued operation by Kinder
Morgan, Inc. for a portion of 1999.
The pro forma adjustments to the amortization of excess cost of equity
investments reflect the amortization of the excess cost of our investment in Red
Cedar Gathering Company over our share of the book value of the underlying net
assets of Red Cedar Gathering Company.
The pro forma adjustment to interest, net reflects the reversal of Kinder
Morgan Interstate Gas Transmission LLC's historical interest expense and the
incremental interest expense on the additional $367.6 million in debt incurred
with respect to the acquisitions at a rate of 6.17%, our average borrowing rate
for 1999.
The pro forma adjustments to minority interest, general partner's interest
in net income and limited partners' net income give effect to the allocation of
pro forma net income to the general partner and the limited partners resulting
from the utilization of partnership sharing ratios.
The general partner's interest in net income includes incentive
distributions the general partner would have received based on total
distributions. These incentive distributions are greater under the pro forma
statements due to our announced $0.05 increase in per unit quarterly
distributions resulting from cash flow attributable to all of the acquired
interests and the issuance of the 9,810,000 common units
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<PAGE> 12
to Kinder Morgan, Inc. as consideration for the acquired interests.
The pro forma adjustment to income tax benefit (expense) reflects the
reversal of Kinder Morgan Interstate Gas Transmission LLC's historical income
tax expense.
Merger-related and severance costs in the column entitled "Acquired Assets
Historical" are non-recurring, allocated expenses related to the acquisition by
K N Energy, Inc. of Kinder Morgan, Inc. These non-recurring expenses have been
reversed in the column entitled "Pro Forma Adjustments" as they are unrelated to
the financial performance of the acquired assets and unrelated to the transfer
of the acquired assets from Kinder Morgan, Inc. to Kinder Morgan Energy
Partners.
The unaudited pro forma combined statements of income do not purport to
present the results of operations of Kinder Morgan Energy Partners had the
assumed acquisitions and assumed events occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. The unaudited pro forma combined statements of income do not give
effect to any operating efficiencies or cost savings that may be realized as a
result of the acquisitions, primarily related to reduction of duplicative
operating, general and administrative expenses, other than those cost savings
which are contractually guaranteed.
The unaudited pro forma combined statements of income should be read in
conjunction with the historical financial statements, including the related
notes which are included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, incorporated by reference.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
KINDER MORGAN
ENERGY ACQUIRED TRAILBLAZER
PARTNERS ASSETS CONSOLIDATING PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
------------- ---------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................................ $428,749 $113,207 $33,711 $575,667 $ -- $575,667
Costs and expenses
Operating expenses............................. 143,107 37,333 2,827 183,267 (12,514) 170,753
Depreciation and amortization.................. 46,469 16,985 16,973 80,427 (4,710) 75,717
General and administrative..................... 35,612 9,566 -- 45,178 (3,516) 41,662
Taxes, other than income taxes................. 16,154 4,608 879 21,641 -- 21,641
Merger-related and severance costs............. -- 3,054 -- 3,054 (3,054) --
-------- -------- ------- -------- -------- --------
241,342 71,546 20,679 333,567 (23,794) 309,773
Operating income................................ 187,407 41,661 13,032 242,100 23,794 265,894
Other income (expense)
Earnings from equity investments............... 42,918 16,280 (3,666) 55,532 -- 55,532
Amortization of excess cost of equity
investments.................................. (4,254) -- 24 (4,230) (1,110) (5,340)
Interest, net.................................. (52,605) (27,119) (2,882) (82,606) 4,631 (77,975)
Other, net..................................... 14,085 (248) -- 13,837 -- 13,837
Gain on sale of equity interest and special
charges...................................... 10,063 -- -- 10,063 -- 10,063
Minority interest.............................. (2,891) -- (3,383) (6,274) (616) (6,890)
-------- -------- ------- -------- -------- --------
Income before income taxes and extraordinary
charge......................................... 194,723 30,574 3,125 228,422 26,699 255,121
Income tax benefit (expense).................... (9,826) (5,948) -- (15,774) 5,948 (9,826)
-------- -------- ------- -------- -------- --------
Income before extraordinary charge.............. 184,897 24,626 3,125 212,648 32,647 245,295
Extraordinary charge on early extinguishment of
debt........................................... (2,595) -- -- (2,595) -- (2,595)
-------- -------- ------- -------- -------- --------
Net income...................................... $182,302 $ 24,626 $ 3,125 $210,053 $ 32,647 $242,700
======== ======== ======= ======== ======== ========
Calculation of limited partners' interest in
income before extraordinary item:
Income before extraordinary charge.............. $184,897 60,398 245,295
Less: general partner's interest in net
income......................................... (56,273) (22,793) (79,066)
-------- -------- --------
Limited partners' net income before
extraordinary item............................. 128,624 37,605 166,229
Less: extraordinary charge on early
extinguishment of debt......................... (2,595) -- (2,595)
-------- -------- --------
Limited partners' net income.................... $126,029 37,605 163,634
======== ======== ========
Net income per unit before extraordinary
charge......................................... $ 2.63 0.20 2.83
======== ========
Extraordinary charge per unit................... $ (0.06) 0.01 (0.05)
======== ========
Net income per unit............................. $ 2.57 0.21 2.78
======== ========
Declared distribution per unit.................. $ 2.85 0.20 3.05
======== ========
Number of units used in computation............. 48,974 9,810 58,784
======== ========
</TABLE>
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<PAGE> 13
SUMMARY OF RISK FACTORS
The following risk factors can be found beginning on page 2 of the accompanying
prospectus:
- Pending Federal Energy Regulatory Commission and California Public
Utilities Commission proceedings seek substantial refunds and reductions
in tariff rates on some of our pipelines.
- Our rapid growth may cause difficulties integrating new operations.
- Our debt securities are subordinated to SFPP, L.P.'s debt.
- Unitholders may have negative tax consequences if a default on debt or
sale of assets occurs.
- Our debt instruments may limit our financial flexibility.
- Restrictions on our ability to prepay SFPP, L.P.'s debt may limit our
financial flexibility.
- We generally do not own the land on which our pipelines are constructed
and we are subject to the possibility of increased costs for the loss of
land use.
- Environmental regulation significantly affects our business.
- Competition could ultimately lead to lower levels of profits and lower
our cash flow.
- Our partnership agreement and state partnership law limit the rights of
unitholders.
The risk factors beginning on page 23 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, include the additional risk factor relating
to conflicts of interest that could arise between us and the parent of our
general partner.
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<PAGE> 14
USE OF PROCEEDS
We expect the net proceeds from this offering of units to be approximately
$171 million, or $196 million if the underwriters' over-allotment option is
exercised in full, in each case after deducting underwriting discounts and our
estimated expenses of the offering.
We will use these proceeds:
- to partially fund our acquisition of Shell CO(2) Company;
- to reduce borrowings under our commercial paper program, with maturities
all under 30 days and interest rates that approximate 6%, which were
primarily used for working capital purposes; and
- for other general partnership purposes.
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999, and our capitalization as adjusted to give effect to:
- the issuance of the units we are selling in this offering at the issue
price of $39.75;
- the sale of $400 million of our notes in an offering that closed on March
22, 2000; and
- the application of the net proceeds from both this unit offering and our
notes offering.
See "Use of Proceeds."
<TABLE>
<CAPTION>
December 31, 1999
------------------------
Pro Forma
Historical As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Current portion of long-term debt........................... 209,200 0
Long-term debt.............................................. 989,101 1,029,536
Minority interest........................................... 48,299 48,299
Partner's capital
Common units, 59,137,137 issued and outstanding,
historical; 4,500,000 units issued pursuant to this
offering; 63,637,137 units issued and outstanding,
after this offering as adjusted........................ 1,759,142 1,929,912
General partner interest.................................. 15,656 15,651
---------- ---------
Total partner's capital..................................... 1,774,798 1,945,563
---------- ---------
Total capitalization........................................ 3,021,398 3,023,398
========== =========
</TABLE>
The unit numbers do not include:
- the 675,000 units subject to the underwriters' option to purchase;
- the 211,200 units issuable, subject to vesting, upon exercise of options
granted by us and outstanding on December 31, 1999;
- the 574,172 units issued on February 7, 2000, for our acquisition of the
Milwaukee and Dakota terminals; and
- the 800 units issued upon exercise of options since December 31, 1999.
S-12
<PAGE> 15
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The following table sets forth, for the periods indicated, the high and low
sale prices per unit, as reported on the New York Stock Exchange, the principal
market in which the units are traded, and the amount of cash distributions
declared per unit.
<TABLE>
<CAPTION>
PRICE RANGE
------------------- CASH
HIGH LOW DISTRIBUTIONS
-------- -------- -------------
<S> <C> <C> <C>
2000
First Quarter
(through March 28,
2000).............. $ 44.875 $ 37.625 $ --
1999
First Quarter........ $37.9375 $33.1250 $0.7000
Second Quarter....... 39.0000 33.9375 0.7000
Third Quarter........ 45.3750 37.5000 0.7250
Fourth Quarter....... 43.9375 39.6250 0.7250
1998
First Quarter........ $37.8750 $30.1250 $0.5625
Second Quarter....... 38.1250 35.0000 0.6300
Third Quarter........ 37.3750 28.5625 0.6300
Fourth Quarter....... 36.9375 29.5625 0.6500
</TABLE>
The last reported sale price of the units on the New York Stock Exchange on
March 28, 2000, was $39.75 per unit.
We paid a quarterly distribution of $.725 per unit for the quarter ended
December 31, 1999. We have announced an increase in the quarterly distribution
to $.775 for the quarter ended March 31, 2000, to reflect available cash
generated by acquisitions of:
- Kinder Morgan Interstate Gas Transmission LLC;
- our increased interest in Trailblazer Pipeline Company; and
- our 49% interest in Red Cedar Gathering Company.
Further, we announced our expected ability to increase the quarterly
distribution for the quarter ended June 30, 2000, to $.8125 following the
closing of our acquisition of the additional 80% interest in Shell
CO(2) Company, Ltd.
As of February 29, 2000, there were approximately 35,000 beneficial owners
of our units.
S-13
<PAGE> 16
RECENT TAX DEVELOPMENTS
The Internal Revenue Service has recently finalized regulations under
Sections 743 and 197 of the Internal Revenue Code. We depreciate and amortize
the Section 743(b) adjustment attributable to unrealized appreciation in the
value of contributed or adjusted property over the remaining cost recovery
period for the underlying property, despite its inconsistency with the recently
finalized regulations that appear to require that any adjustment attributable to
unrealized appreciation in the value of such property to be treated as a newly
placed in service asset. If the Internal Revenue Service successfully challenged
our method for depreciating or amortizing the Section 743(b) adjustment, the
uniformity of units might be affected, and the gain from the sale of units might
be increased without the benefit of additional deductions.
In addition, recently proposed regulations would allow a unitholder
disposing of units, who can identify units transferred with an ascertainable
holding period, to use the actual holding period of the units transferred, but
indicate that the unitholder would maintain a single adjusted tax basis in his
units. The Internal Revenue Service has previously ruled that partners in a
partnership must maintain a single adjusted basis for their interests. It is not
clear how the ruling applies to partners in a publicly traded partnership. If
the ruling applies to us or the proposed regulations are finalized in their
current form, a unitholder would be unable to select high or low basis units to
sell as would be the case with corporate stock. A unitholder considering the
purchase of additional units or a sale of units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
this ruling and application of the proposed regulations.
S-14
<PAGE> 17
UNDERWRITING
We, and the underwriters for this offering named below, have entered into
an underwriting agreement with respect to the units being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of units indicated in the following table. Goldman, Sachs & Co., PaineWebber
Incorporated and Salomon Smith Barney Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Units
------------ ---------
<S> <C>
Goldman, Sachs & Co............. 1,350,000
PaineWebber Incorporated........ 1,350,000
Salomon Smith Barney Inc. ...... 1,350,000
A.G. Edwards & Sons, Inc. ...... 150,000
First Union Securities, Inc. ... 150,000
Sanders Morris Harris Inc. ..... 150,000
---------
Total................. 4,500,000
=========
</TABLE>
If the underwriters sell more units than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 675,000
units from us to cover the sales. The underwriters may exercise that option for
30 days. If any units are purchased pursuant to this option, the underwriters
will severally purchase units in approximately the same proportion as set forth
in the table above.
The following table shows the per unit and total underwriting discounts and
commissions to be paid to the underwriters by us. The amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional units.
<TABLE>
<CAPTION>
Paid by
Kinder Morgan Energy Partners
-----------------------------
Full
No Exercise Exercise
--------------- -----------
<S> <C> <C>
Per Unit............. $ 1.69 $ 1.69
Total................ $7,605,000 $8,745,750
</TABLE>
Units sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus
supplement. Any units sold by the underwriters to securities dealers may be sold
at a discount of up to $1.00 per unit from the initial price to public. Any of
the securities dealers may resell any units purchased from the underwriters to
other brokers or dealers at a discount of up to $0.10 per unit from the initial
price to public. If all the units are not sold at the initial price to public,
the underwriters may change the offering price and the other selling terms.
We, some directors and executive officers of our general partner and,
subject to exceptions, the general partner, have agreed with the underwriters
not to dispose of or hedge any of the units, securities similar to the units or
securities convertible into or exchangeable for the units during the period from
the date of this prospectus supplement continuing through the date 90 days after
the date of this prospectus supplement, except with the prior written consent of
Goldman, Sachs & Co. These agreements do not apply to the acquisition of assets,
businesses or the capital stock or other ownership interests of businesses by us
in exchange for units, if the recipient of units agrees not to dispose of any
units received in connection with the acquisition during that period. These
agreements also do not apply to any existing employee benefits plans or unit
option plans. We also have agreed not to waive a lock-up in our favor of units
held by Kinder Morgan, Inc. for that period.
In connection with our acquisition on February 7, 2000 of the Milwaukee and
Dakota bulk terminals, we issued 574,172 units and agreed to file a registration
statement covering these units by March 31, 2000. The holder of 335,897 of these
units has agreed to enter into a lock-up agreement in the form described above.
Each of the five holders of all these units has agreed with us to retain at
least 20% of his units until January 1, 2001 and 10% of his units until January
1, 2002 and not to sell more than 25,000 of his units on any trading day.
In connection with this offering, the underwriters may purchase and sell
units. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of units than they are
S-15
<PAGE> 18
required to purchase in the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the units while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased units sold
by it or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the units. As a result, the price of the units may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $500,000.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
The underwriters have performed investment banking and advisory services
for us from time to time for which they have received customary fees and
expenses. Goldman, Sachs & Co. also acted as the book-running manager of an
offering of our senior debt securities that closed on March 22, 2000. The
underwriters may, from time to time in the future, engage in transactions with
and perform services for us in the ordinary course of their business.
S-16
<PAGE> 19
EXPERTS
The financial statements incorporated in this prospectus supplement and the
accompanying prospectus by reference to Kinder Morgan Energy Partners' Annual
Report on Form 10-K for the year ended December 31, 1999, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of KN Interstate Gas Transmission Co., the
predecessor of Kinder Morgan Interstate Gas Transmission LLC, and Trailblazer
Pipeline Company incorporated in this prospectus supplement and the accompanying
prospectus by reference to Kinder Morgan Energy Partners' Current Report on Form
8-K dated March 28, 2000, have been so incorporated in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Red Cedar Gathering Company incorporated by
reference in this prospectus supplement and the accompanying prospectus by
reference to Kinder Morgan Energy Partners, L.P.'s Current Report on Form 8-K
dated March 28, 2000, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
The validity of the units representing limited partner interests we are
offering will be passed upon for us by Bracewell & Patterson, L.L.P., Houston,
Texas. Certain legal matters with respect to the units representing limited
partner interests will be passed upon for the underwriters by Andrews & Kurth
L.L.P., New York, New York.
S-17
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the documents incorporated by reference
include forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements are identified as any statement that does not relate strictly to
historical or current facts. They use words such as "anticipate," "believe,"
"intend," "plan," "projection," "forecast," "strategy," "position," "continue,"
"estimate," "expect," "may," "will," or the negative of those terms or other
variations of them or by comparable terminology. In particular, statements,
express or implied, concerning future operating results or the ability to
generate sales, income or cash flow are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results of our company may
differ materially from those expressed in these forward-looking statements. Many
of the factors that will determine these results are beyond our ability to
control or predict. Specific factors which could cause actual results to differ
from those in the forward-looking statements, include:
- price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, natural gas, coal and other bulk
materials in the United States. Economic activity, weather, alternative
energy sources, conservation and technological advances may affect price
trends and demand;
- changes in our tariff rates implemented by the Federal Energy Regulatory
Commission or the California Public Utilities Commission;
- our ability to integrate any acquired operations into our existing
operations;
- any difficulties or delays experienced by railroads in delivering
products to the bulk terminals;
- our ability to successfully identify and close strategic acquisitions and
make cost saving changes in operations;
- shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use our services;
- the condition of the capital markets and equity markets in the United
States; and
- the political and economic stability of the oil producing nations of the
world.
You should not put undue reliance on any forward-looking statements.
See Items 1 and 2 "Business and Properties - Risk Factors" in our Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, for a more
detailed description of these and other factors that may affect the
forward-looking statements. When considering forward-looking statements, one
should keep in mind the risk factors described under "Summary of Risk Factors"
in this prospectus supplement and under the "Risk Factors" sections in the
accompanying prospectus. We disclaim any obligation to update the above list or
to announce publicly the result of any revisions to any of the forward-looking
statements to reflect future events or developments.
In addition, our classification as a partnership for federal income tax
purposes means that we do not generally pay federal income taxes on our net
income. We do, however, pay taxes on the net income of subsidiaries that are
corporations. We are relying on a legal opinion from our counsel, and not a
ruling from the Internal Revenue Service, as to our proper classification for
federal income tax purposes. See Items 1 and 2 "Business and Properties - Tax
Treatment of Publicly Traded Partnerships Under the Internal Revenue Code" of
our Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
S-18
<PAGE> 21
PROSPECTUS
$600,000,000
[KINDER MORGAN LOGO]
COMMON UNITS
DEBT SECURITIES
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read this prospectus and any supplement
carefully before you invest.
The units are traded on the New York Stock Exchange under the symbol "ENP."
On January 6, 1999, the last reported sales price for the units as reported on
the NYSE Composite Transactions tape was $36 per unit.
We will provide information in the prospectus supplement for the expected
trading market, if any, for the debt securities.
See "Risk Factors" beginning on page 2 for a discussion of the material
risks involved in investing our securities.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The Prospectus is dated January 26, 1999.
<PAGE> 22
RISK FACTORS
PENDING FERC AND CPUC PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN
TARIFF RATES.
Some shippers have filed complaints with the Federal Energy Regulatory
Commission and the California Public Utilities Commission that seek substantial
refunds and reductions in the Pacific Operations' tariff rates. An adverse
decision could negatively impact revenues, results of operations, financial
condition, liquidity, and funds available for distribution to unitholders.
Additional challenges to tariff rates could be filed with the FERC or CPUC in
the future.
The complaints filed before the Federal Energy Regulatory Commission allege
that some pipeline tariff rates of our Pacific Operations are not entitled to
"grandfathered" status under the Energy Policy Act of 1992 because "changed
circumstances" may have occurred under the Act. An initial decision by the FERC
Administrative Law Judge was issued on September 25, 1997. The initial decision
determined that our Pacific Operations' East Line rates were not grandfathered
under the Energy Policy Act. The initial decision also included rulings that
were generally adverse to our Pacific Operations regarding certain cost of
service issues. On January 13, 1999, the FERC issued a draft order partially
overruling and partially affirming the initial decision. Although we cannot
fully gauge the effect of the FERC's ruling on our operations, we believe that
the effect will be less than the approximate $8 million annually that we had
been accruing as a reserve.
The complaints filed before the California Public Utilities Commission
generally challenge the rates we charge for intrastate transportation of refined
petroleum through our pipeline system in California. On June 18, 1998, a CPUC
Administrative Law Judge issued a ruling in our favor and dismissed the
complaints. The shippers filed an application for rehearing, which is currently
pending before CPUC.
Additional information about these proceedings is in our reports filed with
the Securities and Exchange Commission.
OUR RAPID GROWTH MAY CAUSE DIFFICULTIES INTEGRATING NEW OPERATIONS
Part of our business strategy includes acquiring additional businesses that
will allow us to increase distributions to unitholders. During the period from
December 31, 1996 to September 30, 1998, we made several acquisitions that
increased our asset base almost 7 times and our net income over 5 1/2 times. We
believe that we can profitably combine the operations of acquired businesses
with our existing operations. However, unexpected costs or challenges may arise
whenever businesses with different operations and management are combined.
Successful business combinations require management and other personnel to
devote significant amounts of time to integrating the acquired business with
existing operations. These efforts may temporarily distract their attention from
day-to-day business, the development or acquisition of new properties and other
business opportunities. In addition, the management of the acquired business
will often not join our management team. The change in management may make it
more difficult to integrate an acquired business with our existing operations.
DEBT SECURITIES ARE SUBORDINATED TO SFPP DEBT
Since SFPP, L.P. will not guarantee the Debt Securities, the Debt
Securities will be effectively subordinated to all debt of SFPP. If SFPP
defaults on its debt, the holders of the Senior Debt Securities would not
receive any money from SFPP until SFPP repaid its debt in full. SFPP is the
operating partnership that owns our Pacific Operations. See "Description of the
Debt Securities."
2
<PAGE> 23
UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR SELL
ASSETS
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and cause
negative tax consequences for unitholders through the realization of taxable
income by unitholders without a corresponding cash distribution. Likewise, if we
were to dispose of assets and realize a taxable gain while there is substantial
debt outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
OUR DEBT INSTRUMENTS MAY LIMIT OUR FINANCIAL FLEXIBILITY
The instruments governing our debt contain restrictive covenants that may
prevent us from engaging in certain beneficial transactions. Such provisions may
also limit or prohibit distributions to unitholders under certain circumstances.
The agreements governing our debt generally require us to comply with various
affirmative and negative covenants including the maintenance of certain
financial ratios and restrictions on:
- incurring additional debt;
- entering into mergers, consolidations and sales of assets;
- making investments; and
- granting liens.
Additionally, the agreements governing our debt generally prohibit us from:
- making cash distributions to unitholders more often than quarterly;
- distributing amounts in excess of 100% of available cash for the
immediately preceding calendar quarter; and
- making any distribution to unitholders if an event of default exists or
would exist when such distribution is made.
The instruments governing any additional debt incurred to refinance the
debt may also contain similar restrictions.
RESTRICTIONS ON OUR ABILITY TO PREPAY SFPP'S DEBT MAY LIMIT OUR FINANCIAL
FLEXIBILITY
SFPP is subject to certain restrictions with respect to its debt that may
limit our flexibility in structuring or refinancing existing or future debt.
These restrictions include the following:
- We may not prepay SFPP's First Mortgage Notes before December 15, 1999.
- After December 15, 1999 and before December 15, 2002, we may prepay the
SFPP First Mortgage Notes with a make-whole prepayment premium.
- We agreed as part of the acquisition of the Pacific Operations to not
take certain actions with respect to $190 million of the SFPP First
Mortgage Notes that would cause adverse tax consequences for the prior
general partner of SFPP.
POTENTIAL CHANGE OF CONTROL IF KINDER MORGAN, INC. DEFAULTS ON DEBT
Kinder Morgan, Inc. owns all of the outstanding capital stock of the
general partner. KMI has pledged this stock to secure some of its debt.
Presently, KMI's only source of income to pay such debt is dividends that KMI
receives from the general partner. If KMI defaults on its debt, the lenders
could acquire control of the general partner.
POSSIBLE INCREASED COSTS FOR PIPELINE EASEMENTS
We generally do not own the land on which our pipelines are constructed.
Instead we obtain the right to construct and operate our pipelines on other
people's land for a period of time. If we were to lose these rights, our
business could be negatively affected.
Southern Pacific Transportation Company has allowed us to construct and
operate a significant portion of our Pacific Operations'
3
<PAGE> 24
pipeline under their railroad tracks. Southern Pacific Transportation Company
and its predecessors were given the right to construct their railroad tracks
under federal statutes enacted in 1871 and 1875. The 1871 statute was thought to
be an outright grant of ownership that would continue until the land ceased to
be used for railroad purposes. Two United States Circuit Courts, however, ruled
in 1979 and 1980 that railroad rights-of-way granted under laws similar to the
1871 statute provide only the right to use the surface of the land for railroad
purposes without any right to the underground portion. If a court were to rule
that the 1871 statute does not permit the use of the underground portion for the
operation of a pipeline, we may be required to obtain permission from the land
owners in order to continue to maintain the pipelines. We believe that we could
obtain such permission over time at a cost that would not have a material
negative effect on the Partnership. We cannot, however, assure you of this.
We have been advised by counsel that we have the power of eminent domain
for the liquids pipelines in the states in which we operate (except for
Illinois) assuming that we meet certain requirements, which differ from state to
state. We believe that we meet these requirements. We believe that Shell CO(2)
Company does not have the power of eminent domain for its CO(2) pipelines. Our
inability to exercise the power of eminent domain could have a material negative
effect on our business if we were to lose the right to use or occupy the
property on which our pipelines are located.
DISTRIBUTIONS FROM SHELL CO(2) COMPANY MAY BE LIMITED
Under certain unlikely scenarios, we possibly would not receive any
distributions from Shell CO(2) Company during 2002 and 2003 and we could be
required to return a portion of the distributions received during 1998-2001.
During 1998-2001, we will receive a fixed, quarterly distribution from Shell
CO(2) Company of approximately $3.6 million ($14.5 million per year). In 2002
and 2003, Shell CO(2) Company will increase or decrease our cash distributions
so that our percentage of the total cash distribution during 1998-2003 will
equal our ownership percentage of Shell CO(2) Company during that time
(initially 20%). These calculations will be done on a present value basis using
a discount rate of 10%. After 2003, we will participate in distributions
according to our partnership percentage.
ENVIRONMENTAL REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS
Our business operations are subject to federal, state and local laws and
regulations relating to environmental practices. If an accidental leak or spill
of liquid petroleum products occurs in our pipeline or at a storage facility, we
may have to pay a significant amount to clean up the leak or spill. The
resulting costs and liabilities could negatively affect the level of cash
available for distributions to unitholders. Our costs could also increase
significantly if environmental laws and regulations become more strict. We
cannot predict the impact of Environmental Protection Agency standards or future
environmental measures. Because the costs of environmental regulation are
already significant, additional regulation could negatively affect the level of
cash available for distribution to unitholders.
COMPETITION
Competition could ultimately lead to lower levels of profits and lower cash
distributions to unitholders. Propane competes with electricity, fuel, oil and
natural gas in the residential and commercial heating market. In the engine fuel
market, propane competes with gasoline and diesel fuel. Butanes and natural
gasoline used in motor gasoline blending and isobutane used in premium fuel
production compete with alternative products. Natural gas liquids used as feed
stocks for refineries and petrochemical plants compete with alternative feed
stocks. The availability and prices of alternative energy sources and feed
stocks significantly affects demand for natural gas liquids.
Pipelines are generally the lowest cost method for intermediate and
long-haul overland product movement. Accordingly, the
4
<PAGE> 25
most significant competitors for our pipelines are:
- proprietary pipelines owned and operated by major oil companies in the
areas where our pipelines deliver products;
- refineries within the market areas served by our pipelines; and
- trucks.
Additional pipelines may be constructed in the future to serve specific
markets now served by our pipelines. Trucks competitively deliver products in
certain markets. Recently, major oil companies have increasingly used trucking,
resulting in minor but notable reductions in product volumes delivered to
certain shorter-haul destinations, primarily Orange and Colton, California
served by the South, North and East lines of our Pacific Operations.
We cannot predict with certainty whether this trend towards increased
short-haul trucking will continue in the future. Demand for terminaling services
varies widely throughout our pipeline system. Certain major petroleum companies
and independent terminal operators directly compete with us at several terminal
locations. At those locations, pricing, service capabilities and available tank
capacity control market share.
Our ability to compete also depends upon general market conditions which
may change. We conduct our operations without the benefit of exclusive
franchises from government entities. We also provide common carrier
transportation services through our pipelines at posted tariffs and almost
always without long-term contracts for transportation service with our
customers. Demand for transportation services for refined petroleum products is
primarily a function of:
- total and per capita fuel consumption;
- prevailing economic and demographic conditions;
- alternate modes of transportation;
- alternate product sources; and
- price.
LIMITATIONS IN OUR PARTNERSHIP AGREEMENT AND STATE PARTNERSHIP LAW
LIMITED VOTING RIGHTS AND CONTROL OF MANAGEMENT. Unitholders have only
limited voting rights on matters affecting the partnership. The general partner
manages Partnership activities. Unitholders have no right to elect the general
partner on an annual or other ongoing basis. If the general partner withdraws,
however, its successor may be elected by the holders of a majority of the
outstanding units (excluding units owned by the departing general partner and
its affiliates).
The limited partners may remove the general partner only if:
- the holders of 66 2/3% of the units vote to remove the general partner.
Units owned by the general partner and its affiliates are not counted;
- the same percentage of units approves a successor general partner;
- the Partnership continues to be taxed as a partnership for federal income
tax purposes; and
- the limited partners maintain their limited liability.
PERSONS OWNING 20% OR MORE OF THE UNITS CANNOT VOTE. Any units held by a
person that owns 20% or more of the units cannot be voted. This limitation does
not apply to the general partner and its affiliates. This provision may:
- discourage a person or group from attempting to remove the general
partner or otherwise change management; and
- reduce the price at which the units will trade under certain
circumstances. For example, a third party will probably not attempt to
remove the general partner and take over our management by making a
tender offer for the units at a price above their trading market price
without removing the general partner and substituting an affiliate.
5
<PAGE> 26
THE GENERAL PARTNER'S LIABILITY TO THE PARTNERSHIP AND UNITHOLDERS MAY BE
LIMITED. The partnership agreement contains language limiting the liability of
the general partner to the partnership or the unitholders. For example, the
partnership agreement provides that:
- the general partner does not breach any duty to the partnership or the
unitholders by borrowing funds or approving any borrowing. The general
partner is protected even if the purpose or effect of the borrowing is to
increase incentive distributions to the general partner;
- the general partner does not breach any duty to the Partnership or the
unitholders by taking any actions consistent with the standards of
reasonable discretion outlined in the definitions of available cash and
cash from operations contained in the partnership agreement; and
- the general partner does not breach any standard of care or duty by
resolving conflicts of interest unless the general partner acts in bad
faith.
THE PARTNERSHIP AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF THE GENERAL
PARTNER UNDER DELAWARE LAW. Such modifications of state law standards of
fiduciary duty may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners. Such
a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under the partnership agreement, the
general partner may exercise its broad discretion and authority in the
management of the partnership and the conduct of its operations as long as the
general partner's actions are in the best interest of the Partnership.
UNITHOLDERS MAY HAVE LIABILITY TO REPAY DISTRIBUTIONS. Unitholders will not
be liable for assessments in addition to their initial capital investment in the
units. Under certain circumstances, however, unitholders may have to repay the
Partnership amounts wrongfully returned or distributed to them. Under Delaware
law, we may not make a distribution to you if the distribution causes the
liabilities of the Partnership to exceed the fair value of the Partnership's
assets. Liabilities to partners on account of their partnership interests and
non-recourse liabilities are not counted for purposes of determining whether a
distribution is permitted. Delaware law provides that a limited partner who
receives such a distribution and knew at the time of the distribution that the
distribution violated Delaware law will be liable to the limited partnership for
the distribution amount for three years from the distribution date. Under
Delaware law, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of the assignor to make contributions
to the partnership. However, such an assignee is not obligated for liabilities
unknown to him at the time he or she became a limited partner if the liabilities
could not be determined from the partnership agreement.
UNITHOLDERS MAY BE LIABLE IF WE HAVE NOT COMPLIED WITH STATE PARTNERSHIP
LAW. We conduct our business in a number of states. In some of those states the
limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established. The unitholders might be
held liable for the Partnership's obligations as if they were a general partner
if:
- a court or government agency determined that we were conducting business
in the state but had not complied with the state's partnership statute;
or
- unitholders' rights to act together to remove or replace the general
partner or take other actions under the partnership agreement constitute
"control" of the Partnership's business.
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<PAGE> 27
THE GENERAL PARTNER MAY BUY OUT MINORITY UNITHOLDERS IF IT OWNS 80% OF THE
UNITS. If at any time the general partner and its affiliates own 80% or more of
the issued and outstanding units, the general partner will have the right to
purchase all of the remaining units. Because of this right, a unitholder may
have to sell his units against his will or for a less than desirable price. The
general partner may only purchase all of the units. The purchase price for such
a purchase will be the greater of:
- the most recent 20-day average trading price; or
- the highest purchase price paid by the general partner or its affiliates
to acquire units during the prior 90 days.
The general partner can assign this right to its affiliates or to the
partnership.
WE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, DILUTING EXISTING
INTERESTS OF UNITHOLDERS. The partnership agreement allows the general partner
to cause the partnership to issue additional units and other equity securities.
When we issue additional equity securities, your proportionate partnership
interest will decrease. Such an issuance could negatively affect the amount of
cash distributed to unitholders and the market price of units. Issuance of
additional units will also diminish the relative voting strength of the
previously outstanding units. There is no limit on the total number of units we
may issue.
GENERAL PARTNER CAN PROTECT ITSELF AGAINST DILUTION. Whenever the
partnership issues equity securities to any person other than the general
partner and its affiliates, the general partner has the right to purchase
additional limited partnership interests on the same terms. This allows the
general partner to maintain its partnership interest in the Partnership. No
other unitholder has a similar right. Therefore, only the general partner may
protect itself against dilution caused by issuance of additional equity
securities.
POTENTIAL CONFLICTS OF INTEREST RELATED TO THE OPERATION OF THE PARTNERSHIP
Certain conflicts of interest could arise among the general partner, KMI
and the partnership. Such conflicts may include, among others, the following
situations:
- we do not have any employees and we rely solely on employees of the
general partner and its affiliates, including KMI;
- under the partnership agreement, we reimburse the general partner for the
costs of managing and operating the Partnership;
- the amount of cash expenditures, borrowings and reserves in any quarter
may affect available cash to pay quarterly distributions to unitholders;
- the general partner tries to avoid being personally liable for
Partnership obligations. The general partner is permitted to protect its
assets in this manner by the partnership agreement. Under the partnership
agreement the general partner does not breach its fiduciary duty even if
the Partnership could have obtained more favorable terms without
limitations on the general partner's liability;
- under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable to the
Partnership. The general partner may also enter into additional contracts
with any of its affiliates on behalf of the Partnership. Agreements or
contracts between the partnership and the general partner (and its
affiliates) are not the result of arms length negotiations;
- the general partner does not breach the partnership agreement by
exercising its call rights to purchase limited partnership interests or
by assigning its call rights to one of its affiliates or to the
Partnership.
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<PAGE> 28
THE PARTNERSHIP
We are a master limited partnership that owns and operates a wide range of
energy assets through our operating partnerships and subsidiaries, including:
- six refined products/liquids pipeline systems containing over 5,000 miles
of trunk pipeline and twenty-one truck loading terminals;
- 24 bulk terminals;
- a 24% interest in Plantation Pipe Line Company which owns and operates a
3,100 mile pipeline system;
- a 20% interest in a joint venture that produces, markets and delivers
CO(2) for enhanced oil recovery (Shell CO(2) Company); and
- a 25% interest in a Y-grade fractionation facility that separates energy
products.
We group our operations into three reportable business segments:
- Pacific Operations;
- Mid-Continent Operations; and
- Bulk Terminals.
We were formed in August, 1992, as a publicly traded master limited
partnership. We are currently the largest pipeline master limited partnership
and the second largest pipeline system in the United States in terms of volumes
delivered. Our goal is to operate as a growth-oriented master limited
partnership by:
- reducing operating costs;
- better utilizing and expanding our asset base; and
- making selective, strategic acquisitions that allow us to increase our
distributions to Unitholders.
We regularly evaluate potential acquisitions of assets and businesses that
would complement our existing business.
Our general partner receives incentive distributions that provide it with a
strong incentive to increase Unitholder distributions through successful
management and growth of our business.
Our address is 1301 McKinney Street, Suite 3450, Houston, Texas 77010. Our
telephone number is (713) 844-9500.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
- -------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
2.01 2.16 2.05 2.14 2.65 3.01
</TABLE>
The pro forma ratio of earnings to fixed charges assuming we acquired the
Pacific Operations on January 1, 1997 for each of the periods indicated is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
- ------------ -------------
<S> <C>
2.65 3.36
</TABLE>
These computations include us and our operating partnerships and
subsidiaries, and 50% or less equity companies. For these ratios, "earnings" is
the amount resulting from adding and subtracting the following items.
Add the following:
- pre-tax income from continuing operations before adjustment for minority
interests in consolidated subsidiaries or income or loss from equity
investees;
- fixed charges;
- amortization of capitalized interest;
- distributed income of equity investees; and
- our share of pre-tax losses of equity investees for which charges arising
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<PAGE> 29
from guarantees are included in fixed charges.
From the total of the added items, subtract the following:
- interest capitalized;
- preference security dividend requirements of consolidated subsidiaries;
and
- minority interest in pre-tax income of subsidiaries that have not
incurred fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed and capitalized;
- amortized premiums, discounts and capitalized expenses related to
indebtedness;
- an estimate of the interest within rental expenses; and
- preference security dividend requirements of consolidated subsidiaries.
We calculated the pro forma ratio of earnings to fixed charges using the
pro forma financial statements incorporated by reference in this prospectus.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be:
- our direct unsecured general obligations; and
- either Senior Debt Securities or Subordinated Debt Securities.
Senior Debt Securities will be issued under a "Senior Indenture" and
Subordinated Debt Securities will be issued under a "Subordinated Indenture".
Together the Senior Indenture and the Subordinated Indenture are called the
"Indentures".
We have summarized the material provisions of the Indentures in the
following order:
- those provisions that apply only to the Senior Indenture;
- those provisions that apply only to the Subordinated Indenture; and
- those provisions that apply to both Indentures.
We have not restated these agreements in their entirety. We have filed the
forms of the Indentures as exhibits to the registration statement. You should
read the Indentures, because they, and not this description, control your rights
as holders of the Debt Securities. In the summary below, we have included
references to section numbers of the applicable Indentures so that you can
easily locate these provisions. Capitalized terms used in the summary have the
meanings specified in the Indentures.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement and a supplemental indenture relating to any series
of Debt Securities being offered will include specific terms relating to the
offering. These terms will include some or all of the following:
- the form and title of the Debt Securities;
- the total principal amount of the Debt Securities;
- the portion of the principal amount which will be payable if the maturity
of the Debt Securities is accelerated;
- the currency or currency unit in which the Debt Securities will be paid,
if not U.S. dollars;
- any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will be
payable as well;
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<PAGE> 30
- the dates on which the principal of the Debt Securities will be payable;
- the interest rate which the Debt Securities will bear and the interest
payment dates for the Debt Securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the Debt Securities;
- any changes to or additional Events of Default or covenants; and
- any other terms of the Debt Securities.
PROVISIONS ONLY IN THE SENIOR INDENTURE
The Senior Debt Securities will rank equally in right of payment with all
of our other senior and unsubordinated debt. The Senior Indenture contains
provisions that:
- limit our ability to put liens on our principal assets;
- limit our ability to sell and lease back our principal assets; and
- require our Subsidiaries that guarantee our long term debt to guarantee
the Senior Debt Securities on an equal basis.
The Subordinated Indenture does not contain any similar provisions. We have
described below these provisions and some of the defined terms used in them. In
this section, references to the Partnership relate only to Kinder Morgan Energy
Partners, L.P., the issuer of the Debt Securities, and not our Subsidiaries.
LIMITATIONS ON LIENS. The Senior Indenture provides that the Partnership
will not, nor will it permit any Subsidiary to, create, assume, incur or suffer
to exist any lien upon any Principal Property (as defined below) or upon any
shares of capital stock of any Subsidiary owning or leasing any Principal
Property, whether owned or leased on the date of the Senior Indenture or
thereafter acquired, to secure any debt of the Partnership or any other person
(other than the Senior Debt Securities issued thereunder), without in any such
case making effective provision whereby all of the Senior Debt Securities
outstanding thereunder shall be secured equally and ratably with, or prior to,
such debt so long as such debt shall be so secured.
"Principal Property" means, whether owned or leased on the date of the
Senior Indenture or thereafter acquired:
(a) any pipeline assets of the Partnership or any Subsidiary,
including any related facilities employed in the transportation,
distribution, storage or marketing of refined petroleum products, natural
gas liquids, coal and carbon dioxide, that are located in the United States
of America or any territory or political subdivision thereof; and
(b) any processing or manufacturing plant or terminal owned or leased
by the Partnership or any Subsidiary that is located in the United States
or any territory or political subdivision thereof,
except, in the case of either of the foregoing clauses (a) or (b):
(1) any such assets consisting of inventories, furniture, office
fixtures and equipment (including data processing equipment), vehicles and
equipment used on, or useful with, vehicles; and
(2) any such assets, plant or terminal which, in the opinion of the
board of directors of the General Partner, is not material in relation to
the activities of the Partnership or of the Partnership and its
Subsidiaries, taken as a whole.
There is excluded from this restriction:
1. Permitted Liens (as defined below);
2. any lien upon any property or assets created at the time of
acquisition of such property or assets by the Partnership or any Subsidiary
or within one year after such time to secure all or a portion of the
purchase price for such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the
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<PAGE> 31
time of or within one year after the date of such acquisition;
3. any lien upon any property or assets to secure all or part of the
cost of construction, development, repair or improvements thereon or to
secure debt incurred prior to, at the time of, or within one year after
completion of such construction, development, repair or improvements or the
commencement of full operations thereof (whichever is later), to provide
funds for any such purpose;
4. any lien upon any property or assets existing thereon at the time
of the acquisition thereof by the Partnership or any Subsidiary; provided,
however, that such lien only encumbers the property or assets so acquired;
5. any lien upon any property or assets of a person existing thereon
at the time such person becomes a Subsidiary by acquisition, merger or
otherwise; provided, however, that such lien only encumbers the property or
assets of such person at the time such person becomes a Subsidiary;
6. with respect to any series, any lien upon any property or assets of
the Partnership or any Subsidiary in existence on the date the Senior Debt
Securities of such series are first issued or provided for pursuant to
agreements existing on such date;
7. liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or settlement as
to which the Partnership or the applicable Subsidiary has not exhausted its
appellate rights;
8. any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (7) above;
provided, however, that any such extension, renewal, refinancing, refunding
or replacement lien shall be limited to the property or assets covered by
the lien extended, renewed, refinanced, refunded or replaced and that the
obligations secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the amount of
the obligations secured by the lien extended, renewed, refinanced, refunded
or replaced and any expenses of the Partnership and its subsidiaries
(including any premium) incurred in connection with such extension,
renewal, refinancing, refunding or replacement; or
9. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of the Partnership
or any Subsidiary.
Notwithstanding the foregoing, under the Senior Indenture, the Partnership
may, and may permit any Subsidiary to, create, assume, incur, or suffer to exist
any lien upon any Principal Property to secure debt of the Partnership or any
person (other than the Senior Debt Securities) that is not excepted by clauses
(1) through (9), inclusive, above without securing the Senior Debt Securities
issued under the Senior Indenture, provided that the aggregate principal amount
of all debt then outstanding secured by such lien and all similar liens,
together with all Attributable Indebtedness from Sale-Leaseback Transactions
(excluding Sale-Leaseback Transactions permitted by clauses (1) through (4),
inclusive, of the first paragraph of the restriction on sale-leasebacks covenant
described below) does not exceed 10% of Consolidated Net Tangible Assets.
(Section 1006)
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers', carriers',
landlords', warehousemen's or similar lien incurred in the ordinary course
of business which is not yet due or which is being contested in good faith
by
11
<PAGE> 32
appropriate proceedings and any undetermined lien which is incidental to
construction, development, improvement or repair;
(3) the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant, license,
permit or by any provision of law, to purchase or recapture or to designate
a purchaser of, any property;
(4) liens of taxes and assessments which are (A) for the then current
year, (B) not at the time delinquent, or (C) delinquent but the validity of
which is being contested at the time by the Partnership or any Subsidiary
in good faith;
(5) liens of, or to secure performance of, leases, other than capital
leases;
(6) any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity or stay of
judicial proceedings;
(7) any lien upon property or assets acquired or sold by the
Partnership or any Subsidiary resulting from the exercise of any rights
arising out of defaults on receivables;
(8) any lien incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to secure
obligations imposed by statute or governmental regulations;
(9) any lien in favor of the Partnership or any Subsidiary;
(10) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to secure
partial, progress, advance, or other payments pursuant to any contract or
statute, or any debt incurred by the Partnership or any Subsidiary for the
purpose of financing all or any part of the purchase price of, or the cost
of constructing, developing, repairing or improving, the property or assets
subject to such lien;
(11) any lien securing industrial development, pollution control or
similar revenue bonds;
(12) any lien securing debt of the Partnership or any Subsidiary, all
or a portion of the net proceeds of which are used, substantially
concurrent with the funding thereof (and for purposes of determining such
"substantial concurrence," taking into consideration, among other things,
required notices to be given to holders of outstanding Senior Debt
Securities under the Senior Indenture in connection with such refunding,
refinancing or repurchase, and the required corresponding durations
thereof), to refinance, refund or repurchase all outstanding Senior Debt
Securities under the Senior Indenture, including the amount of all accrued
interest thereon and reasonable fees and expenses and premium, if any,
incurred by the Partnership or any Subsidiary in connection therewith;
(13) liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or surety
obligations required or requested by any governmental authority in
connection with any contract or statute; or
(14) any lien upon or deposits of any assets to secure performance of
bids, trade contracts, leases or statutory obligations.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities
that by their terms are extendable or renewable at the option of the
obligor thereon to a time more than 12 months after the time as of
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<PAGE> 33
which the amount thereof is being computed, and (B) current maturities of
long-term debt); and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all as set
forth, or on a proforma basis would be set forth, on the consolidated
balance sheet of the Partnership and its consolidated subsidiaries for the
Partnership's most recently completed fiscal quarter, prepared in
accordance with generally accepted accounting principles.
RESTRICTION ON SALE-LEASEBACKS. The Senior Indenture provides that the
Partnership will not, and will not permit any Subsidiary to, engage in the
sale or transfer by the Partnership or any Subsidiary of any Principal
Property to a person (other than the Partnership or a Subsidiary) and the
taking back by the Partnership or any Subsidiary, as the case may be, of a
lease of such Principal Property (a "Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the
date of completion of the acquisition of the Principal Property subject
thereto or the date of the completion of construction, development or
substantial repair or improvement, or commencement of full operations on
such Principal Property, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than three years;
(3) the Partnership or such Subsidiary would be entitled to incur debt
secured by a lien on the Principal Property subject thereto in a principal
amount equal to or exceeding the Attributable Indebtedness from such
Sale-Leaseback Transaction without equally and ratably securing the Senior
Debt Securities; or
(4) the Partnership or such Subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an amount
not less than the Attributable Indebtedness from such Sale-Leaseback
Transaction to (A) the prepayment, repayment, redemption, reduction or
retirement of any debt of the Partnership or any Subsidiary that is not
subordinated to the Senior Debt Securities, or (B) the expenditure or
expenditures for Principal Property used or to be used in the ordinary
course of business of the Partnership or its Subsidiaries.
"Attributable Indebtedness," when used with respect to any to any
Sale-Leaseback Transaction, means, as at the time of determination, the present
value (discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of property taxes,
maintenance, repairs, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights)
during the remaining term of the lease included in such Sale-Leaseback
Transaction (including any period for which such lease has been extended). In
the case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of the
amount determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Senior Indenture the Partnership
may, and may permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive, of the first
paragraph under "-- Restrictions On Sale-Leasebacks," provided that the
Attributable Indebtedness from such Sale-Leaseback Transaction, together with
the aggregate principal amount of outstanding
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<PAGE> 34
debt (other than the Senior Debt Securities) secured by liens upon Principal
Properties not excepted by clauses (1) through (9), inclusive, of the first
paragraph of the limitation on liens covenant described above, do not exceed 10%
of the Consolidated Net Tangible Assets. (Section 1007)
GUARANTY OF SENIOR DEBT SECURITIES BY SUBSIDIARIES. We are a holding
company that conducts all of our operations through our subsidiaries. The Senior
Indenture will require our Subsidiaries which are guarantors or co-obligors of
our Funded Debt to fully and unconditionally guarantee, as "Guarantors," our
payment obligations on the Senior Debt Securities. In particular, the Senior
Indenture will require those Subsidiaries who are guarantors or borrowers under
our Credit Agreement to equally guarantee the Senior Debt Securities.
In the Indentures, the term "Subsidiary" means, with respect to any person:
- any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof; or
- any partnership of which more than 50% of the partners' equity interests
(considering all partners' equity interests as a single class) is at the
time owned or controlled, directly or indirectly, by such person or one
or more of the other Subsidiaries of such person or combination thereof.
"Funded Debt" means all debt :
- maturing one year or more from the date of its creation;
- directly or indirectly renewable or extendable, at the option of the
debtor, by its terms or by the terms of any instrument or agreement
relating to the debt, to a date one year or more from the date of its
creation; or
- under a revolving credit or similar agreement obligating the lender or
lenders to extend credit over a period of one year or more.
ADDITION AND RELEASE OF GUARANTEES. The Senior Indenture will provide that
if any Subsidiary of the Partnership is a guarantor or obligor of any Funded
Debt of the Partnership at any time on or subsequent to the date on which the
Senior Debt Securities are originally issued (including, without limitation,
following any release of such Subsidiary from its Guarantee as described below),
then the Partnership will cause the Senior Debt Securities to be equally and
ratably guaranteed by such Subsidiary. Under the terms of the Senior Indenture,
a Guarantor may be released from its Guarantee if such Guarantor is not a
guarantor or obligor of any Funded Debt of the Partnership, provided that no
Default or Event of Default under the Senior Indenture has occurred or is
continuing. (Section 1406)
Initially, we expect that the Guarantors will be Kinder Morgan Operating
L.P. "A," Kinder Morgan Operating L.P. "B," Kinder Morgan Operating L.P. "C,"
Kinder Morgan Operating L.P. "D," Kinder Morgan Natural Gas Liquids Corporation,
Kinder Morgan CO(2), LLC and Kinder Morgan Bulk Terminals, Inc. Each of the
Guarantees will be an unsecured obligation of a Guarantor and will rank equally
with that Guarantor's guarantee under the Partnership's existing credit facility
and existing and future unsecured debt that is not expressly subordinated to its
Guarantee.
Each Guarantor is obligated under its Guarantee only up to an amount that
will not constitute a fraudulent conveyance or fraudulent transfer under
federal, state or foreign law.
SENIOR DEBT SECURITIES EFFECTIVELY SUBORDINATED TO DEBT OF NON-GUARANTOR
SUBSIDIARIES. Holders of Senior Debt Securities will effectively have a junior
position to claims of creditors and preferred stockholders of our subsidiaries
who are not Guarantors. SFPP, L.P., the subsidiary that owns our Pacific
Operations, currently has debt agreements that prohibit it from being a
guarantor of any debt of the Partnership. As a result, SFPP would not be
required to be a
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<PAGE> 35
Guarantor. As of September 30, 1998, SFPP had approximately $355 million of
outstanding debt. This debt of SFPP, and any future debt it incurs, effectively
will be senior to the Senior Debt Securities.
PROVISIONS ONLY IN THE SUBORDINATED INDENTURE
SUBORDINATED DEBT SECURITIES SUBORDINATED TO SENIOR DEBT. The Subordinated
Debt Securities will rank junior in right of payment to all of our Senior Debt.
"Senior Debt" is defined to include all notes or other unsecured evidences of
indebtedness, including guarantees of the Partnership for money borrowed by the
Partnership, not expressed to be subordinate or junior in right of payment to
any other indebtedness of the Partnership.
PAYMENT BLOCKAGES. The Subordinated Indenture provides that no payment of
principal, interest and any premium on the Subordinated Debt Securities may be
made in the event:
- we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
- we fail to pay the principal, interest, any premium or any other amounts
on any Senior Debt when due; or
- we have a nonpayment default on any Senior Debt that imposes a payment
blockage on the Subordinated Debt Securities for a maximum of 179 days at
any one time.
(Sections 1401, 1402 and 1403 of the Subordinated Indenture)
SUBORDINATED DEBT SECURITIES SUBORDINATED TO ALL DEBT OF SUBSIDIARIES. The
Subordinated Indenture will not require our Subsidiaries to guarantee the
Subordinated Debt Securities. As a result, the holders of Subordinated Debt
Securities will generally have a junior position to claims of all creditors and
preferred stockholders of our subsidiaries.
NO LIMITATION ON AMOUNT OF SENIOR DEBT. The Subordinated Indenture will not
limit the amount of Senior Debt that we may incur.
CONSOLIDATION, MERGER OR ASSET SALE
Each Indenture generally allows us to consolidate or merge with a domestic
partnership or corporation. They also allow us to sell, lease or transfer all or
substantially all of our property and assets to a domestic partnership or
corporation. If this happens, the remaining or acquiring partnership or
corporation must assume all of our responsibilities and liabilities under the
Indentures including the payment of all amounts due on the Debt Securities and
performance of the covenants in the Indentures.
However, we will only consolidate or merge with or into any other
partnership or corporation or sell, lease or transfer all or substantially all
of our assets according to the terms and conditions of the Indentures, which
include the following requirements:
- the remaining or acquiring partnership or corporation is organized under
the laws of the United States, any state or the District of Columbia;
- the remaining or acquiring partnership or corporation assumes the
Partnership's obligations under the Indentures; and
- immediately after giving effect to the transaction no Default or Event of
Default exists.
The remaining or acquiring partnership or corporation will be substituted
for us in the Indentures with the same effect as if it had been an original
party to the Indentures. Thereafter, the successor may exercise our rights and
powers under the Indentures, in our name or in its own name. If we sell or
transfer all or substantially all of our assets, we will be released from all
our liabilities and obligations under any Indenture and under the Debt
Securities. If we lease all or substantially all of our assets, we will not be
released from our obligations under the Indentures. (Sections 801 & 802)
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The Senior Indenture contains similar provisions for the Guarantors.
MODIFICATION OF INDENTURES
Under each Indenture, generally we and the Trustee may modify our rights
and obligations, the Guarantors' rights and obligations and the rights of the
holders with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debt Securities of each series affected by the
modification. No modification of the principal or interest payment terms, and no
modification reducing the percentage required for modifications, is effective
against any holder without its consent. In addition, the Partnership and the
trustee may amend the Indentures without the consent of any holder of the Debt
Securities to make certain technical changes, such as:
- correcting errors;
- providing for a successor trustee;
- qualifying the Indentures under the Trust Indenture Act; or
- adding provisions relating to a particular series of Debt Securities.
(Sections 901 & 902)
EVENTS OF DEFAULT AND REMEDIES
"Event of Default" when used in an Indenture, will mean any of the
following:
- failure to pay the principal of or any premium on any Debt Security when
due;
- failure to pay interest on any Debt Security for 30 days;
- failure to perform any other covenant in the Indenture that continues for
60 days after being given written notice;
- certain events of bankruptcy, insolvency or reorganization of the
Partnership; or
- any other Event of Default included in any Indenture or supplemental
indenture. (Section 501)
An Event of Default for a particular series of Debt Securities does not
necessarily constitute an Event of Default for any other series of Debt
Securities issued under an Indenture. The Trustee may withhold notice to the
holders of Debt Securities of any default (except in the payment of principal or
interest) if it considers such withholding of notice to be in the best interests
of the holders. (Section 602)
If an Event of Default for any series of Debt Securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the Debt Securities of the series may declare the entire principal of
all the Debt Securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the Debt Securities of that series can void the
declaration. (Section 502)
Other than its duties in case of a default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. (Section 601) If they provide this reasonable indemnification, the
holders of a majority in principal amount of any series of Debt Securities may
direct the time, method and place of conducting any proceeding or any remedy
available to the Trustee, or exercising any power conferred upon the Trustee,
for any series of Debt Securities. (Section 512)
NO LIMIT ON AMOUNT OF DEBT SECURITIES
Neither of the Indentures limits the amount of Debt Securities that we may
issue. Each Indenture allows us to issue Debt Securities up to the principal
amount that we authorize.
REGISTRATION OF NOTES
We may issue Debt Securities of a series in registered, bearer, coupon or
global form. (Sections 201 & 202)
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MINIMUM DENOMINATIONS
Unless the prospectus supplement for each issuance of Debt Securities
states otherwise the securities will be issued in registered form in amounts of
$1,000 each or multiples of $1,000.
NO PERSONAL LIABILITY OF GENERAL PARTNER
The General Partner and its directors, officers, employees and shareholders
will not have any liability for our obligations under the Indentures or the Debt
Securities. Each holder of Debt Securities by accepting a Debt Security waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Debt Securities.
PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the Debt Securities are registered on days specified in the
Indentures or any prospectus supplement. Debt Securities payments in other forms
will be paid at a place designated by us and specified in a prospectus
supplement. (Section 307)
Fully registered securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency
maintained by us for such purposes, without the payment of any service charge
except for any tax or governmental charge. (Section 305)
DISCHARGING OUR OBLIGATIONS
We and the Guarantors may choose to either discharge our obligations on the
Debt Securities of any series in a covenant defeasance, or to release ourselves
from our covenant restrictions on the Debt Securities of any series in a
covenant defeasance. We may do so at any time on the 91st day after we deposit
with the Trustee sufficient cash or government securities to pay the principal,
interest, any premium and any other sums due to the stated maturity date or a
redemption date of the Debt Securities of the series. If we choose the legal
defeasance option, the holders of the Debt Securities of the series will not be
entitled to the benefits of the Indenture except for registration of transfer
and exchange of Debt Securities, replacement of lost, stolen or mutilated Debt
Securities conversion or exchange of Debt Securities, sinking fund payments and
receipt of principal and interest on the original stated due dates or specified
redemption dates. (Section 1302)
We may discharge our obligations under the Indentures or release ourselves
from covenant restrictions only if we meet certain requirements. Among other
things, we must deliver an opinion of our legal counsel that the discharge will
not result in holders having to recognize taxable income or loss or subject them
to different tax treatment. In the case of legal defeasance, this opinion must
be based on either an IRS letter ruling or change in federal tax law. We may not
have a default on the Debt Securities discharged on the date of deposit. The
discharge may not violate any of our agreements. The discharge may not result in
our becoming an investment company in violation of the Investment Company Act of
1940.
BOOK ENTRY, DELIVERY AND FORM
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a prospectus supplement.
Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry notes of
a series will be issued in the form of a global note that will be deposited with
DTC. This means that we will not issue certificates to each holder. One global
note will be issued to DTC who will keep a computerized record of its
participants (for example, your broker) whose clients have purchased the notes.
The participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a certificate note, a global note
may not be transferred; except that DTC, its nominees and their
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successors may transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participant's accounts. This eliminates the need
to exchange certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date, by using an omnibus proxy. Payments by participants
to owners of beneficial interests in the global notes, and voting by
participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with notes held
for the account of customers registered in "street name." However, payments will
be the responsibility of the participants and not of DTC, the Trustee or us.
Debt Securities represented by a global note will be exchangeable for
certificate notes with the same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- we determine not to require all of the Debt Securities of a series to be
represented by a global note and notify the Trustee of our decision.
THE TRUSTEE
U.S. Trust Company of Texas, N.A. will initially act as trustee under the
Senior Indenture and the Subordinated Indenture.
RESIGNATION OR REMOVAL OF TRUSTEE. Under provisions of the Indentures and
the Trust Indenture Act of 1939, as amended, governing trustee conflicts of
interest, any uncured Event of Default with respect to any series of Senior Debt
Securities will force the trustee to resign as trustee under either the
Subordinated Indenture or the Senior Indenture. Also, any uncured Event of
Default with respect to any series of Subordinated Debt Securities will force
the trustee to resign as trustee under either the Senior Indenture or the
Subordinated Indenture. Any
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resignation will require the appointment of a successor trustee under the
applicable Indenture in accordance with the terms and conditions.
The trustee may resign or be removed by us with respect to one or more
series of Debt Securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the Debt Securities of any series may remove the trustee with respect
to the Debt Securities of such series. (Section 610)
LIMITATIONS ON TRUSTEE IF IT IS A CREDITOR OF THE PARTNERSHIP. Each
Indenture contains certain limitations on the right of the trustee thereunder,
in the event that it becomes a creditor of the Partnership, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. (Section 613)
ANNUAL TRUSTEE REPORT TO HOLDERS OF DEBT SECURITIES. The trustee is
required to submit an annual report to the holders of the Debt Securities
regarding, among other things, the trustee's eligibility to serve as such, the
priority of the trustee's claims regarding certain advances made by it, and any
action taken by the trustee materially affecting the Debt Securities.
CERTIFICATES AND OPINIONS TO BE FURNISHED TO TRUSTEE. Each Indenture
provides that, in addition to other certificates or opinions that may be
specifically required by other provisions of an Indenture, every application by
us for action by the trustee shall be accompanied by a certificate of certain of
our officers and an opinion of counsel (who may be our counsel) stating that, in
the opinion of the signers, all conditions precedent to such action have been
complied with by us. (Section 102)
GOVERNING LAW. The Indentures and the Debt Securities will be governed by
the laws of the State of New York.
DESCRIPTION OF COMMON UNITS
NUMBER OF UNITS
As of September 30, 1998, we have 48,851,690 Units outstanding. Our
partnership agreement does not limit the number of Units we may issue.
WHERE UNITS ARE TRADED
Our outstanding Units are listed on the New York Stock Exchange under the
symbol "ENP". Any additional Units we issue will also be listed on the NYSE.
QUARTERLY DISTRIBUTIONS
Our partnership agreement requires us to distribute 100% of "Available
Cash" to the Partners within 45 days following the end of each calendar quarter.
"Available Cash" consists generally of all of our cash receipts, less cash
disbursements and net additions to reserves. In addition, when we acquired our
Pacific Operations from Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"),
the general partner of Santa Fe retained a 0.5% interest in those operations.
"Available Cash" does not include amounts payable to the former Santa Fe general
partner due to this interest.
We distribute Available Cash for each quarter as follows:
- 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;
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- 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.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the Units is First Chicago Trust
Company of New York. You may contact them at the following address:
First Chicago Trust Company
of New York
525 Washington Blvd.
Jersey City, NJ 07310
SUMMARY OF PARTNERSHIP AGREEMENT
A summary of the important provisions of our partnership agreement is
included in the reports filed with the SEC.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of material tax considerations that
may be relevant to a prospective Unitholder. The discussion is the opinion of
Morrison & Hecker L.L.P. ("Counsel") as to the material federal income tax
consequences of the ownership and disposition of Units. Counsel's opinion does
not include portions of the discussion regarding factual matters or portions of
the discussion that specifically state that it is unable to opine. The IRS may
disagree with Counsel's opinion as to the tax consequences of ownership and
disposition of Units. The Partnership has not and will not request a ruling from
the IRS as to any matter addressed in this discussion.
The following discussion is based upon current provisions of the Code,
existing and proposed regulations under the Code and current administrative
rulings and court decisions, including modifications made by the Taxpayer Relief
Act of 1997 (the "1997 Act"), all as in effect on the date of this Prospectus.
This discussion is also based on the assumptions that the operation of the
Partnership and its operating partnerships (collectively, the "Operating
Partnerships") will be in accordance with the relevant partnership agreements.
This discussion is subject both to the accuracy of these assumptions and the
continued applicability of such legislative, administrative and judicial
authorities. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below. Any
such change may be retroactively applied in a manner that could adversely affect
a holder of Units.
The discussion below is directed primarily to a Unitholder that is a United
States person for federal income tax purposes. Except as specifically noted, the
discussion does not address all of the federal income tax consequences that may
be relevant:
- to a holder in light of the holder's particular circumstances;
- to a holder that is a partnership, corporation, trust or estate (and
their partners, shareholders and beneficiaries);
- to holders subject to special rules, such as certain financial
institutions, tax-exempt entities, foreign corporations, non-resident
alien individuals, regulated investment companies, insurance companies,
dealers in securities, or traders in securities who elect to mark to
market; and
- to persons holding Units as part of a "straddle," "synthetic security,"
"hedge" or "conversion transaction" or other integrated investment.
Moreover, the effect of any applicable state, local or foreign tax laws is not
discussed.
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The discussion deals only with Units held as "capital assets" within the
meaning of Section 1221 of the Code.
The federal income tax treatment of holders of Units depends in some
instances on determinations of fact and interpretations of complex provisions of
federal income tax laws for which no clear precedent or authority may be
available. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT HIS OWN TAX
ADVISORS WHEN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF UNITS.
LEGAL OPINIONS AND ADVICE
The remainder of the discussion under this "Material Federal Income Tax
Considerations" section is the opinion of Counsel as to the material federal
income tax consequences of the ownership and disposition of Units.
Counsel has rendered its opinion to the Partnership to the effect that:
- the Partnership and the Operating Partnerships are and will continue to
be classified as partnerships for federal income tax purposes and will
not be classified as associations taxable as corporations, assuming that
the factual representations set forth in "-- General Features of
Partnership Taxation -- Partnership Status" are adhered to by such
partnerships;
- each person who acquires beneficial ownership of Units pursuant to this
prospectus and either has been admitted or is pending admission to the
Partnership as an additional limited partner will be treated as a partner
of the Partnership for federal income tax purposes; and
- each person who acquired beneficial ownership of Units and whose Units
are held by a nominee will be treated as a partner of the Partnership for
federal income tax purposes, so long as such person has the right to
direct the nominee in the exercise of all substantive rights attendant to
the ownership of such Units.
The following are material federal income tax issues associated with the
ownership of Units and the operation of the Partnership with respect to which
Counsel is unable to opine:
- whether a court would sustain the valuations of assets and allocations of
such amounts (the "Book-Tax Disparity") among tangible assets (and the
resulting net Curative Allocations) if the IRS challenged such valuations
and allocations;
- whether a court would sustain certain procedures utilized by the
Partnership in administering the Section 754 election and the resulting
Section 743(b) adjustments to any Unitholder's basis in its Units if the
IRS challenged such procedures. See "-- Tax Treatment of Operations --
Section 754 Election."; and
- whether a court would allow the Partnership's monthly convention for
allocating Partnership income, gain, loss, deduction or credit to
Partners. See "Disposition of Units -- Allocations Between Transferors
and Transferees."
A more detailed discussion of these items is contained in the applicable
sections below.
The opinion of Counsel as to partnership classification is based on certain
representations of the Partnership and the General Partner. These
representations address the nature of the income of the Partnership which is
relevant to a determination of whether its income qualifies for the Natural
Resource Exception pursuant to Section 7704 of the Code. See "-- General
Features of Partnership Taxation -- Partnership Status." The opinion of Counsel
is based upon existing provisions of the Code and the Regulations, existing
administrative rulings and procedures of the IRS and existing court decisions.
Such authorities may change in the future, which change could be retroactively
applied. Such opinions represent
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only Counsel's best legal judgment as to the particular issues and are not
binding on the IRS or the courts.
GENERAL FEATURES OF PARTNERSHIP TAXATION
PARTNERSHIP STATUS. The applicability of the federal income tax
consequences described in this prospectus depends on the treatment of the
Partnership and the Operating Partnerships as partnerships for federal income
tax purposes and not as associations taxable as corporations. For federal income
tax purposes, a partnership is not a taxable entity. It is a conduit through
which all items of partnership income, gain, loss, deduction and credit are
passed through to its partners. Thus, income and deductions resulting from
partnership operations are allocated to the partners and are taken into account
by the partners on their individual federal income tax returns. In addition, a
partner generally is not taxed upon a distribution of money from a partnership
unless the amount of the distribution exceeds the partner's tax basis in the
partner's interest in the partnership. If the Partnership or any of the
Operating Partnerships were classified for federal income tax purposes as an
association taxable as a corporation, the entity would be a separate taxable
entity. In such a case, the entity, rather than its members, would be taxed on
the income and gains and would be entitled to claim the losses and deductions
resulting from its operations. A member would be taxed on distributions from the
entity in the same manner as a shareholder would be taxed on distributions from
a corporation. A member would recognize ordinary income to the extent of the
current and accumulated earnings and profits of the entity, then a nontaxable
reduction of basis to the extent of the member's tax basis in the member's
interest in the entity and finally gain from the sale or exchange of the
member's interest in the entity. Any such characterization of either the
Partnership or one of the Operating Partnerships as an association taxable as a
corporation would likely result in a material reduction of the anticipated cash
flow and after-tax return to the Unitholders.
Pursuant to Final Treasury Regulations 301.7701-1, 301.7701-2 and
301.7701-3, effective January 1, 1997 (the "Check-the-Box Regulations"), an
entity in existence on January 1, 1997, will generally retain its current
classification for federal income tax purposes. As of January 1, 1997, the
Partnership was classified and taxed as a partnership. Pursuant to the
Check-the-Box Regulations this prior classification will be respected for all
periods prior to January 1, 1997, if (1) the entity had a reasonable basis for
the claimed classification; (2) the entity recognized federal tax consequences
of any change in classification within five years prior to January 1, 1997; and
(3) the entity was not notified prior to May 8, 1996, that the entity
classification was under examination. Prior to the finalization of the
Check-the-Box Regulations, the classification of an entity as a partnership was
determined under a four factor test developed by a number of legal authorities.
Based on this four factor test, the Partnership had a reasonable basis for its
classification as a partnership. Moreover, the Partnership has not changed its
classification and the IRS has not notified the partnership that its
classification was under examination.
Section 7704 provides that publicly traded partnerships will, as a general
rule, be taxed as corporations. However, an exception exists with respect to
publicly traded partnerships 90% or more of the gross income of which for every
taxable year consists of "qualifying income" (the "Natural Resource Exception").
"Qualifying income" includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines) or marketing of any mineral or natural resource including
oil, natural gas or products of oil and natural gas. Other types of "qualifying
income" include interest (other than from a financial business), dividends,
gains from the sale of real property and gains from the sale or other
disposition of capital assets held for the production of income that otherwise
constitute "qualifying income." The General Partner has represented that the
Partnership will derive more than 90% of its gross income from fees and charges
for
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transporting refined petroleum products, NGLs, CO(2) and other hydrocarbons
through the Partnership's pipelines, dividends from the corporation that owns
the Mont Belvieu Fractionator and interest (other than from a financial
business). Based upon that representation, Counsel is of the opinion that the
Partnership's gross income derived from these sources will constitute
"qualifying income" and the Partnership will qualify for the Natural Resource
Exception.
If the Partnership fails to meet the Natural Resource Exception, the
Partnership will be treated as if it had transferred on the first day of the
year in which it fails to meet the Natural Resource Exception all of its assets
(subject to liabilities) to a newly-formed corporation in exchange for stock in
that corporation. Then that Partnership will be treated as having distributed
such stock to the partners in liquidation of their interests in the Partnership.
This contribution and liquidation should be tax-free to the holders of Units and
the Partnership, if the Partnership, at that time, does not have liabilities in
excess of the basis of its assets. Thereafter, the Partnership would be treated
as a corporation for tax purposes.
However, in such case the Partnership will not be treated as a corporation
if the IRS determines that the failure to meet the Natural Resources Exception
is inadvertent, and the Partnership takes steps within a reasonable time to once
again meet the 90% gross income test and agrees to make such adjustments and pay
such amounts as the IRS requires. Such amount might include the tax liability
that would be imposed on the Partnership if it were treated as a corporation
during the period of inadvertent failure. The General Partner, as general
partner of the Partnership, will use its best efforts to assure that the
Partnership will continue to meet the gross income test for each taxable year.
The Partnership anticipates that it will continue to meet the gross income test.
If the Partnership fails to meet the gross income test for any taxable year, the
General Partner, as general partner of the Partnership, will use its best
efforts to assure that the Partnership will qualify under the inadvertent
failure exception discussed above.
If the Partnership or any Operating Partnership were treated as an
association or otherwise taxable as a corporation in any taxable year, because
it failed to meet the Natural Resource Exception or for any other reason, its
items of income, gain, loss, deduction and credit would be reflected only on its
tax return rather than being passed through to the holders of Units, and its net
income would be taxed at the entity level at corporate rates. In addition, any
distribution made to a holder of Units would be treated as either taxable
dividend income (to the extent of the Partnership's current or accumulated
earnings and profits) or in the absence of earnings and profits as a nontaxable
return of capital (to the extent of the holder's basis in the Units) or taxable
capital gain (after the holder's basis in the Units is reduced to zero).
Accordingly, treatment of either the Partnership or any of the Operating
Partnerships as an association taxable as a corporation would materially reduce
a Unitholder's cash flow and after-tax economic return on an investment in the
Partnership.
Congress could change the tax laws to treat the Partnership as an
association taxable as a corporation for federal income tax purposes or
otherwise subject it to entity-level taxation. The Partnership Agreement
provides that, if a law is enacted that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to entity-level taxation for
federal income tax purposes, the General Partner will amend the Partnership
Agreement to reduce its incentive distributions.
Under current law, the Partnership and the Operating Partnerships are
classified and taxed as partnerships for federal income tax purposes and not as
associations taxable as corporations. This conclusion is based upon certain
factual representations and covenants made by the General Partner including:
- the General Partner will operate the Partnership and the Operating
Partnerships strictly in accordance with (i) all applicable partnership
statutes, and (ii) the Partnership Agreements;
- the General Partner will at all times act independently of the
Unitholders;
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- for each taxable year, the Partnership and the Operating Partnerships
will derive less than 10% of the aggregate gross income from sources
other than (i) the exploration, development, production, processing,
refining, transportation or marketing of any mineral or natural resource,
including oil, gas or products of oil and natural gas and naturally
occurring carbon dioxide or (ii) other items of "qualifying income"
within the definition of Section 7704(d);
- prior to January 1, 1997, the General Partner maintained throughout the
term of the Partnership and the Operating Partnerships substantial assets
that creditors of the Partnership and the Operating Partnerships could
reach. This determination was based upon the fair market value of its
assets and excluding its interest in, and any account or notes receivable
from or payable to, any limited partnership in which the General Partner
has any interest; and
- the Partnership and each of the Operating Partnerships have not elected
association classification under the Check-the-Box Regulations or
otherwise and will not elect such classification.
The Partnership has not requested or received any ruling from the IRS with
respect to the classification of the Partnership and the Operating Partnerships
for federal income tax purposes and the opinion of Counsel is not binding on the
IRS. The IRS imposed certain procedural requirements for years prior to 1997 to
be met before it would issue a ruling to the effect that a limited partnership
with a sole corporate general partner would be classified as a partnership for
federal income tax purposes. These procedural requirements were not rules of
substantive law to be applied on audit, but served more as a "safe-harbor" for
purposes of obtaining a ruling. The General Partner believes that the
Partnership and the Operating Partnerships did not satisfy all such procedural
requirements. The conclusion described above as to the partnership status of the
Partnership for years before January 1, 1997 does not depend upon the ability of
the Partnership to meet the criteria set forth in such procedural requirements.
The following discussion assumes that the Partnership and the Operating
Partnerships are, and will continue to be, treated as partnerships for federal
income tax purposes. If either assumption is incorrect, most, if not all, of the
tax consequences described in the prospectus would not apply to Unitholders. In
particular, if the Partnership is not a partnership, a Unitholder may for
federal income tax purposes (i) recognize ordinary income, as the result of any
payments to him in respect of partnership distributions and (ii) not be entitled
to allocations of partnership income, gain, loss and deduction.
LIMITED PARTNER STATUS. Holders of Units who the General Partner has
admitted as limited partners will be treated as partners of the Partnership for
federal income tax purposes. Moreover, the IRS has ruled that assignees of
partnership interests who have not been admitted to a partnership as partners,
but who have the capacity to exercise substantial dominion and control over the
assigned partnership interests, will be treated as partners for federal income
tax purposes. On the basis of this ruling, except as otherwise described in this
prospectus, the General Partner will treat the following persons as partners of
the Partnership for federal income tax purposes, (a) assignees who have executed
and delivered Transfer Applications, and are awaiting admission as limited
partners and (b) holders of Units whose Units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their Units. As this ruling
does not extend, on its facts, to assignees of Units who are entitled to execute
and deliver Transfer Applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver Transfer
Applications, Counsel cannot opine as to the status of these persons as partners
of the Partnership. Income, gain, deductions, losses or credits
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would not appear to be reportable by such a holder of Units, and any such
holders of Units receiving cash distributions would be fully taxable as ordinary
income. These holders should consult their own tax advisors with respect to
their status as partners in the Partnership for federal income tax purposes. A
purchaser or other transferee of Units who does not execute and deliver a
Transfer Application may not receive certain federal income tax information or
reports furnished to record holders of Units, unless the Units are held in a
nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose the status as a partner
with respect to such Units for federal income tax purposes. See "-- Disposition
of Units -- Treatment of Short Sales and Deemed Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
BASIS OF UNITS. A Unitholder's initial tax basis for a Unit is the amount
paid for the Unit plus his share, if any, of nonrecourse liabilities of the
Partnership. A partner also includes in the tax basis for such partnership
interest any capital contributions that the partner actually makes to the
Partnership and the partner's allocable share of all Partnership income and
gains, less the amount of all distributions that the partner receives from the
Partnership and such partner's allocable share of all Partnership losses. For
purposes of these rules, if a partner's share of Partnership liabilities is
reduced for any reason, the partner is deemed to have received a cash
distribution equal to the amount of the reduction. The partner will recognize
gain as a result of this deemed cash distribution if, and to the extent that,
the deemed cash distribution exceeds the partner's adjusted tax basis for his
partnership interest.
FLOW-THROUGH OF TAXABLE INCOME. The Partnership will not pay any federal
income tax. Instead, each holder of Units must report on such holder's income
tax return such holder's allocable share of the income, gains, losses and
deductions without regard to whether corresponding cash distributions are
received by such Unitholders. Consequently, the Partnership may allocate income
to a holder of Units even though the holder has not received a cash distribution
in respect of such income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Under Section 731 of the Code, a
partner will recognize gain as a result of a distribution from a partnership if
the partnership distributes an amount of money to the partner which exceeds such
partner's adjusted tax basis in the partnership interest prior to the
distribution. The amount of gain is limited to this excess. Cash distributions
in excess of such Unitholder's basis generally will be considered to be gain
from the sale or exchange of the Units, taxable in accordance with the rules
described under "-- Disposition of Units."
A decrease in a Unitholder's percentage interest in the Partnership,
because of the Partnership's issuance of additional Units, or otherwise, will
decrease a Unitholder's share of nonrecourse liabilities of the Partnership, if
any. This decrease will result in a corresponding deemed distribution of cash.
The Partnership does not currently have, and the General Partner does not
anticipate that it will have, any material nonrecourse liabilities.
A non-pro rata distribution of money or property may result in ordinary
income to a holder of Units, regardless of such holder's tax basis in Units, if
the distribution reduces such holder's share of the Partnership's "Section 751
Assets." "Section 751 Assets" are defined by the Code to include assets giving
rise to depreciation recapture or other "unrealized receivables" or
"substantially appreciated inventory." For this purpose, inventory is
substantially appreciated if its value exceeds 120% of its adjusted tax basis.
In addition to depreciation recapture, "unrealized receivables" include rights
to payment for goods (other than capital assets) or services to the extent not
previously includable in income under a partnership's method of accounting. To
the extent that such a reduction in a Unitholder's
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share of Section 751 Assets occurs, the Partnership will be deemed to have
distributed a proportionate share of the Section 751 Assets to the Unitholder
followed by a deemed exchange of such assets with the Partnership in return for
the non-pro rata portion of the actual distribution made to such holder. This
deemed exchange will generally result in the realization of ordinary income
under Section 751(b) by the Unitholder. Such income will equal the excess of (1)
the non-pro rata portion of such distribution over (2) the Unitholder's tax
basis in such holder's share of Section 751 Assets deemed relinquished in the
exchange.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. Generally, a Unitholder may deduct
his share of losses that the Partnership incurs only to the extent of his tax
basis in the Units which he holds. A further "at risk" limitation may operate to
limit deductibility of losses in the case of an individual holder of Units if
the "at risk" amount is less than the holder's basis in the Units. This
limitation also applies to a corporate holder of Units if five or fewer
individuals or certain tax-exempt organizations own directly or indirectly more
than 50% in the value of its stock. A holder of Units must recapture losses
deducted in previous years to the extent that the Partnership distributions
cause such Unitholder's at risk amount to be less than zero at the end of any
taxable year. Losses disallowed to a holder of Units or recaptured as a result
of theses limitations will carry forward and will be allowable to the extent
that the Unitholder's basis or at risk amount (whichever is the applicable
limiting factor) is increased.
In general, a holder of Units will be "at risk" to the extent of the
purchase price of the holder's Units. The amount "at risk" may be less than the
Unitholder's basis for the Units in an amount equal to the Unitholder's share of
nonrecourse liabilities, if any, of the Partnership. A Unitholder's at risk
amount will increase or decrease as the basis of such Units held increases or
decreases, excluding any effect on basis attributable to changes in the
Unitholder's share of Partnership nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely-held corporations and personal service corporations can
only deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) that are not in excess of the
taxpayer's income from such passive activities or investments. The passive loss
limitations are not applicable to a widely held corporation. The passive loss
limitations are to be applied separately with respect to each publicly traded
partnership. Consequently, a Unitholder can use the losses generated by the
Partnership, if any, only to offset future income generated by the Partnership.
A Unitholder cannot use such losses to offset income from other passive
activities or investments (including other publicly traded partnerships) or
salary or active business income. Passive losses that are not deductible,
because they exceed the Unitholder's allocable share of income generated by the
Partnership would be deductible in the case of a fully taxable disposition of
such Units to an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions such as the at risk rules and
the basis limitation.
The IRS has announced that it will issue Treasury Regulations that
characterize net passive income from a publicly traded partnership as investment
income for purposes of the limitations on the deductibility of investment
interest.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION. In general, the Partnership
will allocate items of income, gain, loss and deduction between the General
Partner, in its capacity as general partner, and the holders of Units in the
same proportion that Available Cash is distributed between the General Partner
and the holders of Units. If distributions of Available Cash are not made in
respect of a particular taxable year, the Partnership will allocate such items
among the partners in accordance with their respective percentage interests. If
the Partnership has a net loss, the Partnership will allocate items of income,
gain, loss and deduction first, to the General Partner and the
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Unitholders to the extent of their positive capital accounts, and second, to the
General Partner. On a liquidating sale of assets, the Partnership Agreement
provides separate gain and loss allocations, designed to the extent possible,
(1) to eliminate a deficit in any partner's capital account and (2) to produce
capital accounts which, when followed on liquidation, will result in each holder
of Units recovering Unrecovered Capital, and a distributive share of any
additional value.
Under Section 704(b), a partnership's allocation of any item of income,
gain, loss or deduction to a partner will not be given effect for federal income
tax purposes, unless it has "substantial economic effect," or is otherwise
allocated in accordance with the partner's interest in the partnership. If the
allocation does not satisfy this standard, it will be reallocated among the
partners on the basis of their respective interests in the partnership, taking
into account all facts and circumstances.
Regulations under Section 704(b) delineate the circumstances under which
the IRS will view partnership allocations as having an "economic effect" that is
"substantial." Generally, for an allocation to have "economic effect" under the
Regulations:
- the partnership must reflect the allocation as an appropriate increase or
decrease in a capital account maintained for each partner in accordance
with specific rules set forth in the Regulations;
- throughout the term of the partnership, the partnership must make
liquidating distributions (including complete redemptions of a partner's
interest in the partnership) in accordance with the partner's positive
capital account balances; and
- any partner with a deficit balance in such partner's capital account
following a liquidating distribution must be unconditionally obligated
(either by contract or state law) to restore the amount of such deficit
to the partnership within a limited period of time.
If the first two of these requirements are met, but the partner to whom an
allocation of loss or deduction is made is not obligated to restore the full
amount of any deficit balance in such partner's capital account upon liquidation
of the partnership, an allocation of loss or deduction may still have economic
effect, if (1) the agreement contains a "qualified income offset" provision, and
(2) the allocation either does not (i) cause a deficit balance in a partner's
capital account (reduced by certain anticipated adjustments, allocations and
distributions specified in the Regulations) as of the end of the partnership
taxable year to which the allocation relates or (ii) increase any such deficit
balance in this specially adjusted capital account by more than the partner's
unpaid obligation to contribute additional capital to the partnership. A
qualified income offset provision requires that in the event of any unexpected
distribution (or specified adjustments or allocations) the partnership must make
an allocation of income or gain to the distributees that eliminates the
resulting capital account deficit as quickly as possible. This rule is referred
to in this prospectus as the "Alternate Economic Effect Rule."
The Regulations require that capital accounts be:
- credited with the fair market value of property contributed to the
partnership, net of liabilities encumbering the contributed property that
the partnership is considered to assume or take subject to pursuant to
Section 752 ("Contributed Property");
- credited with the amount of cash contributed to the partnership; and
- adjusted by items of depreciation, amortization, gain and loss
attributable to partnership properties that have been computed by taking
into account the book value (rather than tax basis) of such properties.
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A partner's capital account must also be reduced by:
- the amount of money distributed to such partner by the partnership;
- the fair market value of property distributed to such partner by the
partnership, net of liabilities encumbering the distributed property that
such holder is considered to assume or take subject to pursuant to
Section 752; and
- a distributive share of certain partnership expenses that are neither
deductible nor amortizable.
The "Book-Tax Disparities" created by crediting capital accounts with the
value of Contributed Properties are eliminated through tax allocations that
cause the partner whose capital account reflects unrealized gain or loss to bear
the corresponding tax benefit or burden associated with the recognition of such
unrealized gain or loss in accordance with the principles of Section 704(c). The
allocations of these tax items that differ in amount from their correlative book
items do not have economic effect, because they are not reflected in the
partners' capital accounts. However, the allocations of such items will be
deemed to be in accordance with the partners' interests in the partnership if
they are made in accordance with the Section 704(c) Regulations.
In addition, the Regulations permit a partnership to increase or decrease
partners' capital accounts to reflect a fair market revaluation of partnership
property, if the adjustments are made for a substantial non-tax business purpose
in connection with a contribution or distribution of money or other property in
consideration for the acquisition or relinquishment of an interest in the
partnership. These adjustments may also create Book-Tax Disparities, which the
Regulations require a partnership to eliminate through tax allocations in
accordance with Section 704(c) principles.
An allocation must not only have economic effect to be respected, but that
economic effect must also be "substantial." The economic effect of an allocation
is substantial if there is a reasonable possibility that the allocation will
affect substantially the dollar amounts the partners will receive from the
partnership, independent of tax consequences. As a general matter, however, the
economic effect of an allocation is not substantial if, at the time the
partnership adopts the allocation, the after-tax economic consequences of at
least one partner may, in present value terms, be enhanced by such allocation,
but there is a strong likelihood that the after-tax economic consequences of no
other partner will, in present value terms, be substantially diminished by such
allocation.
The Partnership Agreement requires that the Partnership maintain a capital
account for each partner, generally in accordance with the applicable tax
accounting principles set forth in the Regulations, and that the Partnership
reflect all allocations to a partner by an appropriate increase or decrease in
the partner's capital account. In addition, the General Partner will make
distributions upon liquidation of the Partnership in accordance with positive
capital account balances. The limited partners are not required to contribute
capital to the Partnership to restore deficit balances in their capital accounts
upon liquidation of the Partnership. However, the Partnership Agreement contains
qualified income offset and minimum gain chargeback provisions, which under the
Section 704(b) Regulations comply with the Alternate Economic Effect Rule and
will obviate the requirement to restore negative capital accounts. The
Partnership Agreement provides for the reallocation to the General Partner of
any losses or deductions otherwise allocable to a holder of Units that have the
effect of creating a deficit balance in such holder's capital account, as
specially adjusted, pursuant to the Partnership Agreement's terms.
Except as discussed below, items of income, gain, loss and deduction
allocated to the holders of Units, in the aggregate, will be allocated among the
holders of Units in accordance with the number of Units held by such Unitholder.
The Partnership will make special tax (but not book) allocations to reflect
Book-Tax Disparities with respect to Contributed Properties. The Partnership
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Agreement also provides for certain special allocations of income and gain
required by the qualified income offset and minimum gain chargeback provisions.
In addition, the Partnership Agreement empowers the General Partner to allocate
various Partnership items other than in accordance with the percentage interests
of the General Partner and the holders of Units when, in its judgment, such
special allocations are necessary to comply with applicable provisions of the
Code and the Regulations and to achieve uniformity of Units. See "-- Uniformity
of Units."
With respect to Contributed Property, the Partnership Agreement provides
that, for federal income tax purposes, items of income, gain, loss and deduction
are first allocated among the partners in a manner consistent with Section
704(c). In addition, the Partnership Agreement requires the Partnership to
allocate items of income, gain, loss and deduction attributable to any
properties in accordance with Section 704(c) principles when, upon the
subsequent issuance of any Units, the Partnership has adjusted the book value of
such properties to reflect unrealized appreciation or depreciation in value from
the later of the Partnership's acquisition date for such properties or the
latest date of a prior issuance of Units ("Adjusted Property"). Thus, the
Partnership will specially allocate deductions for the depreciation of
Contributed Property and Adjusted Property to the non-contributing Unitholders
and the Partnership will specially allocate gain or loss from the disposition of
such property attributable to the Book-Tax Disparity (the "Section 704(c) Gain")
to the contributing Unitholders so that the non-contributing Unitholders may
claim, to the extent possible, cost recovery and depreciation deductions and the
Partnership will allocate to them gain or loss from the sale of assets generally
as if they had purchased a direct interest in the Partnership's assets.
The Partnership Agreement also allocates gain from the sale of properties
that is characterized as recapture income among the holders of Units and the
General Partner (or its successors) in the same manner in which such partners
were allocated the deductions giving rise to such recapture income. Final
Treasury Regulations under Section 1245 provide that depreciation recapture will
be specially allocated based on the allocation of the deductions giving rise to
such recapture income, as provided for in the Partnership Agreement.
Items of gross income and deduction will be allocated in a manner intended
to eliminate Book-Tax Disparities, if any, that are not eliminated by Section
704(c) allocations as a result of the application of the Ceiling Rule with
respect to Contributed Property or Adjusted Property. Such Curative Allocations
of gross income and deductions to preserve the uniformity of the income tax
characteristics of Units will not have economic effect, because the capital
accounts of the holders of Units will not reflect such allocations. However,
such allocations will eliminate Book-Tax Disparities and are thus consistent
with the Regulations under Section 704(c). With the exception of certain
conventions adopted by the Partnership with respect to administration of the
Section 754 election and the attendant Section 743(b) basis adjustments
discussed at "-- Tax Treatment of Operations -- Section 754 Election"; and
allocation of the effect of unamortizable Section 197 Book-Up amounts and common
inside basis, allocations under the Partnership Agreement will be given effect
for federal income tax purposes in determining a holder's distributive share of
an item of income, gain, loss or deduction. There are, however, uncertainties in
the Regulations relating to allocations of partnership income, and Unitholders
should be aware that the IRS may successfully challenge some of the allocations
in the Partnership Agreement. See "-- Tax Treatment of Operations -- Section 754
Election-- " and "-- Uniformity of Units" for a discussion of such allocations.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR. The Partnership currently maintains the
calendar year as its taxable year and has adopted the accrual method of
accounting for federal income tax purposes.
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TAX BASIS, DEPRECIATION AND AMORTIZATION. The Partnership will use its tax
bases for its assets to compute depreciation and cost recovery deductions and,
ultimately, after adjustment for intervening depreciation or cost recovery
deductions, gain or loss on the disposition of such assets.
The Partnership and the Operating Partnerships will have tangible assets of
substantial value, including the pipelines and related equipment. A significant
portion of the assets were placed in service prior to the effective dates of the
accelerated cost recovery system and will be depreciated over a 17 1/2 year
period on a declining balance method. The General Partner will depreciate
certain assets using the accelerated methods provided for under Section 168 of
the Code. In addition, the Partnership, will use accelerated methods provided
for under Section 167 of the Code to depreciate certain other assets during the
early years of the depreciable lives of those assets, and then elect to use the
straight line method in subsequent years.
The Partnership allocated the capital account value among the Partnership's
assets after the acquisition of Santa Fe based upon their relative fair market
values established by an independent appraisal. Any amount in excess of the fair
market values of specific tangible assets may constitute non-amortizable
intangible assets (including goodwill).
The tax basis of goodwill and most other intangible assets used in a trade
or business acquired after August 10, 1993 (or prior to that time in certain
events), may be amortized over 15 years. The Partnership will not amortize the
goodwill, if any, created as a result of the acquisition of Santa Fe for tax
capital account or income tax purposes because of the Step-in-the-Shoes and
Anti-Churning rules. However, see "-- Section 754 Election" with respect to the
amortization of Section 743(b) adjustments available to purchasers of Units. The
IRS may challenge either the fair market values or the useful lives assigned to
such assets. If any such challenge or characterization were successful, the
Partnership would reduce the deductions allocated to a holder of Units in
respect of such assets and would increase by a like amount a Unitholder's share
of taxable income from the Partnership. Any such increase could be material.
If the Partnership disposes of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain may be subject to the recapture rules
and taxed as ordinary income rather than capital gain. The Partnership will
determine the amount of the gain by reference to the amount of depreciation
previously deducted and the nature of the property. Similarly, a partner that
has taken cost recovery or depreciation deductions with respect to Partnership
property may be required to recapture such deductions upon a sale of such
partner's interest in the Partnership. See "-- Allocation of Partnership Income,
Gain, Loss and Deduction" and "-- Disposition of Units -- Recognition of Gain or
Loss."
A partnership may amortize its organizational costs over any period
selected by the partnership not shorter than 60 months. A partnership must
capitalize the costs incurred in promoting the issuance of Units, including
underwriting commissions and discounts. The Partnership cannot deduct such costs
currently, ratably or upon termination of the Partnership. Uncertainties exist
regarding the classification of costs as organization expenses, which the
Partnership may amortize, and as syndication expenses which the Partnership may
not amortize.
SECTION 754 ELECTION. The Partnership has previously made a Section 754
election and will make another Section 754 election for protective purposes.
This election is irrevocable without the consent of the IRS. The election will
generally permit a purchaser of Units to adjust such purchaser's share of the
basis in the Partnership's properties ("Common Basis") pursuant to Section
743(b) to reflect the purchase price paid for such Units. In the case of Units
purchased in the market, the Section 743(b) adjustment acts in concert with
Section 704(c) allocations (and Curative Allocations, if respected) in providing
the purchaser of such Units with the equivalent of a fair market
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value Common Basis. See "-- Allocation of Partnership Income, Gain, Loss and
Deduction." The Section 743(b) adjustment is attributed solely to a purchaser of
Units and is not added to the bases of the Partnership's assets associated with
Units held by other Unitholders. For purposes of this discussion, a Unitholder's
inside basis in the Partnership's assets is considered to have two components:
- the Unitholder's share of the Partnership's actual basis in such assets
("Common Basis"); and
- the Unitholder's Section 743(b) adjustment allocated to each such asset.
A Section 754 election is advantageous if the transferee's basis in Units
is higher than the Partnership's aggregate Common Basis allocable to that
portion of its assets represented by such Units immediately prior to the
transfer. In such case, pursuant to the election, the transferee would take a
new and higher basis in the transferee's share of the Partnership's assets for
purposes of calculating, among other items, depreciation deductions and the
applicable share of any gain or loss on a sale of the Partnership's assets.
Conversely, a Section 754 election is disadvantageous if the transferee's basis
in such Units is lower than the Partnership's aggregate Common Basis allocable
to that portion of its assets represented by such Units immediately prior to the
transfer. Such election may affect either favorably or unfavorably, the amount
that a holder of Units may obtain upon the sale of Units. A constructive
termination of the Partnership will also cause a Section 708 termination of the
Operating Partnerships. Such a termination could also result in penalties or
loss of basis adjustments under Section 754, if the General Partner could not
determine that the termination had occurred and, therefore, did not timely file
a tax return or make appropriate Section 754 elections for the "new"
Partnership.
Proposed Treasury Regulation Section 1.743-1(j)(4)(B) generally requires
the Partnership to depreciate the Section 743(b) adjustment attributable to
recovery property as if the total amount of such adjustment were attributable to
newly-acquired recovery property placed in service when the purchase of a Unit
occurs. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
rather than cost recovery deductions under Section 168 is generally required to
be depreciated using either the straight-line method or the 150% declining
balance method. Although Counsel is unable to opine as to the validity of such
an approach, the Partnership intends to depreciate the portion of a Section
743(b) adjustment attributable to unrealized appreciation in the value of the
Partnership property (to the extent of any unamortized Book-Tax Disparity) using
a rate of depreciation derived from the depreciation method and useful life
applied to the Common Basis of such property, despite its inconsistency with
Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and Treasury Regulation
Section 1.167(c)-1(a)(6). If an asset is not subject to depreciation or
amortization, no Section 743(b) adjustment would be available to that extent. If
the General Partner determines that the Partnership cannot reasonably take such
position, it may adopt a depreciation convention under which all purchasers
acquiring Units in the same month would receive depreciation, whether
attributable to Common Basis or Section 743(b) basis, based upon the same
applicable rate as if they had purchased a direct interest in the Partnership's
property. Such an aggregate approach, or any other method required as a result
of an IRS examination, may result in lower annual depreciation deductions than
would otherwise be allowable to certain holders of Units. See "-- Uniformity of
Units."
The Partnership must allocate the Section 743(b) adjustment in accordance
with the principles of Section 1060. Based on these principles, the IRS may seek
to reallocate some or all of any Section 743(b) adjustment that the Partnership
does not allocate to intangible assets which have a
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longer 15 year amortization period and which are not eligible for accelerated
depreciation methods generally applicable to other assets of the Partnership.
The calculations involved in the Section 754 election are complex and the
Partnership will make such calculations on the basis of certain assumptions as
to the value of the Partnership assets and other matters. The IRS may challenge
the General Partner's determinations and may seek to disallow or reduce the
deductions attributable to them.
VALUATION OF PROPERTY OF THE PARTNERSHIP. The federal income tax
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the General Partner of the relative fair market values,
and determinations of the tax basis, of the assets of the Partnership. Although
the General Partner may from time to time consult with professional appraisers
with respect to valuation matters, the General Partner will make many of the
relative fair market value estimates by itself. These estimates are subject to
challenge and are not binding on the IRS or the courts. In the event the
determinations of fair market value are subsequently found to be incorrect, the
character and amount of items of income, gain, loss, deductions or credits
previously reported by Unitholders might change, and Unitholders might have
additional tax liability for such prior periods.
TAX TREATMENT OF CORPORATE SUBSIDIARIES. The Partnership owns an interest
in several corporations. As corporations these entities pay federal and state
income taxes. The Partnership, as a shareholder, will include in its income any
amounts distributed to it by such corporations to the extent of such
corporations' current and accumulated earnings and profits. The General Partner
estimates that a portion of the corporations' cash distributions to the
Partnership will be treated as taxable dividends.
ALTERNATIVE MINIMUM TAX. Each holder of Units must take into account such
holder's distributive share of any items of the Partnership's income, gain or
loss for purposes of the alternative minimum tax ("AMT"). The AMT currently is a
tax of 26% on the first $175,000 of alternative minimum taxable income in excess
of the exemption amount and 28% on any additional alternative minimum taxable
income of individuals. Alternative minimum taxable income is calculated using
the 150% declining balance method of depreciation with respect to personal
property and 40-year straight-line depreciation for real property. These
depreciation methods are not as favorable as the alternative straight line and
accelerated methods provided for under Section 168 which the Partnership will
use in computing its income for regular federal income tax purposes.
Accordingly, a Unitholder's AMT taxable income derived from the Partnership may
be higher than such holder's share of the Partnership's net income. Prospective
holders of Units should consult with their tax advisors as to the impact of an
investment in Units on their liability for the alternative minimum tax.
DISPOSITION OF UNITS
RECOGNITION OF GAIN OR LOSS. A Unitholder will recognize gain or loss on a
sale of Units equal to the difference between the amount realized and a holder's
tax basis for the Units sold. A holder's amount realized will be measured by the
sum of the cash received or the fair market value of other property received,
plus such holder's share of the Partnership's nonrecourse liabilities. Because
the amount realized includes a Unitholder's share of the Partnership's
nonrecourse liabilities, the gain recognized on the sale of Units could result
in a tax liability in excess of any cash received from such sale.
In general, the Partnership will allocate items of income, gain, loss and
deduction for book and tax purposes among the General Partner, in its capacity
as general partner, and the holders of Units in the same proportion that
Available Cash is distributed. If distributions of Available Cash are not made
in respect of a particular taxable year, the Partnership will allocate such
items among the partners in accordance with their percentage interests.
Moreover, if a Unitholder has received distributions from the Partnership which
exceed the cumulative net taxable income allocated to him, his basis will
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decrease to an amount less than his original purchase price for the Units. In
effect, this amount would increase the gain recognized on sale of the Unit(s).
Under such circumstances, a gain could result even if the Unit(s) are sold at a
price less than their original cost.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, the partnership must allocate a portion of
such aggregate tax basis to the interests sold on the basis of some equitable
apportionment method. The ruling is unclear as to how this aggregation concept
affects the holding period. If this ruling is applicable to the holders of
Units, the aggregation of tax bases of a holder of Units effectively prohibits
such holder from choosing among Units with varying amounts of unrealized gain or
loss as would be possible in a stock transaction. Thus, the ruling may result in
an acceleration of gain or deferral of loss on a sale of a portion of a holder's
Units. It is not clear whether the ruling applies to publicly traded
partnerships, such as the Partnership, the interests in which are evidenced by
separate Units. Accordingly, Counsel is unable to opine as to the effect such
ruling will have on a holder of Units. A holder of Units considering the
purchase of additional Units or a sale of Units purchased at differing prices
should consult a tax advisor as to the possible consequences of such ruling.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"-- Tax Treatment of Operations -- Section 754 Election") attributable to an
Amortizable Section 197 Intangible after a sale of Units, a holder of Units
could realize more gain from the sale of its Units than if such convention had
been respected. In that case, the holder of Units may be unable to claim
additional deductions against income in prior years to which they are entitled
with the result of greater overall taxable income than appropriate. Counsel is
unable to opine as to the validity of the convention because of the lack of
specific regulatory authority for its use.
TREATMENT OF SHORT SALES AND DEEMED SALES. Under the 1997 Act, a taxpayer
is treated as having sold an "appreciated" partnership interest (one in which
gain would be recognized if such interest were sold), if such taxpayer or
related persons entered into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminated both the risk of loss and opportunity for gain on the appreciated
financial position. This rule would include selling "short against the box"
transactions. Holders of Units should consult with their tax advisers in the
event they are considering entering into a short sale transaction or any other
risk arbitrage transaction involving Units.
A holder that loans Units to a "short seller" to cover a short sale of
Units will be considered as having transferred beneficial ownership of those
Units. Such a holder will, thus, no longer be a partner with respect to those
Units during the period of the loan. As a result, during this period:
- any Partnership income, gain, deductions, losses or credits with respect
to those Units would appear not to be reportable by the holders thereof;
- any cash distributions received by such holders with respect to those
Units would be fully taxable; and
- all of such distributions would appear to be treated as ordinary income.
The IRS could also contend that a loan of Units to a "short seller"
constitutes a taxable exchange. If the IRS were successful, a lending holder of
Units may be required to recognize gain or loss. HOLDERS OF UNITS DESIRING TO
ASSURE THEIR STATUS AS PARTNERS SHOULD MODIFY THEIR BROKERAGE ACCOUNT
AGREEMENTS, IF ANY, TO PROHIBIT THEIR BROKERS FROM BORROWING THEIR UNITS.
CHARACTER OF GAIN OR LOSS. Generally, a Unitholder will recognize capital
gain or loss on the sale or exchange of a Unit. This rule
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does not apply to a "dealer" in Units. For transactions in tax years ending
after December 31, 1997, the 1998 Act reduced the holding period required for
long-term capital gain treatment to 12 months in order to qualify a gain for an
effective maximum tax rate of 20%. Capital assets sold at a profit within 12
months of purchase would result in short term capital gains taxed at ordinary
income tax rates. The Partnership must separately compute any gain or loss.
These gains or losses will be taxed as ordinary income or loss under Section 751
to the extent attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to "inventory" owned by the Partnership. The
1997 Act provides for a maximum 25% tax rate for depreciation recapture
attributable to "unrecaptured Section 1250 gain". For this purpose, Section 1250
gain includes any gain which would have been treated as ordinary income if the
property had been Section 1245 property. This provision would effectively tax
all depreciation on Section 1250 property at a 25% rate. The term "unrealized
receivables" also includes potential recapture items other than depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory and
depreciation recapture may exceed net taxable gain realized upon the sale of a
Unit. In such a case, a Unitholder will recognize income even if there is a net
taxable loss realized on the sale of a Unit. Any loss recognized on the sale of
Units will generally be a capital loss. Thus, a holder of Units may recognize
both ordinary income and a capital loss upon a disposition of Units. Net capital
loss may offset no more than $3,000 of ordinary income in the case of
individuals and may only offset capital gains in the case of a corporation.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership will determine taxable income and losses annually and will prorate
these amounts on a monthly basis. The Partnership will subsequently apportion
these amounts among the holders in proportion to the number of Units owned by
them as of the opening of the first business day of the month to which the
income and losses relate even though Unitholders may dispose of their Units
during the month in question. The Partnership will allocate gain or loss
realized on a sale or other disposition of Partnership assets other than in the
ordinary course of business among the Unitholders of record as of the opening of
the NYSE on the first business day of the month in which such gain or loss is
recognized. As a result of this monthly allocation, a holder of Units
transferring Units in the open market may be allocated income, gain, loss,
deduction, and credit accrued after the transfer.
Existing Treasury Regulations may not permit the use of the monthly
conventions discussed above. Accordingly, Counsel is unable to opine on the
validity of the method of allocating income and deductions between a transferor
and a transferee of Units. If a court determines the Treasury Regulations do not
allow a monthly convention (or that it only applies to transfers of less than
all of the holder's Units), it could reallocate taxable income or losses of the
Partnership among the holders of Units. The General Partner is authorized to
review the Partnership's method of allocation
- between transferors and transferees; and
- among partners whose interests otherwise vary during a taxable period
to conform to a method permitted by future Treasury Regulations.
If a holder disposes of Units prior to the record date for a quarterly
distribution, the Partnership will allocate to such holder items of income and
gain attributable to such quarter for the months during which such Units were
owned. However, such holder will not receive the cash distribution for such
quarter.
UNITHOLDERS AND THE PARTNERSHIP MUST BE GIVEN CERTAIN NOTICES. A Unitholder
who sells or exchanges Units must notify the Partnership in writing of such sale
or exchange within 30 days of the sale or exchange and in any event by January
15 of the following year. The Partnership must notify the IRS of the transaction
and furnish
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certain information to the transferor and transferee. However, these reporting
requirements do not apply to a sale by an individual who is a United States
citizen and who effects such sale through a broker. Additionally, a transferor
and a transferee of a Unit must furnish statements to the IRS with their income
tax returns for the taxable year in which the sale or exchange occurred, which
set forth the amount of the consideration received for such Unit that is
allocated to goodwill or going concern value of the Partnership. A Unitholder
may have to pay substantial penalties if it fails to satisfy such reporting
obligations.
SALE OR EXCHANGE OF 50% OF THE UNITS WILL CAUSE A CONSTRUCTIVE
TERMINATION. The Partnership and the Operating Partnerships will be considered
to have been terminated if there is a sale or exchange of 50% or more of the
total interests in partnership capital and profits within a 12-month period. A
constructive termination results in the closing of a partnership's taxable year
for all partners and the "old" Partnership (before termination) is deemed to
have contributed its assets to the "new" Partnership and distributed interests
in the "new" Partnership to the holders of Units. The "new" Partnership is then
treated as a new partnership for tax purposes. A constructive termination of the
Partnership will also cause a Section 708 termination of the Operating
Partnerships. Such a termination could also result in penalties or loss of basis
adjustments under Section 754, if the Partnership cannot determine that the
termination had occurred and, therefore, did not timely file a tax return and
make the appropriate Section 754 elections for the "new" Partnership.
In the case of a holder of Units reporting its taxable income on a fiscal
year other than a calendar year, the closing of a tax year of the Partnership
may result in more than 12 months' taxable income or loss of the Partnership
being includable in its taxable income for the year of termination. The
Partnership must make new tax elections, including a new election under Section
754, subsequent to the constructive termination. A constructive termination
would also result in a deferral of the Partnership's deductions for depreciation
and amortization. In addition, a termination might either accelerate the
application of or subject the Partnership to any tax legislation enacted with
effective dates after the date of the termination.
ENTITY-LEVEL COLLECTIONS. If applicable law so requires, the Partnership
must pay any federal, state or local income tax on behalf of any holder of Units
or the General Partner or former holders of Units. In such a case, the General
Partner may pay such taxes from Partnership funds. The Partnership will treat
such payments, if made, as current distributions of cash. The General Partner
may amend the Partnership Agreement to maintain uniformity of intrinsic tax
characteristics of Units and to adjust subsequent distributions so that after
giving effect to such deemed distributions, the priority and characterization of
distributions otherwise applicable under the Partnership Agreement is maintained
as nearly as is practicable. Payments by the Partnership as described above
could give rise to an overpayment of tax on behalf of an individual partner in
which event, the partner could file a claim for credit or refund.
UNIFORMITY OF UNITS. The Partnership cannot trace the chain of ownership of
any particular Unit. Therefore, it is unable to track the economic and tax
characteristics related to particular Units from owner to owner. Consequently,
the Partnership needs to maintain uniformity of the economic and tax
characteristics of the Units to a purchaser of Units. In order to achieve
uniformity, compliance with a number of federal income tax requirements, both
statutory and regulatory, could be substantially diminished. For example, a lack
of uniformity can result from a literal application of Proposed Treasury
Regulation Section 1.743-1(j)(4)(B) and Treasury Regulation Section
1.167(c)-1(a)(6) and from the effect of the Ceiling Rule on the Partnership's
ability to make allocations to eliminate Book-Tax Disparities attributable to
Contributed Properties and partnership property that the Partnership has
revalued and reflected in the partners' capital accounts. If the IRS
successfully challenged
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the conventions that are intended to achieve uniformity, the tax consequences of
holding particular Units could differ. Any such non-uniformity could have a
negative impact on the value of Units.
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation derived from the depreciation method and
useful life applied to the Common Basis of such property, despite its
inconsistency with Proposed Treasury Regulation Section 1.743-1(j)(4)(B) and
Treasury Regulation Section 1.167(c)-1(a)(6). See "Tax Treatment of
Operations -- Section 754 Election." If the Partnership determines that it
cannot reasonably take this position, the Partnership will adopt a different
depreciation convention. For example, all purchasers acquiring Units in the same
month could receive depreciation, whether attributable to Common Basis or
Section 743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's property. If the Partnership
adopts such an aggregate approach, it may result in lower annual depreciation
deductions to certain holders of Units and risk the loss of depreciation
deductions not taken in the year that such deductions are otherwise allowable.
The Partnership will not adopt this convention if the Partnership determines
that the loss of depreciation deductions would have a material adverse effect on
a holder of Units. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation convention to
preserve the uniformity of the intrinsic tax characteristics of Units that would
not have a material adverse effect on the holders of Units. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If such a challenge were sustained, the uniformity of Units
might be affected.
The Partnership will specially allocate items of income and deduction,
including the effects of any unamortizable intangibles under the Proposed
Treasury Regulation Section 1.197-2(g)(1), in a manner that is intended to
preserve the uniformity of intrinsic tax characteristics among all Units,
despite the application of the Ceiling Rule to Contributed Properties and
Adjusted Properties. The Partnership will make the special allocations solely
for federal income tax purposes. See "-- Tax Consequences of Unit Ownership" and
"-- Allocations of Income, Gain, Loss and Deduction."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS. Ownership of Units by
certain tax-exempt entities, regulated investment companies and foreign persons
raises issues unique to such persons and, as described below, may have
substantial adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs and other retirement plans) are subject to federal
income tax on unrelated business taxable income in excess of $1,000. Each such
entity must file a tax return for each year in which it has more than $1,000 of
gross income included in computing unrelated business taxable income.
Substantially all of the taxable income derived by such an organization from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a holder of Units at the maximum corporate tax rate. Also, to
the extent that the Partnership holds debt financed property, the disposition of
a Unit could result in unrelated business taxable income.
A regulated investment company is required to derive 90% or more of its
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. The Partnership does
not anticipate that any significant amount of its gross income will include
those categories of income.
Non-resident aliens and foreign corporations, trusts or estates which
acquire Units will be considered to be engaged in business in the United States
on account of ownership of Units. As a result, they file federal tax returns for
their distributive shares of Partnership income, gain, loss, deduction
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or credit and pay federal income tax at regular tax rates on such income.
Generally, a partnership must pay a withholding tax on the portion of the
partnership income which is effectively connected with the conduct of a United
States trade or business and which is allocable to the foreign partners,
regardless of whether the Partnership has made any actual distributions to such
partners. However, under procedural guidelines applicable to publicly traded
partnerships, the Partnership has elected instead to withhold (or a broker
holding Units in street name will withhold) at the rate of 39.6% on actual cash
distributions made quarterly to foreign holders of Units. Each foreign holder of
Units must obtain a taxpayer identification number from the IRS and submit that
number to the Transfer Agent on a Form W-8 in order to obtain credit for the
taxes withheld. Subsequent adoption of Treasury Regulations or the issuance of
other administrative pronouncements may require the Partnership to change these
procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a holder may have to pay a United
States branch profits tax at a rate of 30%, on its allocable share of the
Partnership's earnings and profits that are effectively connected with the
conduct of a United States trade or business. This amount will be adjusted for
changes in the foreign corporation's "U.S. net equity." Such a tax may be
reduced or eliminated by an income tax treaty between the United States and the
country where the foreign corporate holder of Units is a "qualified resident."
This tax is in addition to regular federal income tax.
An interest in the Partnership may also constitute a "United States Real
Property Interest" ("USRPI") under Section 897(c) of the Code. For this purpose,
Treasury Regulation Section 1.897-1(c)(2)(iv) treats a publicly traded
partnership the same as a corporation. Assuming that the Units continue to be
regularly traded on an established securities market, a foreign holder of Units
who sells or otherwise disposes of a Unit and who has always held 5% or less in
value of the Units, including Units held by certain related individuals and
entities during the five-year period ending on the date of the disposition will
qualify for an exclusion from USRPI treatment and will not be subject to federal
income tax on gain realized on the disposition that is attributable to real
property held by the Partnership. However, such holder may have to pay federal
income tax on any gain realized on the disposition that is treated as
effectively connected with a United States trade or business of the foreign
holder of Units. This tax would be due regardless of a foreign Unitholder's
percentage interest in the Partnership or whether Units are regularly traded. A
foreign holder of Units will be subject to federal income tax on gain
attributable to real property held by the Partnership if the holder held more
than 5% in value of the Units, including Units held by certain related
individuals and entities, during the five-year period ending on the date of the
disposition or if the Units were not regularly traded on an established
securities market at the time of the disposition.
A foreign holder of Units will also be subject to withholding under Section
1445 of the Code if such holder owns, including Units held by certain related
individuals and entities, more than a 5% interest in the Partnership. Under
Section 1445 a transferee of a USRPI is required to deduct and withhold a tax
equal to 10% of the amount realized on the disposition of a USRPI if the
transferor is a foreign person.
ADMINISTRATIVE MATTERS
INFORMATION RETURNS AND AUDIT PROCEDURES. The Partnership intends to
furnish to each holder of Units within 90 days after the close of each
Partnership taxable year, certain tax information, including a Schedule K-1. The
Schedule K-1 will list each holder's allocable share of the Partnership's
income, gain, loss, deduction and credit. In preparing this information, which
counsel will generally not review, the General Partner will use various
accounting and reporting conventions to determine the respective Unitholder's
allocable share of income, gain, loss, deduction and credits. Some of these
conventions were discussed above. There is no assurance that any such
conventions will
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yield a result which conforms to the requirements of the Code, the Regulations
or administrative interpretations of the IRS. The General Partner cannot assure
a current or prospective holder of Units that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible.
The IRS may in the future audit the Partnership which could result in
adjustments to the Partnership's tax returns. A holder of Units owning less than
a 1% profits interest in the Partnership has limited rights to participate in
the income tax audit process. Further, any adjustments in the Partnership's
returns will lead to adjustments in Unitholder's returns and may lead to audits
of their returns and adjustments of items unrelated to the Partnership. Each
Unitholder would bear the cost of any expenses incurred in connection with an
examination of such holder's personal tax return.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. Under the 1997 Act, any penalty relating to an adjustment to a
partnership item is determined at the partnership level. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and holders of Units and can extend the statute of limitations for
assessment of tax deficiencies against holders of Units with respect to the
Partnership items. The Tax Matters Partner may bind a holder of Units with less
than a 1% profits interest in the Partnership to a settlement with the IRS,
unless such holder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review of a final partnership administrative adjustment. All the holders of
Units would be bound by the court's decision in the judicial review. If the Tax
Matters Partner fails to seek judicial review, any holder having at least a 1%
interest in the profits of the Partnership or holders of Units having in the
aggregate at least a 5% profits interest may seek such a review. However, only
one action for judicial review will go forward, and each holder of Units with an
interest in the outcome may participate.
A holder of Units must file a statement with the IRS identifying the
treatment of any item on its federal income tax return that is inconsistent with
the treatment of the item on the Partnership's return to avoid the requirement
that all items be treated consistently on both returns. A holder of Units may
have to pay substantial penalties if it intentionally or negligently disregards
the consistency requirement.
ELECTING LARGE PARTNERSHIPS. The 1997 Act provides that certain
partnerships with at least 100 partners may elect to be treated as an electing
large partnership ("ELP") for tax years ending after December 31, 1997. If
Congress makes further revisions to the law, it is possible that at some future
date the Partnership will make this election to be taxed as an electing large
partnership. However, based on current law, the Partnership does not intend to
make such an election for 1998 or any subsequent year.
Under the reporting provisions of the 1997 Act, each partner of an ELP will
take into account separately such partner's share of several designated items,
determined at the partnership level. The ELP procedures provide that any tax
adjustments generally would flow through to the holders of Units for the year in
which the adjustment takes effect, and the adjustments would not affect prior-
year returns of any holder, except in the case of changes to any holder's
distributive share. In lieu of passing through an adjustment to the holders of
Units, the Partnership may elect to pay an imputed underpayment. The
Partnership, and not the holders of Units, would be liable for any interest and
penalties resulting from a tax adjustment.
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NOMINEE REPORTING. Persons who hold an interest in the Partnership as a
nominee for another person are required to furnish to the Partnership:
- the name, address and taxpayer identification number of the beneficial
owners and the nominee;
- whether the beneficial owner is (1) a person that is not a United States
person, (2) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing or (3)
a tax-exempt entity;
- the amount and description of Units held, acquired or transferred for the
beneficial owners; and
- certain information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are a United States person and certain
information on Units they acquire, hold or transfer for their own account. A
Unitholder may have to pay a penalty of $50 per failure (up to a maximum of
$100,000 per calendar year) for failure to report such information to the
Partnership. The nominee must supply the beneficial owner of the Units with the
information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER. The Code requires that "tax shelters" be
registered with the Secretary of the Treasury. The Treasury Regulations
interpreting the tax shelter registration provisions of the Code are extremely
broad. The Partnership may not be subject to the registration requirement on the
basis that (1) it does not constitute a tax shelter, or (2) it constitutes a
projected income investment exempt from registration. However, the General
Partner registered the Partnership as a tax shelter with the IRS when it was
originally formed in the absence of assurance that the Partnership would not be
subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration was required and not undertaken. The
Partnership's tax shelter registration number with the IRS is 9228900496. The
Partnership will provide this number to every Unitholder with year-end tax
information. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the registration
number to the holder of Units, and a holder of Units who sells or otherwise
transfers a Unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a Unit to
furnish such registration number to the transferee is $100 for each such
failure. The holder of Units must disclose the tax shelter registration number
of the Partnership on any tax return on which any deduction, loss, credit or
other benefit generated by the Partnership is claimed or income of the
Partnership is included. Form 8271 is used to disclose tax shelter registration
numbers. A holder of Units who fails to disclose the tax shelter registration
number on such holder's tax return, without reasonable cause for such failure,
may have to pay a $250 penalty for each such failure. Any penalties discussed in
this prospectus are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Code. A Unitholder will
not have to pay a penalty with respect to any portion of an underpayment if it
is shown that there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any
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understatement subject to penalty generally is reduced if any portion:
- is attributable to an item with respect to which there is, or was,
"substantial authority" for the position taken on the return; or
- is attributable to an item for which there was a reasonable basis for the
tax treatment of the items and as to which the pertinent facts are
disclosed on the return.
Certain more stringent rules apply to "tax shelters," which term includes a
partnership if a significant purpose of such entity is the avoidance or evasion
of income tax. This term does not appear to include the Partnership. If any
Partnership item of income, gain, loss, deduction or credit included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Partnership must
disclose the pertinent facts on its return. In addition, the Partnership will
make a reasonable effort to furnish sufficient information for holders of Units
to make adequate disclosure on their returns to avoid liability for this
penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement is in excess of $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAXES
Holders of Units may have to pay other taxes, such as:
- state and local taxes;
- unincorporated business taxes;
- estate or inheritance taxes; or
- intangible taxes
in the various jurisdictions in which the Partnership does business or owns
property. Unitholders should consider state and local tax consequences of an
investment in the Partnership. On December 31, 1998, the Partnership owned an
interest in the Operating Partnerships, which owned property or conducted
business in:
- Arizona;
- California;
- Illinois;
- Indiana;
- Iowa;
- Kansas;
- Kentucky;
- Louisiana;
- Missouri;
- Nebraska;
- Nevada;
- New Mexico;
- Oregon;
- South Carolina;
- Texas;
- Virginia; and
- Wyoming.
A holder of Units will likely have to file state income tax returns and/or
pay taxes in most of these states and may be subject to penalties for failure to
do so. Some of the states may require the Partnership to withhold a percentage
of the distribution to a holder of Units that is not a resident of the state.
Such amounts withheld, if any, which may be greater or less than a particular
holder's income tax liability to the state, generally do not relieve the
non-resident Unitholder from the obligation to file a state income tax return.
Amounts withheld, if any, will be treated as if distributed to holders of Units
for purposes of determining the amounts distributed by the Partnership. Based on
current law and its estimate of future partnership operations, the General
Partner does not anticipate withholding any material amount. In addition, an
obligation to file tax returns or to pay taxes may arise in other states.
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The Partnership also owns, directly or indirectly, interests in several
corporations which will be subject to state income tax on their income.
Each prospective holder of Units should investigate the legal and tax
consequences, under the laws of pertinent states or localities, of such
investment in the Partnership. Further, each holder of Units must file all
required state and local, as well as federal tax returns. Counsel has not
rendered an opinion on the state and local tax consequences of an investment in
the Partnership.
USE OF PROCEEDS
We will use the net proceeds from the sale of the Units and Debt Securities
for general business purposes, including debt repayment, future acquisitions,
capital expenditures and working capital. We may change the potential uses of
the net proceeds in a prospectus supplement.
PLAN OF DISTRIBUTION
We may sell the Units or Debt Securities directly, through agents, or to or
through underwriters or dealers (possibly including our affiliates). Read the
prospectus supplement to find the terms of the Unit or Debt Securities offering,
including:
- the names of any underwriters, dealers or agents;
- the offering price;
- underwriting discounts;
- sales agents' commissions;
- other forms of underwriter or agent compensation;
- discounts, concessions or commissions that underwriters may pass on to
other dealers;
- any exchange on which the Units or Debt Securities are listed.
We may change the offering price, underwriter discounts or concessions, or
the price to dealers when necessary. Discounts or commissions received by
underwriters or agents and any profits on the resale of Units or Debt Securities
by them may constitute underwriting discounts and commissions under the
Securities Act of 1933.
Unless we state otherwise in the prospectus supplement, underwriters will
need to meet certain requirements before purchasing Units or Debt Securities.
Underwriters may only purchase all of the Units or Debt Securities. Agents will
act on a "best efforts" basis during their appointment. We will also state the
net proceeds from the sale in the prospectus supplement.
Any brokers or dealers that participate in the distribution of the Units or
Debt Securities may be "underwriters" within the meaning of the Securities Act
for such sales. Profits, commissions, discounts or concessions received by any
such broker or dealer may be underwriting discounts and commissions under the
Securities Act.
When necessary, we may fix Unit or Debt Securities distribution using
changeable, fixed prices, market prices at the time of sale, prices related to
market prices, or negotiated prices.
We may, through agreements, indemnify underwriters, dealers or agents who
participate in the distribution of the Units or Debt Securities against certain
liabilities including liabilities under the Securities Act. We may also provide
funds for payments such underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents, and their affiliates may transact with us and
our affiliates in the ordinary course of their businesses.
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FORWARD LOOKING STATEMENTS
Some information in this prospectus or any prospectus supplement may
contain forward-looking statements. Such statements use forward-looking words
such as "anticipate," "continue," "estimate," "expect," "may," "will," or other
similar words. These statements discuss future expectations or contain
projections. Specific factors which could cause actual results to differ from
those in the forward-looking statements, include:
- price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, and coal in the United States.
Economic activity, weather, alternative energy sources, conservation and
technological advances may affect price trends and demand;
- if the Federal Energy Regulatory Commission or the California Public
Utilities Commission changes our tariff rates;
- our ability to integrate any acquired operations into our existing
operations;
- if railroads experience difficulties or delays in delivering products to
our bulk terminals;
- our ability to successfully identify and close strategic acquisitions and
make cost saving changes in operations;
- shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use our services;
- the condition of the capital markets and equity markets in the United
States; and
- the political and economic stability of the oil producing nations of the
world.
In addition, our classification as a partnership for federal income tax
purposes means that generally we do not pay federal income taxes on our net
income. We do, however, pay taxes on the net income of subsidiaries that are
corporations. We are relying on a legal opinion from our counsel, and not a
ruling from the Internal Revenue Service, as to our proper classification for
federal income tax purposes. See "Material Federal Income Tax Consequences."
When considering forward-looking statements, you should keep in mind the
risk factors described in "Risk Factors" above. The risk factors could cause our
actual results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation to update the above list or to announce
publicly the result of any revisions to any of the forward looking statements to
reflect future events or developments.
You should consider the above information when reading any forward looking
statements in:
- this prospectus;
- documents incorporated in this prospectus by reference;
- reports filed with the SEC;
- press releases; or
- oral statements made by us or any of our officers or other persons acting
on our behalf.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms.
We also provide information to the NYSE because the Units are traded on the
NYSE. You may obtain reports and other information at the offices of the NYSE at
20 Broad Street, New York, New York 10002.
We provide an annual report to Unitholders of record within 90 days after
the close of each calendar year. The annual report contains audited financial
statements and a related report by our independent public accountants. We will
also provide you with tax information within 90 days after the close of each
taxable year.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose to you important information
contained in other documents filed with the SEC by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information we later file with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below:
- annual report on Form 10-K for the year ended December 31, 1997;
- quarterly reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998;
- current report on Form 8-K dated March 5, 1998, as amended;
- current report on Form 8-K dated November 6, 1998, as amended;
- current report on Form 8-K dated January 13, 1999;
- the description of the Units in our Registration Statement on Form S-1
(File No. 33-48142) filed on June 1, 1992 and any amendments or reports
filed to update the description; and
- all documents filed under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 between the date of this prospectus and
the termination of the Registration Statement.
If information in incorporated documents conflicts with information in this
prospectus you should rely on the most recent information. If information in an
incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Kinder Morgan Energy Partners, L.P.
1301 McKinney Street, Suite 3450
Houston, Texas 77010
Attention: Carol Haskins
(713) 844-9500.
You should only rely on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are making offers of
the securities only in states where the offer is permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
43
<PAGE> 64
LEGAL OPINIONS
Morrison & Hecker L.L.P., our counsel, will issue an opinion for us about
the legality of the Units and Debt Securities and the material federal income
tax considerations regarding the Units. Any underwriter will be advised about
other issues relating to any offering by their own legal counsel.
EXPERTS
The consolidated financial statements as of and for the year ended December
31, 1997 of the Partnership and its subsidiaries and the financial statements as
of and for the year ended December 31, 1997 of Mont Belvieu Associates
incorporated in this prospectus by reference to the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1997, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of the Partnership and its
subsidiaries and the financial statements of Mont Belvieu Associates as of
December 31, 1996 and for the two years ended December 31, 1996 included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The consolidated financial statements of Santa Fe as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
incorporated in this prospectus by reference to the Partnership's Current Report
on Form 8-K, dated March 5, 1998, as amended, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The balance sheet of the general partner as of December 31, 1997,
incorporated by reference in the registration statement of which this prospectus
is a part, has been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
44
<PAGE> 65
55,000 barrel normal butane
[Picture] spheres located at Kinder Morgan's
Morris, Illinois facility
Aerial view of Kinder Morgan's
Morris, Illinois facility, which
includes butane spheres, propane [Picture]
and propylene bullet tanks, and an
underground ethane storage cavern
Dump bridge located at Kinder Morgan's
Grand Rivers Terminal, a modern coal
[Picture] storage, blending and transfer facility
located on the Tennessee-Tombigbee River
near Paducah, Kentucky
Railcar unloading and storage
facility at Kinder Morgan's [Picture]
Grand Rivers Terminal
<PAGE> 66
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus supplement
and accompanying prospectus. You must not rely on any unauthorized information
or representations. This prospectus supplement is an offer to sell only the
units offered hereby, but only under circumstances and in jurisdictions where it
is lawful to do so. The information contained in this prospectus supplement and
accompanying prospectus is current only as of its date.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement
Prospectus Supplement Summary........ S-1
Use of Proceeds...................... S-12
Capitalization....................... S-12
Price Range of Common Units and
Distributions...................... S-13
Recent Tax Developments.............. S-14
Underwriting......................... S-15
Experts.............................. S-17
Legal Matters........................ S-17
Forward-Looking Statements........... S-18
Prospectus
Risk Factors......................... 2
The Partnership...................... 8
Ratio of Earnings to Fixed Charges... 8
Description of Debt Securities....... 9
Description of Common Units.......... 19
Material Federal Income Tax
Considerations..................... 20
Use of Proceeds...................... 41
Plan of Distribution................. 41
Forward-Looking Statements........... 42
Where You Can Find More
Information........................ 43
Legal Opinions....................... 44
Experts.............................. 44
</TABLE>
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4,500,000 Common Units
Representing Limited Partner Interests
[Kinder Morgan Logo]
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
Representatives of the Underwriters
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