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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 2001
REGISTRATION NO. 333-
REGISTRATION NO. 333-
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FORM S-1 FORM S-3
KINDER MORGAN MANAGEMENT, LLC KINDER MORGAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED KINDER MORGAN ENERGY PARTNERS, L.P.
IN CHARTER) (EXACT NAME OF REGISTRANT AS
SPECIFIED IN CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF KANSAS
INCORPORATION OR ORGANIZATION) DELAWARE
(STATE OR OTHER JURISDICTION OF
76-0669886 INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
48-0290000
4610 76-0380342
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
CLASSIFICATION CODE NUMBER) NUMBER)
4923
4610
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
500 DALLAS STREET, SUITE 1000
HOUSTON, TEXAS 77002
(713) 369-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF EACH REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOSEPH LISTENGART
500 DALLAS STREET, SUITE 1000
HOUSTON, TEXAS 77002
(713) 369-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Please send copies of communications to:
GARY W. ORLOFF MIKE ROSENWASSER
BRACEWELL & PATTERSON, L.L.P. VINSON & ELKINS L.L.P.
711 LOUISIANA STREET, SUITE 2900 666 FIFTH AVENUE
HOUSTON, TX 77002-2781 NEW YORK, NY 10022
(713) 221-1306 (917) 206-8000
(713) 221-2166 (FAX) (917) 206-8100 (FAX)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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9,775,000 Shares, representing limited liability company
interests(2)..............................................
i-units(3)(4)...............................................
Exchange Feature(5)......................................... $586,500,000 $146,625
Purchase Obligation(5)......................................
Common Units(3).............................................
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(i), (n) and (o) of the Securities Act of 1933, as
amended.
(2) To be issued by Kinder Morgan Management, LLC. Includes the underwriters
over-allotment option.
(3) To be issued by Kinder Morgan Energy Partners, L.P.
(4) The i-units are being registered solely due to the "co-registrant" status of
Kinder Morgan Energy Partners, L.P.
(5) To be issued by Kinder Morgan, Inc.
THE REGISTRANTS HEREBY AMEND THESE REGISTRATION STATEMENTS ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THEIR EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THESE REGISTRATION
STATEMENTS SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THESE REGISTRATION STATEMENTS SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains a prospectus to be used in connection
with the offer and sale of Kinder Morgan Management, LLC shares. This
registration statement also registers:
- the deemed offer and sale of Kinder Morgan Energy Partners, L.P. i-units
to be acquired by Kinder Morgan Management, LLC with substantially all of
the net proceeds of the offering of our shares, pursuant to Rule 140 of
the Securities Act of 1933, as amended;
- the exchange feature offered by Kinder Morgan, Inc. to exchange our
shares offered hereby for common units of Kinder Morgan Energy Partners,
L.P. owned by Kinder Morgan, Inc.;
- the delivery by Kinder Morgan, Inc. of the common units of Kinder Morgan
Energy Partners, L.P. pursuant to the exchange feature; and
- the obligation of Kinder Morgan, Inc. to purchase our shares under
specified circumstances pursuant to the terms of an agreement between
Kinder Morgan, Inc. and Kinder Morgan Management, LLC, for itself and for
the express benefit of the holders of our shares.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ARE EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED FEBRUARY 20, 2001.
8,500,000 SHARES
REPRESENTING LIMITED LIABILITY COMPANY INTERESTS
KINDER MORGAN MANAGEMENT, LLC
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This is an initial public offering of shares of our limited liability
company interests, a class of our equity, with limited voting rights. All of the
8,500,000 shares are being sold by us.
We are a recently formed limited liability company that has elected to be
treated as a corporation for federal income tax purposes. We will be a partner
in, and manage and control the business and affairs of, Kinder Morgan Energy
Partners, L.P.
We will not pay cash distributions on the shares. When Kinder Morgan Energy
Partners, L.P. makes distributions on its common units, we will make
distributions on your shares in the form of additional shares. You will receive
that number of additional shares equal to the amount of cash distributions you
would have received if you had owned Kinder Morgan Energy Partners, L.P. common
units, divided by an average market price of the shares. On February 14, 2001,
Kinder Morgan Energy Partners, L.P. paid a regular quarterly distribution of
$.95 per common unit, or $3.80 per unit on an annualized basis.
Kinder Morgan, Inc., our affiliate, has agreed that holders of shares may
exchange their shares for common units of Kinder Morgan Energy Partners, L.P.
owned by Kinder Morgan, Inc. and its affiliates. The exchange feature is subject
to Kinder Morgan, Inc.'s election to settle the exchange in cash rather than in
common units. Upon the occurrence of a limited number of events, Kinder Morgan,
Inc. will purchase all of the shares at a price equal to the higher of the
average market price of the shares or the common units as determined as of the
date of the purchase event.
Prior to this offering, there has been no public market in the shares. We
expect the shares to be offered at a price within % of the last closing price
of Kinder Morgan Energy Partners, L.P. common units on the New York Stock
Exchange prior to the determination of the offering price. The common units
trade on the NYSE under the symbol "KMP." The closing price of the common units
on the NYSE on February 15, 2001 was $59.75 per unit. We have applied to have
our shares included for trading on the under the symbol .
See "Risk Factors" on page 18 to read about factors you should consider
before buying shares.
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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 THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Kinder Morgan Management, $ $
LLC ......................................................
To the extent that the underwriters sell more than 8,500,000 shares, the
underwriters have the option to purchase up to an additional 1,275,000 shares
from Kinder Morgan Management, LLC at the initial public offering price less the
underwriting discount.
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The underwriters expect to deliver the shares against payment in New York,
New York on , 2001.
GOLDMAN, SACHS & CO.
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Prospectus dated , 2001.
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TABLE OF CONTENTS
Page
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Prospectus Summary.......................................... 3
Risk Factors................................................ 18
Information Regarding Forward Looking Statements............ 29
Use of Proceeds............................................. 30
Our Policy Regarding Share Distributions.................... 30
Kinder Morgan Energy Partners, L.P.'s Distribution Policy... 30
Capitalization of Kinder Morgan Management, LLC............. 35
Capitalization of Kinder Morgan Energy Partners, L.P........ 36
Capitalization of Kinder Morgan, Inc........................ 37
Selected Financial Data of Kinder Morgan Energy Partners,
L.P....................................................... 38
Selected Pro Forma Financial Data of Kinder Morgan Energy
Partners, L.P............................................. 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 42
Description of the Shares................................... 56
Description of the i-units.................................. 66
Business.................................................... 68
Management of Kinder Morgan Management, LLC................. 74
Relationships and Related Party Transactions................ 78
Limited Liability Company Agreement......................... 80
Description of Common Units................................. 81
Shares Eligible for Future Sale............................. 83
Federal Income Tax Considerations Relating to the Shares and
the Common Units.......................................... 83
ERISA Considerations........................................ 102
Underwriting................................................ 104
Legal Matters............................................... 107
Experts..................................................... 107
Where You Can Find Additional Information................... 108
Index to Financial Statement................................ F-1
Until , 2001, all dealers that buy, sell or trade our shares, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligations to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. Therefore, you should read this entire
prospectus carefully, including the risks discussed under the "Risk Factors"
section and our financial statements and the related notes. This prospectus also
incorporates by reference important information about Kinder Morgan Energy
Partners, L.P. and Kinder Morgan, Inc., including information about their
businesses and financial and operating data, and certain financial information
with respect to Kinder Morgan G.P., Inc. You should also read carefully the
information, including the financial statements and the footnotes to those
statements, which is incorporated by reference.
KINDER MORGAN Management, LLC
We are a recently formed limited liability company that has elected to be
treated as a corporation for federal income tax purposes. We will be a partner
in and manage and control the business and affairs of Kinder Morgan Energy
Partners, L.P. All of our voting shares are owned indirectly by Kinder Morgan,
Inc. On the closing of this offering, Kinder Morgan G.P., Inc., will delegate to
us, to the fullest extent permitted under Delaware law and the Kinder Morgan
Energy Partners, L.P. partnership agreement, all of its rights and powers to
manage and control the business and affairs of Kinder Morgan Energy Partners,
L.P., subject to Kinder Morgan G.P., Inc.'s right to approve specified actions.
We were formed in Delaware on February 14, 2001. Our principal executive
offices are located at 500 Dallas Street, Suite 1000, Houston, Texas 77002. Our
telephone number is (713) 369-9000.
KINDER MORGAN ENERGY PARTNERS, L.P.
BUSINESS DESCRIPTION
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership with
its common units traded on the New York Stock Exchange under the symbol "KMP,"
was formed in August 1992. Kinder Morgan Energy Partners, L.P. is the largest
publicly-traded pipeline limited partnership in the United States and owns and
operates the second largest products pipeline system based on volume delivered.
Since February 1997, when current management assumed control of the operations
of Kinder Morgan Energy Partners, L.P., quarterly common unit distributions have
more than tripled from $0.315 per common unit to $0.95 per common unit. The
operations of Kinder Morgan Energy Partners, L.P. are grouped into the following
four reportable business segments:
- PRODUCT PIPELINES: Over 10,000 miles of pipelines and associated
terminals delivering gasoline, diesel, jet fuel and natural gas liquids
to various markets. Includes Pacific Operations, 51% of Plantation Pipe
Line Company, North System, Cypress Pipeline, 32.5% of Cochin Pipeline
System, 50% interest in Heartland Pipeline Company and transmix
operations;
- NATURAL GAS PIPELINES: Includes Kinder Morgan Interstate Gas
Transmission LLC, Kinder Morgan Texas Pipeline, L.P., a 66 2/3% interest
in Trailblazer Pipeline Company, a 49% interest in Red Cedar Gathering
Company, the Casper and Douglas gathering system, a 25% interest in
Thunder Creek Gas Services LLC and a 50% interest in Coyote Gas Treating
LLC;
- CO(2) PIPELINES: Transports via pipeline and markets CO(2) for use in
enhanced oil recovery projects. Assets include 50% of Cortez Pipeline,
Central Basin Pipeline, 81% of CRC Pipeline, 13% of Bravo Pipeline, 45%
of McElmo Dome, 11% of Bravo Dome, and interests in four unitized fields
in West Texas; and
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- BULK TERMINALS: Includes over 25 owned and operated bulk terminal
facilities handling over 40 million tons of coal, petroleum coke and
other bulk products annually.
GATX TRANSACTION
On November 30, 2000, Kinder Morgan Energy Partners, L.P. announced a
definitive agreement with GATX Corporation to purchase GATX Corporation's
domestic pipeline and terminal businesses for approximately $1.15 billion.
Primary assets included in the transaction are:
- CALNEV PIPE LINE COMPANY: A 550-mile refined petroleum products pipeline
system originating in Colton, California and extending to the Las Vegas,
Nevada market;
- CENTRAL FLORIDA PIPELINE COMPANY: A 195-mile refined petroleum products
pipeline system consisting of a 16-inch gasoline pipeline and a 10-inch
jet fuel and diesel pipeline, transporting product from Tampa to the
Orlando, Florida market; and
- LIQUIDS TERMINALS: 12 liquids terminals with a storage capacity of 35.6
million barrels, the largest of which are located in Houston, New York
Harbor, Los Angeles and Chicago, with a total capacity of approximately
31.2 million barrels.
When the GATX transaction closes, CALNEV Pipeline Company, Central Florida
Pipeline Company and those terminals located on the West Coast will be included
in our Product Pipelines segment. The remaining terminals will comprise a new
business segment called Liquids Terminals.
BUSINESS STRATEGY
Management's objective is to grow Kinder Morgan Energy Partners, L.P. by:
- focusing on stable, fee-based assets which are core to the energy
infrastructure of growing markets;
- increasing utilization of assets while controlling costs;
- leveraging economies of scale from incremental acquisitions; and
- maximizing the benefits of the financial structure of Kinder Morgan
Energy Partners, L.P.
Since February 1997, Kinder Morgan Energy Partners, L.P. has announced 20
acquisitions valued at over $4.7 billion. These acquisitions and associated cost
reductions have assisted Kinder Morgan Energy Partners, L.P. in growing from
$17.7 million of net income in 1997 to $278.3 million of net income in 2000.
Kinder Morgan Energy Partners, L.P. regularly considers and enters into
discussions regarding potential acquisitions, including those from Kinder
Morgan, Inc. or its affiliates, and is currently contemplating potential
acquisitions. While there are currently no unannounced purchase agreements for
the acquisition of any material business or assets, such transactions can be
effected quickly, may occur at any time and may be significant in size relative
to Kinder Morgan Energy Partners, L.P.'s existing assets or operations.
Kinder Morgan Energy Partners, L.P. primarily transports and/or handles
products for a fee and generally is not engaged in the purchase and resale of
commodity products. As a result, Kinder Morgan Energy Partners, L.P. does not
face significant risks relating directly to shifts in commodity prices.
Kinder Morgan Energy Partners, L.P. has four business segments.
In the Product Pipelines segment, management plans to continue to expand
its presence in the rapidly growing refined products markets in the western and
southeastern United States through incremental expansions and complementary
acquisitions.
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In the Natural Gas Pipelines segment, management plans to focus on cost
reductions, expansions and storage opportunities as well as to identify and
serve significant customers with demand for capacity on its pipeline systems.
In the CO(2) Pipelines segment, management plans to continue to implement
its strategy in the Permian Basin of offering customers "one-stop shopping" for
carbon dioxide supply, transportation and technical support service. Outside the
Permian Basin, management plans to compete aggressively for new supply and
transportation projects.
In the Bulk Terminals segment, management plans to grow its bulk terminals
business through selective acquisitions, expansions, and the development of new
terminals.
After the GATX acquisition closes, some of the acquired terminals will form
a fifth business segment called Liquids Terminals.
KINDER MORGAN, INC.
Since the merger of the parent of the general partner of Kinder Morgan
Energy Partners, L.P. and KN Energy, Inc. on October 7, 1999, Kinder Morgan,
Inc. has strengthened its position as one of the largest midstream energy
companies in the United States. Kinder Morgan, Inc.'s assets include:
- NGPL: Kinder Morgan, Inc.'s NGPL segment includes Natural Gas Pipeline
Company of America, a 10,000 mile pipeline system that serves the key
Chicago market and the states of Illinois, Iowa, Wisconsin, Indiana,
Missouri, Arkansas and Texas. In 2000, the NGPL segment contributed
$342.9 million of Kinder Morgan Inc.'s operating income.
- RETAIL: These operations provide retail natural gas distribution service
for approximately 225,000 residential, commercial, industrial and
agricultural customers in Colorado, Nebraska and Wyoming. In 2000, Kinder
Morgan, Inc.'s Retail segment contributed $49.7 million of Kinder Morgan,
Inc.'s operating income.
- POWER AND OTHER: These operations include two 550 MW natural gas power
plants in construction outside Little Rock, Arkansas and Jackson,
Michigan and interests in three plants in Colorado and other operating
assets not included in other segments. In 2000, the Power and Other
segment contributed $31.3 million of Kinder Morgan, Inc.'s operating
income.
- KINDER MORGAN ENERGY PARTNERS, L.P.: As Kinder Morgan Energy Partners,
L.P.'s distributions per unit increase, so does total cash flow received
by Kinder Morgan, Inc., through its indirect general partner interest and
its limited partner interest in Kinder Morgan Energy Partners, L.P.
Kinder Morgan Energy Partners, L.P. generated $149.9 million in cash for
Kinder Morgan, Inc. for the year 2000.
The principal executive offices of Kinder Morgan, Inc. and Kinder Morgan
Energy Partners, L.P. are located at One Allen Center, Suite 1000, 500 Dallas
Street, Houston, Texas and the phone number at this address is (713) 369-9000.
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ORGANIZATIONAL STRUCTURE
The following chart depicts our pro forma organizational structure and
operating relationship with Kinder Morgan, Inc. and Kinder Morgan Energy
Partners, L.P. following the offering.
[CHART]
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THE OFFERING
Shares offered................ 8,500,000 shares
Shares outstanding after this
offering.................... 8,500,000 shares
Use of proceeds............... We will use substantially all of the net
proceeds of the offering to buy i-units from
Kinder Morgan Energy Partners, L.P. The i-units
are a new class of Kinder Morgan Energy
Partners, L.P.'s limited partner interests.
Kinder Morgan Energy Partners, L.P. will use
the cash received from the sale of i-units to
us to reduce short-term debt it expects to
incur in its acquisition of the domestic
pipeline and terminal businesses of GATX
Corporation.
Proposed Trading Symbol.......
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' option to purchase up to 1,275,000 additional
shares to cover over-allotments.
THE SHARES
Kinder Morgan Management,
LLC........................... Our shares are interests in Kinder Morgan
Management, LLC, a limited liability company
treated as a corporation for federal income tax
purposes. Kinder Morgan Management, LLC is a
partner in, and will manage and control the
business and affairs of, Kinder Morgan Energy
Partners, L.P.
Federal Income Tax Matters
Associated with our
Shares...................... Because we will be treated as a corporation for
federal income tax purposes, an owner of our
shares will not report on its federal income
tax return any of our items of income, gain,
loss and deduction. As a result of holding our
shares, you will not receive a Schedule K-1 and
will not be subject to state tax filings in the
various states in which Kinder Morgan Energy
Partners, L.P. conducts business. In addition,
a tax-exempt investor will not have unrelated
business taxable income attributable to its
ownership or sale of our shares unless its
ownership of our shares is debt financed. The
ownership or sale of our shares by a mutual
fund will not generate any nonqualifying income
to it and our shares will be treated as a
qualifying asset to a mutual fund.
Federal Income Tax Matters
Associated with i-units..... We will be subject to federal income tax on our
taxable income; however, the i-units owned by
us generally will not be entitled to
allocations of income, gain, loss or deduction
of Kinder Morgan Energy Partners, L.P.
Therefore, we do not anticipate that we
generally will have material amounts of taxable
income resulting from our ownership of the
i-units. In the event that we do have taxable
income, Kinder Morgan, Inc. has agreed to
indemnify us.
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Distributions................. We will make distributions on the shares only
in additional shares. The fraction of an
additional share distributed each quarter per
share outstanding will be equal to the cash
distribution declared by Kinder Morgan Energy
Partners, L.P. on each common unit for that
quarter divided by the average market price of
one of our shares determined for a 10 trading
day period ending on the trading day
immediately prior to the ex-dividend date for
the shares.
Exchange Feature.............. After the 45th day following the closing of
this offering, holders of our shares may
exchange their shares for common units of
Kinder Morgan Energy Partners, L.P. owned by
Kinder Morgan, Inc. This right to exchange is
subject to Kinder Morgan, Inc.'s election to
settle the exchange in cash rather than in
common units. As of the date of this
prospectus, Kinder Morgan, Inc. and its
subsidiaries own 11,312,000 common units.
Mandatory Purchase............ Upon the occurrence of any of the events listed
below, Kinder Morgan, Inc. will be required to
purchase all of the then outstanding shares at
a purchase price equal to the higher of the
average market price of the shares or the
common units as determined for a 10 trading day
period ending on the trading day immediately
prior to the date of the applicable event. The
events include:
- aggregate distributions or other payments
during the immediately preceding four quarter
period of an amount exceeding 50% of the
average market price of a common unit for the
10 trading days ending on the trading day
immediately prior to that four quarter
period;
- an event resulting in another person becoming
the beneficial owner of more than 50% of the
total voting power of all shares of capital
stock of Kinder Morgan G.P., Inc., the
general partner of Kinder Morgan Energy
Partners, L.P., unless:
-- that beneficial owner has long term
unsecured debt with an investment grade
credit rating (as determined by Moody's
and Standard & Poor's) immediately prior
to the closing of the transaction; and
-- that beneficial owner assumes all
obligations of Kinder Morgan, Inc. to us
and to the holders of our shares;
- Kinder Morgan Energy Partners, L.P. merges
with another entity where Kinder Morgan
Energy Partners, L.P. is not the surviving
entity, or sells substantially all of its
assets, except for certain merger and sale
transactions where:
-- in the transaction the holders of common
units receive a security which has in all
the material respects the same or more
favorable rights and privileges as the
common units, provided the more
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favorable rights and privileges are also
granted to the i-units;
-- in the transaction we receive a security
which has in all material respects the
same or more favorable rights and
privileges as the i-units, provided the
more favorable rights are also granted to
the common units;
-- the surviving entity or an entity related
to the surviving entity assumes all
obligations of Kinder Morgan, Inc. to us
and to the holders of our shares; and
-- no consideration is received in the
transaction by a holder of common units
other than securities of the type
described above and/or cash, and the
amount of cash received per common unit
does not exceed 33 1/3% of an average
market price of a common unit as
determined as of the date of the
transaction.
Optional Purchase............. If at any time 80% or more of our outstanding
shares are owned by Kinder Morgan, Inc. and its
affiliates, then Kinder Morgan, Inc. has the
right to purchase all of the shares owned by
other holders at a price equal to 110% of the
higher of the average closing price for the
shares for the 10 consecutive trading days
ending five days prior to the date the notice
of the purchase is mailed to the holders and
the highest price Kinder Morgan, Inc. or its
affiliates paid in cash for such shares,
excluding exchanges, in the 90 days prior to
the giving of the notice.
If at any time 80% or more in the aggregate of
the outstanding common units and the shares are
owned by Kinder Morgan, Inc. and its
affiliates, then Kinder Morgan, Inc. and its
affiliates have the right to purchase all of
the shares and common units at a price equal to
the higher of the average closing price for the
shares or common units for the twenty
consecutive trading days ending five days prior
to the date the notice of the purchase is
mailed to the holders and the highest price
Kinder Morgan, Inc. or its affiliates paid in
cash for such shares or common units, excluding
exchanges, in the 90 days prior to the giving
of the notice.
Voting Rights................. The holders of our shares may vote on the
following matters:
- On any matter submitted by Kinder Morgan
Energy Partners, L.P. for a vote of the
i-units, the i-units we own will be voted as
directed by the votes of holders of our
shares. The i-units vote with the common
units on all matters the common units vote
on, and also as a class on additional matters
related to the i-units alone, such as
amendments to the Kinder Morgan Energy
Partners, L.P. partnership agreement that
would have a material ad-
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verse effect on holders of the i-units in
relation to the holders of the common units;
and
- On amendments to our limited liability
company agreement, the Kinder Morgan Energy
Partners, L.P. registration rights agreement,
and the Kinder Morgan, Inc. exchange
agreement, tax indemnification agreement and
purchase agreement, each as described herein,
but only if any of these amendments would
have a material adverse effect on us or the
holders of the shares.
A person or group owning 20% or more of the
aggregate number of issued and outstanding
common units and our shares cannot vote. This
limitation, however, does not apply to Kinder
Morgan, Inc. and its affiliates.
Anti-dilution Adjustments..... Through the combined effect of the provisions
in the Kinder Morgan Energy Partners, L.P.
partnership agreement and the provisions of our
limited liability company agreement, the number
of our outstanding shares and outstanding
i-units will be the same.
Our Covenants................. Our limited liability company agreement
provides:
- that our activities will be limited to being
a partner in, and managing and controlling
the business and affairs of, Kinder Morgan
Energy Partners, L.P.;
- that all classes of shares we issue, other
than the class of shares offered in this
prospectus, must be owned by Kinder Morgan
G.P., Inc., the general partner of Kinder
Morgan Energy Partners, L.P.; and
- for the maintenance of a one-to-one
relationship between the number of i-units
owned by us and the number of shares
outstanding.
Covenants of Kinder Morgan
Energy Partners, L.P........ Kinder Morgan Energy Partners, L.P.'s
partnership agreement will provide that Kinder
Morgan Energy Partners, L.P. will not:
- pay a distribution on a common unit other
than in cash, additional common units or a
security which has in all material respects
the same or more favorable rights and
privileges of common units, provided the more
favorable rights and privileges are also
granted to i-units;
- allow a holder of common units to receive any
consideration other than cash, common units
or a security which has in all material
respects the same or more favorable rights
and privileges of common units, provided the
more favorable rights and privileges are also
granted to i-units in a:
-- merger in which Kinder Morgan Energy
Partners, L.P. is not the survivor, if the
unitholders of Kinder Morgan Energy
Partners, L.P. immediately prior to
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the transaction own more than 50% of the
total voting power of the voting stock of
the survivor immediately after the
transaction;
-- merger in which Kinder Morgan Energy
Partners, L.P. is the survivor; or
-- recapitalization, reorganization or
similar transaction;
- merge into another person, sell substantially
all of its assets to another person, or enter
into similar transactions, if:
-- the other person is to be controlled by
Kinder Morgan, Inc. after the transaction;
and
-- the transaction would be a mandatory
purchase event;
or
- make a tender offer for common units unless
the consideration:
-- is exclusively cash; and
-- together with any cash payable in respect
of any tender offer by Kinder Morgan
Energy Partners, L.P. for the common units
concluded within the preceding 12 months
and the aggregate amount of any cash
distributions to all holders of common
units made within the preceding 12 months,
is less than 12% of Kinder Morgan Energy
Partners, L.P.'s aggregate equity market
capitalization on the expiration of the
tender offer.
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RISK FACTORS
Before you invest in our shares, you should be aware that there are various
risks relating to an investment in our shares. For more information about these
risks, see "Risk Factors." You should carefully consider these risk factors
together with all of the other information included in this prospectus.
RISKS RELATED TO THE SHARES, I-UNITS AND KINDER MORGAN MANAGEMENT, LLC
- The market price of our shares may be volatile and may not equal the
market price of the common units of Kinder Morgan Energy Partners, L.P.
- Because the fraction of a share to be issued in regular quarterly
distributions per share outstanding will be based on the average closing
price of the shares for the ten consecutive trading days preceding the
ex-dividend date, the value of a share or a fraction of a share
distributed on the date of the distribution may not be equal to the
amount of the cash distribution on a common unit.
- The IRS could treat Kinder Morgan Energy Partners, L.P. as a corporation
for federal income tax purposes, which would substantially reduce the
number of i-units distributed quarterly to us and the number of shares
distributed quarterly to you.
- If holders of shares exchange their shares for common units of Kinder
Morgan Energy Partners, L.P., the market for the shares may become less
liquid.
- Kinder Morgan Energy Partners, L.P. may issue additional common or other
units and we may issue additional shares, which would dilute your
existing ownership interest.
- Our success will be dependent upon our successful operation and
management of Kinder Morgan Energy Partners, L.P. and its resulting
performance.
- If 80% or more of the issued and outstanding shares are owned by Kinder
Morgan, Inc. and its affiliates, and Kinder Morgan, Inc. exercises its
purchase right, you will be required to sell your shares at a time or
price that may be undesirable.
- Through Kinder Morgan, Inc.'s ownership of the general partner, Kinder
Morgan G.P., Inc., Kinder Morgan, Inc. and its affiliates may buy out all
remaining shares and common units if it owns in the aggregate 80% or more
of the shares and common units.
- If a merger where Kinder Morgan Energy Partners, L.P. is not the
surviving entity occurs, various change of control events occur or
various liquidating distributions occur, then Kinder Morgan, Inc. has a
mandatory purchase obligation that will require you to sell your shares
at a time or price that may be undesirable.
- Kinder Morgan, Inc. may be unable to satisfy its obligation to exchange
common units for shares or to purchase shares upon the occurrence of the
mandatory purchase events.
- As a holder of i-units, we may not receive value equivalent to the common
unit value for our i-unit interest in Kinder Morgan Energy Partners, L.P.
if it is liquidated. As a result, you may receive less per share than the
value of a common unit.
- Our limited liability company agreement modifies the fiduciary duties of
our board of directors under Delaware law and limits the liability of our
board of directors to the holders of shares.
- A person or group owning 20% or more of the aggregate number of issued
and outstanding common units and shares, other than Kinder Morgan, Inc.
and its affiliates, cannot vote common units or shares.
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- The exercise of the exchange feature or the mandatory or optional
purchase right is a taxable event to the owners of the shares.
- Holders of shares have limited voting rights and limited control.
- The interests of Kinder Morgan G.P., Inc. and Kinder Morgan, Inc. may
differ from your interests and the interests of common unitholders of
Kinder Morgan Energy Partners, L.P.; Kinder Morgan G.P., Inc. can elect
all of our directors.
RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P.
- Common unitholders have limited voting rights and limited control.
- Liability to Kinder Morgan Energy Partners, L.P. and its unitholders may
be limited for parties involved in its management.
- The Kinder Morgan Energy Partners, L.P. partnership agreement modifies
our duties and the duties of Kinder Morgan G.P., Inc. and its affiliates
under Delaware law.
- Our interests and the interests of the general partner and its affiliates
in the operations of Kinder Morgan Energy Partners, L.P. may conflict
with the interests of a common unitholder.
- There are tax risks to common unitholders of Kinder Morgan Energy
Partners, L.P. that do not exist for owners of shares. For example, the
ownership of common units will result in unrelated business taxable
income to tax exempt persons and nonqualifying income to mutual funds.
RISKS RELATED TO KINDER MORGAN ENERGY PARTNERS, L.P.'S BUSINESS
- Pending Federal Energy Regulatory Commission and California Public
Utilities Commission proceedings seek substantial refunds and reductions
in tariff rates on some of Kinder Morgan Energy Partners, L.P.'s
pipelines.
- Kinder Morgan Energy Partners, L.P.'s acquisition strategy may require
access to new capital, and tightened credit markets or more expensive
capital will impair Kinder Morgan Energy Partners, L.P.'s ability to
execute its strategy.
- Environmental regulation significantly affects Kinder Morgan Energy
Partners, L.P.'s business.
- Competition could ultimately lead to lower levels of profits and lower
Kinder Morgan Energy Partners, L.P.'s cash flow.
- Kinder Morgan Energy Partners, L.P. generally does not own the land on
which its pipelines are constructed and Kinder Morgan Energy Partners,
L.P. is subject to the possibility of increased costs for the loss of
land use.
- Kinder Morgan Energy Partners, L.P.'s rapid growth may cause difficulties
integrating new operations.
- Kinder Morgan Energy Partners, L.P.'s debt instruments may limit its
financial flexibility.
- Restrictions on Kinder Morgan Energy Partners, L.P.'s ability to prepay
the debt of SFPP, L.P. may limit its financial flexibility.
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SUMMARY FINANCIAL DATA
You should read the following financial data together with the financial
statements and related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in or
incorporated by reference in this prospectus.
Kinder Morgan Management, LLC Balance Sheet Data
FEBRUARY 16, 2001
----------------------------
AS ADJUSTED
HISTORICAL (UNAUDITED)
---------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
ASSETS
Cash...................................................... $100 $ 100
i-units................................................... -- 476,000
---- --------
Total Assets................................................ $100 $476,100
==== ========
LIABILITIES AND EQUITY
Liabilities:................................................ -- --
Equity:
Voting Share.............................................. $100 $ 100
Outstanding Shares........................................ -- 476,000
---- --------
Total Liabilities and Equity................................ $100 $476,100
==== ========
The as adjusted balance sheet reflects the sale of 8,500,000 shares offered
at an assumed initial public offering price of $59.75 per share, after deducting
underwriting discounts and estimated offering expenses, and the application of
substantially all those funds to purchase i-units.
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KINDER MORGAN ENERGY PARTNERS, L.P. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998(4) 1999(5) 2000(6)
---- ---- ------- ------- -------
(IN THOUSANDS, EXCEPT PER UNIT)
INCOME AND CASH FLOW DATA:
Revenues................................ $ 71,250 $ 73,932 $ 322,617 $ 428,749 $ 816,442
Cost of product sold.................... 7,874 7,154 5,860 16,241 124,641
Operating expense....................... 22,347 17,982 77,162 111,275 190,329
Fuel and power.......................... 4,916 5,636 22,385 31,745 43,216
Depreciation and amortization........... 9,908 10,067 36,557 46,469 82,630
General and administrative.............. 9,132 8,862 39,984 36,612 60,065
-------- -------- ---------- ---------- ----------
Operating income........................ 17,073 24,231 140,669 187,407 315,561
Earnings from equity investments........ 5,675 5,724 25,732 42,918 71,603
Amortization of excess cost of equity
investments........................... -- -- (764) (4,254) (8,195)
Interest (expense)...................... (12,634) (12,605) (40,856) (54,336) (97,102)
Interest income and other, net.......... 3,129 (353) (5,992) 22,988 10,415
Income tax (provision) benefit.......... (1,343) 740 (1,572) (9,826) (13,934)
-------- -------- ---------- ---------- ----------
Income before extraordinary charge...... 11,900 17,737 117,217 184,897 278,348
Extraordinary charge.................... -- -- (13,611) (2,595) --
-------- -------- ---------- ---------- ----------
Net income.............................. $ 11,900 $ 17,737 $ 103,606 $ 182,302 $ 278,348
======== ======== ========== ========== ==========
Basic Limited Partners' income per unit
before extraordinary charge (1)....... $ 0.90 $ 1.02 $ 2.09 $ 2.63 $ 2.68
======== ======== ========== ========== ==========
Basic Limited Partners' net income per
unit.................................. $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.68
======== ======== ========== ========== ==========
Diluted Limited Partners' net income per
unit(2)............................... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.67
======== ======== ========== ========== ==========
Per unit cash distribution(3)........... $ 1.26 $ 1.88 $ 2.47 $ 2.85 $ 3.43
======== ======== ========== ========== ==========
Additions to property, plant and
equipment............................. $ 8,575 $ 6,884 $ 38,407 $ 82,725 $ 125,523
BALANCE SHEET DATA (AT END OF PERIOD):
Net property, plant and equipment....... $235,994 $244,967 $1,763,386 $2,578,313 $3,306,305
Total assets............................ $303,603 $312,906 $2,152,272 $3,228,738 $4,625,210
Long-term debt.......................... $160,211 $146,824 $ 611,571 $ 989,101 $1,255,453
Partners' capital....................... $118,344 $150,224 $1,360,663 $1,774,798 $2,117,067
---------------
(1) Represents income before extraordinary charge per unit adjusted for the
two-for-one split of units on October 1, 1997. Basic Limited Partners'
income per unit before extraordinary charge was computed by dividing the
interest of our unitholders in income before extraordinary charge by the
weighted average number of units outstanding during the period.
(2) Diluted Limited Partners' net income per unit reflects the potential
dilution, by application of the treasury stock method, that could occur if
options to issue units were exercised, which would result in the issuance of
additional units that would then share in Kinder Morgan Energy Partners,
L.P.'s net income.
(3) Represents cash distributions declared for the four quarters of the calendar
year. Actual cash distributions paid during each year is slightly different
since distributions are paid 45 days after the end of the respective
quarter.
(4) Includes results of operations for Pacific operations, Kinder Morgan Bulk
Terminals and 24% interest in Plantation Pipe Line Company since dates of
acquisition.
(5) Includes results of operations for 51% interest in Plantation Pipe Line
Company, Product Pipelines' transmix operations and 33 1/3% interest in
Trailblazer Pipeline Company since dates of acquisition.
(6) Includes results of operations for Kinder Morgan Interstate Gas Transmission
LLC, 66 2/3% interest in Trailblazer Pipeline Company, 49% interest in Red
Cedar Gathering Company, Kinder Morgan CO(2) Company acquisitions, Milwaukee
and Dakota bulk terminals, 32.5% interest in Cochin Pipeline System and
Delta Terminal Services since dates of acquisition.
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KINDER MORGAN ENERGY PARTNERS, L.P. PRO FORMA FINANCIAL DATA
The following table shows selected income and cash flow data and balance
sheet data for Kinder Morgan Energy Partners, L.P.:
- for the year ended December 31, 2000;
- pro forma to reflect the acquisition of the U.S. terminals and pipeline
operations of GATX Corporation; and
- as adjusted to reflect the payment by Kinder Morgan Management, LLC of
substantially all the net proceeds of our public offering of the shares
to purchase i-units from Kinder Morgan Energy Partners, L.P. and the use
of those net proceeds to retire short-term debt.
As of the date of this prospectus, the GATX acquisition has not been
completed.
The unaudited pro forma for GATX data have been derived from the historical
balance sheets and income statements of Kinder Morgan Energy Partners, L.P. and
GATX Terminals Companies as of December 31, 2000 and for the year then ended.
The unaudited pro forma data have been prepared to give effect to the pending
acquisition of the United States terminals and pipeline operations of GATX
Terminals Companies for $983.8 million in cash plus assumed liabilities using
the purchase method of accounting. This amount is subject to a working capital
and debt adjustment based on a closing balance sheet to be provided on
consummation of the acquisition. The acquisition is expected to be consummated
in the first quarter of 2001. The unaudited pro forma data have been prepared
assuming the acquisition had been consummated on January 1, 2000.
The purchase price allocated in the unaudited pro forma data is based on
management of Kinder Morgan Energy Partners, L.P.'s preliminary estimate of the
fair market values of assets to be acquired and liabilities to be assumed and is
subject to adjustment.
The unaudited pro forma data include assumptions and adjustments as
described in the notes to the unaudited pro forma combined financial statements
incorporated herein by reference and should be read in conjunction with the
historical financial statements and related notes of Kinder Morgan Energy
Partners, L.P. and GATX Terminals Companies incorporated herein by reference.
The unaudited pro forma data may not be indicative of the results that
would have occurred if the acquisition had been consummated on the date
indicated or which will be obtained in the future.
(continued on next page)
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YEAR ENDED AS ADJUSTED
DECEMBER 31, PRO FORMA FOR SALE OF
2000 FOR GATX I-UNITS
------------ --------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
INCOME AND CASH FLOW DATA:
Revenues................................................ $ 816,442 $1,075,632 $1,075,632
Cost of product sold.................................... 124,641 124,641 124,641
Operations and maintenance.............................. 164,379 263,125 263,125
Fuel and power.......................................... 43,216 43,216 43,216
Depreciation and amortization........................... 82,630 109,583 109,583
General and administrative.............................. 60,065 91,728 91,728
Taxes, other than income taxes.......................... 25,950 25,950 25,950
---------- ---------- ----------
Operating income...................................... 315,561 417,389 417,389
Earnings from equity investments........................ 71,603 71,603 71,603
Amortization of excess cost of equity investments....... (8,195) (8,195) (8,195)
Interest, net........................................... (93,284) (175,506) (140,278)
Other, net.............................................. 14,584 14,584 14,584
Minority interest....................................... (7,987) (8,185) (8,185)
---------- ---------- ----------
Income before income taxes.............................. 292,282 311,690 346,918
Income tax benefit (expense)............................ (13,934) (13,934) (13,934)
---------- ---------- ----------
Net income.............................................. $ 278,348 $ 297,756 $ 332,984
========== ========== ==========
Basic limited partners' net income per unit............. $ 2.68 $ 2.78 $ 2.76
========== ========== ==========
Number of units used in computation..................... 63,106 63,106 71,607
========== ========== ==========
Diluted limited partners' net income per unit........... $ 2.67 $ 2.78 $ 2.75
========== ========== ==========
Number of units used in computation..................... 63,150 63,150 71,650
========== ========== ==========
Additions to property, plant and equipment.............. $ 125,523 $ 180,760 $ 180,760
========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Net property, plant and equipment....................... $3,306,305 $4,433,818 $4,433,818
========== ========== ==========
Total assets............................................ $4,625,210 $5,824,309 $5,824,309
========== ========== ==========
Long-term debt.......................................... $1,255,453 $1,385,199 $1,385,199
========== ========== ==========
Partners' capital....................................... $2,117,067 $2,117,067 $2,593,067
========== ========== ==========
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RISK FACTORS
Any investment in our shares involves a high degree of risk. You should
carefully consider the following risks and all of the information contained in
this prospectus before deciding whether to purchase our shares. If any of the
following risks actually occur the trading price of our shares could decline,
and you may lose all or part of your investment in our shares.
RISKS RELATED TO THE SHARES, I-UNITS AND KINDER MORGAN MANAGEMENT, LLC
THE MARKET PRICE OF OUR SHARES MAY BE VOLATILE AND MAY NOT EQUAL THE MARKET
PRICE OF THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P. Prior to this
offering, you could not buy or sell shares. We cannot assure you that an active
public trading market for shares will develop or continue after this offering.
The market price after this offering may vary significantly from the initial
public offering price in response to any of the following factors, some of which
are beyond our control:
- the complexity of the terms of our shares, including the exchange
feature, optional and mandatory purchases and tax indemnity, and
- announcements by Kinder Morgan Energy Partners, L.P. or its competitors
of significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments.
BECAUSE THE FRACTION OF A SHARE TO BE ISSUED IN REGULAR QUARTERLY
DISTRIBUTIONS PER SHARE OUTSTANDING WILL BE BASED ON THE AVERAGE CLOSING PRICE
OF THE SHARES FOR THE TEN CONSECUTIVE TRADING DAYS PRECEDING THE EX-DIVIDEND
DATE, THE VALUE OF A SHARE OR A FRACTION OF A SHARE DISTRIBUTED ON THE DATE OF
THE DISTRIBUTION MAY NOT BE EQUAL TO THE AMOUNT OF THE CASH DISTRIBUTION ON A
COMMON UNIT.
THE IRS COULD TREAT KINDER MORGAN ENERGY PARTNERS, L.P. AS A CORPORATION
FOR FEDERAL INCOME TAX PURPOSES, WHICH WOULD SUBSTANTIALLY REDUCE THE NUMBER OF
I-UNITS DISTRIBUTED QUARTERLY TO US AND THE NUMBER OF SHARES DISTRIBUTED
QUARTERLY TO YOU. The anticipated benefit of an investment in shares depends
largely on Kinder Morgan Energy Partners, L.P. being treated as a partnership
for federal income tax purposes. Kinder Morgan Energy Partners, L.P. has not
requested, and does not plan to request, a ruling from the IRS on this or any
other matter affecting Kinder Morgan Energy Partners, L.P. Current law may
change so as to cause Kinder Morgan Energy Partners, L.P. to be taxed as a
corporation for federal income tax purposes or otherwise subject Kinder Morgan
Energy Partners, L.P. to entity-level taxation.
If Kinder Morgan Energy Partners, L.P. were to be classified as a
corporation for federal income tax purposes, it would pay federal income tax on
its income at the corporate tax rate, which is currently a maximum of 35%.
Distributions to us of additional i-units would generally be taxed as a
corporate distribution. Because a tax would be imposed upon Kinder Morgan Energy
Partners, L.P. as a corporation, the cash available for distribution to a common
unitholder would be substantially reduced which would reduce the number of
i-units distributed quarterly to us and the number of shares distributed
quarterly to you. Treatment of Kinder Morgan Energy Partners, L.P. as a
corporation would likely cause a substantial reduction in the value of the
shares.
IF HOLDERS OF SHARES EXCHANGE THEIR SHARES FOR COMMON UNITS OF KINDER
MORGAN ENERGY PARTNERS, L.P., THE MARKET FOR THE SHARES MAY BECOME LESS
LIQUID. Subject to Kinder Morgan, Inc.'s election to deliver cash in lieu of
common units, shares may be exchanged for common units. If holders of shares
exercise their exchange features, the number of shares held by parties that are
not our affiliates will decrease. Therefore, fewer shares may be available in
the open market, reducing the liquidity of our shares. If a liquid market does
not develop for our shares, the value of your investment may be negatively
impacted.
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KINDER MORGAN ENERGY PARTNERS, L.P. MAY ISSUE ADDITIONAL COMMON OR OTHER
UNITS AND WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD DILUTE YOUR EXISTING
OWNERSHIP INTEREST. The issuance of additional common units or shares will have
the following effects:
- the amount available for distributions on each share may decrease;
- the relative voting strength of each previously outstanding share may be
diminished; and
- the market price of shares may decline.
OUR SUCCESS WILL BE DEPENDENT UPON OUR SUCCESSFUL OPERATION AND MANAGEMENT
OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS RESULTING PERFORMANCE. After this
offering we will be a partner in Kinder Morgan Energy Partners, L.P. In the
event that Kinder Morgan Energy Partners, L.P. decreases its cash distributions
to its common unitholders, our i-unit distribution will decrease
correspondingly, and distributions to holders of our shares will decrease as
well.
IF 80% OR MORE OF THE ISSUED AND OUTSTANDING SHARES ARE OWNED BY KINDER
MORGAN, INC. AND ITS AFFILIATES, AND KINDER MORGAN, INC. EXERCISES ITS PURCHASE
RIGHT, YOU WILL BE REQUIRED TO SELL YOUR SHARES AT A TIME OR PRICE THAT MAY BE
UNDESIRABLE. If at any time Kinder Morgan, Inc. and its affiliates own 80% or
more of the issued and outstanding shares, then Kinder Morgan, Inc. will have
the right to purchase all of those shares that it does not own at a price equal
to 110% of the greater of:
- the most recent consecutive 10 day average trading price as of the date
five days prior to the date the notice of purchase is mailed; or
- the highest purchase price paid in cash by Kinder Morgan, Inc. or its
affiliates to acquire common units during the prior 90 days, excluding
exchanges.
If this purchase right is exercised, you will be required to sell your
shares at a time or price that may be undesirable, and therefore may not receive
any return on your investment. You may also incur a tax liability upon the sale
of your shares. For further information regarding the optional purchase right,
please read "Description of the Shares -- Optional Purchase."
THROUGH KINDER MORGAN, INC.'S OWNERSHIP OF THE GENERAL PARTNER, KINDER
MORGAN G.P., INC., KINDER MORGAN, INC. AND ITS AFFILIATES MAY BUY OUT ALL
REMAINING SHARES AND COMMON UNITS IF IT OWNS IN THE AGGREGATE 80% OR MORE OF THE
SHARES AND COMMON UNITS. If at any time Kinder Morgan, Inc. and its affiliates
own in the aggregate 80% or more of the combined issued and outstanding shares
and common units, Kinder Morgan, Inc. will have the right to purchase all of the
remaining common units and shares. If this right is exercised by Kinder Morgan,
Inc. or its affiliates, a holder of common units and shares will have to sell
their securities at a time or price that may be undesirable. Kinder Morgan, Inc.
may only purchase all of the common units and our shares on a combined basis.
The purchase price for such a purchase will be the greater of:
- the most recent 20-day average trading price as of the date five days
prior to the date the notice of purchase is mailed; or
- the highest purchase price paid in cash by Kinder Morgan, Inc. or its
affiliates to acquire common units during the prior 90 days, excluding
exchanges.
IF A MERGER OCCURS WHERE KINDER MORGAN ENERGY PARTNERS, L.P. IS NOT THE
SURVIVING ENTITY, VARIOUS CHANGE OF CONTROL EVENTS OCCUR OR VARIOUS LIQUIDATING
DISTRIBUTIONS OCCUR, THEN KINDER MORGAN, INC. HAS A MANDATORY PURCHASE
OBLIGATION THAT WILL REQUIRE YOU TO SELL YOUR SHARES AT A TIME OR PRICE THAT MAY
BE UNDESIRABLE. In the event of a "purchase event", Kinder Morgan, Inc. has the
obligation to acquire all, but not less than all, of the shares at a price equal
to the higher of the average market price of a share or a common unit as
determined as of the date of the applicable purchase event. As a result, you
will be required to sell your shares at a time or price
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that may be undesirable, and therefore may not receive any return on your
investment. You may also incur a tax liability upon the sale of your shares. For
further information regarding the optional purchase right, please read
"Description of the Shares -- Mandatory Purchase."
IN SPECIFIC CIRCUMSTANCES, KINDER MORGAN, INC. MAY BE UNABLE TO SATISFY ITS
OBLIGATION TO EXCHANGE COMMON UNITS FOR SHARES OR TO PURCHASE SHARES UPON THE
OCCURRENCE OF THE MANDATORY PURCHASE EVENTS. The obligations of Kinder Morgan,
Inc. to exchange common units for shares and to purchase shares following a
purchase event is dependent on Kinder Morgan, Inc.'s financial ability to meet
its obligations. There is no requirement for them to secure their obligations or
comply with financial covenants. In specific circumstances, Kinder Morgan, Inc.
may be unable to settle its exchange obligations for common units. In such a
situation, Kinder Morgan, Inc. must settle its exchange obligations for cash.
AS A HOLDER OF I-UNITS, WE MAY NOT RECEIVE VALUE EQUIVALENT TO THE COMMON
UNIT VALUE FOR OUR I-UNIT INTEREST IN KINDER MORGAN ENERGY PARTNERS, L.P. IF IT
IS LIQUIDATED. AS A RESULT, YOU MAY RECEIVE LESS PER SHARE THAN THE VALUE OF A
COMMON UNIT. The terms of the i-units provide that no allocations of income,
gain, loss or deduction will be made in respect of the i-units until such time
as there is a liquidation of Kinder Morgan Energy Partners, L.P. If there is a
liquidation of Kinder Morgan Energy Partners, L.P., it is intended that we will
receive allocations of income and gain, or deduction and loss, in an amount
necessary for the capital account attributable to each i-unit to be equal to
that of a common unit. As a result, we could realize taxable income or loss upon
the liquidation of Kinder Morgan Energy Partners, L.P. However, no assurance can
be given that there will be sufficient amounts of income and gain, or deduction
and loss, to cause the capital account attributable to each i-unit to be equal
to that of a common unit. If they are not equal, we may receive less value than
would be received by a holder of common units.
OUR LIMITED LIABILITY COMPANY AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF
OUR BOARD OF DIRECTORS UNDER DELAWARE LAW AND LIMITS THE LIABILITY OF OUR BOARD
OF DIRECTORS TO THE HOLDERS OF SHARES. Modifications of state law standards of
fiduciary duties may significantly limit the ability of holders of shares to
successfully challenge the actions of our board as being the breach of what
would otherwise be a fiduciary duty. These standards include the highest duties
of good faith, fairness and loyalty to the holders of shares. Under our limited
liability company agreement, none of our members, directors or officers will be
liable to us or any other person for any act or omission taken or omitted in the
reasonable belief that the act or omission is in or is not contrary to our best
interests and is within his scope of authority, provided that the act or
omission does not constitute fraud, willful misconduct, bad faith, or gross
negligence.
A PERSON OR GROUP OWNING 20% OR MORE OF THE AGGREGATE NUMBER OF ISSUED AND
OUTSTANDING COMMON UNITS AND SHARES, OTHER THAN KINDER MORGAN, INC. AND ITS
AFFILIATES, CANNOT VOTE COMMON UNITS OR SHARES. Any common units and shares
held by a person or group that owns 20% or more of the common units and shares
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 take over control of
Kinder Morgan Energy Partners, L.P.; and
- reduce the price at which the common 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 common units at a price above their trading market
price without removing the general partner and substituting an affiliate.
THE EXERCISE OF THE EXCHANGE FEATURE OR THE MANDATORY OR OPTIONAL PURCHASE
RIGHT IS A TAXABLE EVENT TO THE OWNERS OF THE SHARES. Any sale or exchange of
shares, with Kinder Morgan, Inc. or otherwise, for common units or cash will be
a taxable transaction to the holder of the shares sold or exchanged.
Accordingly, gain or loss will be recognized on the sale or
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exchange equal to the difference between the fair market value of the common
units or cash received and the holder's tax basis in the shares sold or
exchanged.
HOLDERS OF SHARES HAVE LIMITED VOTING RIGHTS AND LIMITED CONTROL. Kinder
Morgan G.P., Inc., holds 100% of our voting shares. As the owner of all of our
voting shares, Kinder Morgan G.P., Inc. is entitled to elect all of the members
of our board of directors. Our directors and officers are the same as those of
Kinder Morgan G.P., Inc., except that Kinder Morgan, Inc. will be an additional
director on our board. In addition, because of its ownership of all of our
voting shares, Kinder Morgan G.P., Inc. has the exclusive right to vote on all
matters other than:
- those submitted to a vote of the holders of i-units, for which the
i-units will be voted as directed by a vote of the holders of shares;
- amendments to our limited liability company agreement, the Kinder Morgan
Energy Partners, L.P. purchase agreement and tax indemnity agreement, and
the Kinder Morgan, Inc. exchange agreement and registration rights
agreement; but only if any of these amendments would have an adverse
effect on us or the holders of the common units; and
- amendments to the Kinder Morgan Energy Partners, L.P. partnership
agreement that would have an adverse effect on the holders of the i-units
in relation to the common units.
On the closing of this offering Kinder Morgan G.P., Inc. will delegate to
us, to the fullest extent permitted under Delaware law and the Kinder Morgan
Energy Partners, L.P. partnership agreement, all of its rights and powers to
manage and control the business and affairs of Kinder Morgan Energy Partners,
L.P., subject to Kinder Morgan G.P., Inc.'s right to approve specified actions.
OUR INTERESTS AND THE INTERESTS OF KINDER MORGAN G.P., INC. AND KINDER
MORGAN, INC. MAY DIFFER FROM YOUR INTERESTS AND THE INTERESTS OF COMMON
UNITHOLDERS OF KINDER MORGAN ENERGY PARTNERS, L.P.; KINDER MORGAN G.P., INC. CAN
ELECT ALL OF OUR DIRECTORS. Conflicts of interest may arise because of the
relationships between Kinder Morgan, Inc., Kinder Morgan G.P., Inc., and us. Our
directors and officers have duties to manage our business in a manner beneficial
to us and to the holders of our shares; except that these duties have been
limited pursuant to the terms of our limited liability company agreement.
Simultaneously, some of our directors and officers are also directors and
officers of Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. and have fiduciary
duties to manage the businesses of Kinder Morgan, Inc. or Kinder Morgan G.P.,
Inc. and Kinder Morgan Energy Partners, L.P. in a manner beneficial to Kinder
Morgan, Inc. and its shareholders or Kinder Morgan G.P., Inc., Kinder Morgan
Energy Partners, L.P. and their respective shareholders or unitholders. The
resolution of these conflicts may not always be in our best interest or in the
interest of the holders of our shares.
RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P.
COMMON UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND LIMITED CONTROL. Holders
of common units have only limited voting rights on matters affecting Kinder
Morgan Energy Partners, L.P. Kinder Morgan Management, LLC, manages partnership
activities. Holders of common units 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
common units, excluding units owned by the departing general partner and its
affiliates. The withdrawal or removal of the general partner of Kinder Morgan
Energy Partners, L.P. will simultaneously terminate our power and authority to
manage and control the business and affairs of Kinder Morgan Energy Partners,
L.P.
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The limited partners may remove the general partner only if:
- the holders of at least 66 2/3% of the outstanding common units,
excluding common units owned by the departing general partner and its
affiliates, vote to remove the general partner;
- a successor general partner is approved by at least 66 2/3% of the
outstanding common units, excluding common units owned by the departing
general partner and its affiliates; and
- the partnership receives an opinion of counsel opining that the removal
would not result in the loss of the limited liability to any limited
partner or the limited partner of the operating partnership or cause the
partnership or the operating partnership to be taxed other than as a
partnership for federal income tax purposes.
LIABILITY TO KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS UNITHOLDERS MAY BE
LIMITED FOR PARTIES INVOLVED IN ITS MANAGEMENT. The Kinder Morgan Energy
Partners, L.P. partnership agreement limits the liability to Kinder Morgan
Energy Partners, L.P. and its unitholders of the parties who are involved in the
management of Kinder Morgan Energy Partners, L.P. For example, Kinder Morgan
Energy Partners, L.P. agreement provides that:
- these parties do not breach any duty to Kinder Morgan Energy Partners,
L.P. or the holders of common units by borrowing funds or approving any
borrowing. These parties are protected even if the purpose or effect of
the borrowing is to increase incentive distributions to the general
partner;
- these parties do not breach any duty to Kinder Morgan Energy Partners,
L.P. or the holders of common units 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 Kinder Morgan
Energy Partners, L.P. partnership agreement; and
- these parties do not breach any standard of care or duty by resolving
conflicts of interest unless they act in bad faith.
THE KINDER MORGAN ENERGY PARTNERS, L.P. PARTNERSHIP AGREEMENT MODIFIES OUR
DUTIES AND THE DUTIES OF KINDER MORGAN G.P., INC. AND ITS AFFILIATES UNDER
DELAWARE LAW. Modifications of state law standards of fiduciary and other
duties may significantly limit the ability of unitholders to successfully
challenge our actions or the actions of the general partner as being a breach of
what would otherwise have been a 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, or a party such as us
acting on its behalf, from taking any action or engaging in any transaction for
which it has a conflict of interest. Under Kinder Morgan Energy Partners, L.P.'s
partnership agreement, the general partner and its delegated parties, including
us, may exercise broad discretion and authority in the management of Kinder
Morgan Energy Partners, L.P. and the conduct of its operations.
THE INTERESTS OF THE GENERAL PARTNER AND ITS AFFILIATES IN THE OPERATIONS
OF KINDER MORGAN ENERGY PARTNERS, L.P. MAY CONFLICT WITH THE INTERESTS OF A
COMMON UNITHOLDER. Some conflicts of interest could arise among Kinder Morgan
Energy Partners, L.P., us and Kinder Morgan, Inc. The conflicts may include,
among others, the following situations:
Some of the directors and officers of Kinder Morgan, Inc. are also our
directors and officers and are directors and officers of the general partner.
Conflicts of interest may result due to the fiduciary duties such directors and
officers may have to manage our business or the business of Kinder Morgan, Inc.
in a manner beneficial to these companies and their owners. The resolution of
these conflicts may not always be in the best interests of the Kinder Morgan
Energy Partners, L.P. unitholders.
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We may not be fully reimbursed for the use of officers and employees.
Kinder Morgan, Inc. shares administrative personnel with us to operate both
Kinder Morgan, Inc.'s business, our business and the business of Kinder Morgan
Energy Partners, L.P. As a result, our officers, who in some cases may also be
officers of Kinder Morgan, Inc., must allocate, in their reasonable and sole
discretion, the time that our employees spend on behalf of Kinder Morgan Energy
Partners, L.P. and on behalf of Kinder Morgan, Inc. These allocations are not
the result of arms-length negotiations between us and Kinder Morgan, Inc.
Although we intend to be reimbursed for employees' activities, due to the nature
of the allocations, this reimbursement may not exactly match the actual time and
overhead spent. Since Kinder Morgan Energy Partners, L.P. reimburses us for
general and administrative expenses, the under allocation of the time and
overhead spent on Kinder Morgan, Inc.'s activities would negatively affect the
amount of cash available for distribution to the partnership's unitholders. See
Item 13. "Certain Relationships and Related Transactions -- General and
Administrative Expenses" in Kinder Morgan Energy Partners, L.P.'s most recent
annual report on Form 10-K.
The decisions by us may affect cash distributions to unitholders. We will
determine the amount and timing of asset purchases and sales, capital
expenditures, borrowings and reserves, subject to the right of the general
partner to approve some of these decisions. All of these decisions can impact
the amount of cash distributed by Kinder Morgan Energy Partners, L.P. to its
unitholders, which, in turn, affects the amount of the cash incentive
distribution to the general partner.
We and the general partner try to avoid being personally liable for Kinder
Morgan Energy Partners, L.P. obligations. We and the general partner are
permitted to protect assets in this manner by the partnership agreement. Under
the partnership agreement, we and the general partner do not breach duties even
if the partnership could have obtained more favorable terms without limitations
on our and the general partner's liability.
The general partner's decision to exercise or assign its call right to
purchase all of the limited partnership interests and your shares may conflict
with the interests of the unitholders. If Kinder Morgan, Inc. and its affiliates
exercise this right, you and the unitholders will have to sell shares or units
at a price or time that may not be desirable.
THERE ARE TAX RISKS TO COMMON UNITHOLDERS OF KINDER MORGAN ENERGY PARTNERS,
L.P. THAT DO NOT EXIST FOR OWNERS OF SHARES. FOR EXAMPLE, THE OWNERSHIP OF
COMMON UNITS WILL RESULT IN UNRELATED BUSINESS TAXABLE INCOME TO TAX EXEMPT
PERSONS AND NONQUALIFYING INCOME TO MUTUAL FUNDS. The federal income tax
characteristics of owning common units in an entity like Kinder Morgan Energy
Partners, L.P. which is treated as a partnership for federal income tax purposes
are different than those associated with owning shares in an entity like ours
which is treated as a corporation for federal income tax purposes. Likewise,
there is different tax treatment for sales of common units in Kinder Morgan
Energy Partners, L.P. than for the sale of our shares. Before exercising a right
to exchange our shares for common units in Kinder Morgan Energy Partners, L.P.,
you should read "Federal Income Tax Considerations Associated with the Ownership
and Disposition of Common Units" for a more complete discussion of the federal
income tax risks related to owning and disposing of common units of Kinder
Morgan Energy Partners, L.P. These risks include the impact of the IRS
challenging federal income tax positions taken by Kinder Morgan Energy Partners,
the fact that more taxable income, gain, loss and deduction will be allocated to
common unitholders upon the issuance of additional i-units by Kinder Morgan
Energy Partners, L.P., and the fact that tax-exempt entities, regulated
investment companies, mutual funds or individuals not residing in the United
States may have adverse tax consequences from owning common units. For example,
virtually all of Kinder Morgan Energy Partners, L.P.'s income allocated to
organizations exempt from federal income tax, including individual retirement
accounts and other retirement plans, will be unrelated business taxable income
and will be taxable to them. Very little of Kinder Morgan Energy Partners,
L.P.'s income will be qualifying income to a regulated investment company, or
mutual fund.
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RISKS RELATED TO KINDER MORGAN ENERGY PARTNERS, L.P.'S BUSINESS
PENDING FEDERAL ENERGY REGULATORY COMMISSION AND CALIFORNIA PUBLIC
UTILITIES COMMISSION PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN
TARIFF RATES ON SOME OF KINDER MORGAN ENERGY PARTNERS, L.P.'S PIPELINES. Some
shippers on Kinder Morgan Energy Partners, L.P.'s pipelines have filed
complaints with the Federal Energy Regulatory Commission and California Public
Utilities Commission that seek substantial refunds and reductions in the tariff
rates on our Pacific operations. Adverse decisions regarding these complaints
could negatively impact Kinder Morgan Energy Partners, L.P.'s cash flow.
Additional challenges to tariff rates could be filed with the Federal Energy
Regulatory Commission and California Public Utilities Commission in the future.
In the first set of complaints filed between 1992 and 1995 before the
Federal Energy Regulatory Commission, some shippers alleged that pipeline tariff
rates:
- for the West line, serving southern California and Arizona, were not
entitled to "grandfathered" status under the Energy Policy Act because
"substantially changed circumstances" had occurred pursuant to the Energy
Policy Act; and
- for the East line, serving New Mexico and Arizona, were unjust and
unreasonable.
An initial decision by the Federal Energy Regulatory Commission administrative
law judge was issued on September 25, 1997. The initial decision determined that
the Pacific operations' West line rates were grandfathered under the Energy
Policy Act. The initial decision also included rulings that were generally
adverse to the Pacific operations regarding certain cost of service issues for
the East line.
On January 13, 1999, the Federal Energy Regulatory Commission issued an
opinion that affirmed, in major respects, the initial decision, but also
modified parts of the decision that were adverse to Kinder Morgan Energy
Partners, L.P. In May 2000, the Federal Energy Regulatory Commission issued a
new opinion affirming in part and modifying and clarifying in part the January
13, 1999 opinion. Some of the complainants have appealed the Federal Energy
Regulatory Commission's decision to the United States Court of Appeals for the
District of Columbia Circuit.
During the pendency of the above-referenced complaint proceeding, some
shippers filed complaints that predominantly attacked the pipeline tariff rates
of the Pacific operations, contending that the rates were not just and
reasonable under the Interstate Commerce Act and should not be entitled to
"grandfathered" status under the Energy Policy Act. These complaints covered
rates for service on the East line, the West line, the North line serving the
area between San Francisco, California and Reno, Nevada, and the Oregon line
serving the area from Portland, Oregon to Eugene, Oregon. The complaints seek
substantial reparations for alleged overcharges during the years in question and
request prospective rate reduction on each of the challenged facilities. These
complaints are expected to proceed to hearing in August 2001, with an initial
decision by the administrative law judge expected in the first half of 2002. In
January 2000, several of the shippers amended and restated their complaints
challenging the tariff rates of the Pacific operations and filed additional
complaints in July and August 2000. Kinder Morgan Energy Partners, L.P. is
vigorously defending against all of these complaints.
The complaints filed before the California Public Utilities Commission
challenge the rates charged for intrastate transportation of refined petroleum
through the Pacific operations' pipeline system in California. On August 6,
1998, the California Public Utilities Commission issued its decision dismissing
the complainants' challenge to SFPP, L.P.'s intrastate rates. On June 24,
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1999, the California Public Utilities Commission granted limited rehearing of
its August 1998 decision for the purpose of:
- addressing the proper ratemaking treatment for partnership tax expenses;
- the calculation of environmental costs; and
- the public utility status of SFPP, L.P.'s Sepulveda line and its Watson
Station gathering enhancement facilities.
On April 10, 2000, the complainants filed a new complaint with the
California Public Utilities Commission asserting SFPP, L.P.'s intrastate rates
were not just and reasonable.
KINDER MORGAN ENERGY PARTNERS, L.P.'S ACQUISITION STRATEGY MAY REQUIRE
ACCESS TO NEW CAPITAL, AND TIGHTENED CREDIT MARKETS OR MORE EXPENSIVE CAPITAL
WILL IMPAIR KINDER MORGAN ENERGY PARTNERS, L.P.'S ABILITY TO EXECUTE ITS
STRATEGY. Part of Kinder Morgan Energy Partners, L.P.'s business strategy
includes acquiring additional businesses that will allow it to increase
distributions to unitholders. During the period from December 31, 1996 to
December 31, 2000, Kinder Morgan Energy Partners, L.P. made several acquisitions
that increased its asset base over 14 times and increased its net income over 23
times. Kinder Morgan Energy Partners, L.P. regularly considers and enters into
discussions regarding potential acquisitions and is currently contemplating
potential acquisitions. While there are currently no unannounced purchase
agreements pending for the acquisition of any business or assets, such
transactions can be effected quickly, may occur at any time and may be
significant in size relative to Kinder Morgan Energy Partners, L.P.'s existing
assets. Kinder Morgan Energy Partners, L.P. may need new capital to finance
these acquisitions. Limitations on Kinder Morgan Energy Partners, L.P.'s access
to capital will impair its ability to execute its strategy. Expensive capital
will limit Kinder Morgan Energy Partners, L.P.'s ability to make acquisitions
accretive. Kinder Morgan Energy Partners, L.P.'s ability to maintain its capital
structure may impact the market value of its common units.
ENVIRONMENTAL REGULATION SIGNIFICANTLY AFFECTS KINDER MORGAN ENERGY
PARTNERS, L.P.'S BUSINESS. Kinder Morgan Energy Partners, L.P.'s business
operations are subject to federal, state and local laws and regulations relating
to environmental protection. If an accidental leak or spill of liquid petroleum
products occurs from Kinder Morgan Energy Partners, L.P.'s pipelines or at its
storage facilities, it may have to pay a significant amount to clean up the leak
or spill. The resulting costs and liabilities could negatively affect Kinder
Morgan Energy Partners, L.P.'s level of cash flow. In addition, emission
controls required under the Federal Clean Air Act and other similar federal and
state laws could require significant capital expenditures at Kinder Morgan
Energy Partners, L.P.'s facilities. Although Kinder Morgan Energy Partners, L.P.
cannot predict the impact of Environmental Protection Agency standards or future
environmental measures, Kinder Morgan Energy Partners, L.P.'s costs could
increase significantly if environmental laws and regulations become stricter.
Since the costs of environmental regulation are already significant, additional
regulation could negatively affect Kinder Morgan Energy Partners, L.P.'s
business.
COMPETITION COULD ULTIMATELY LEAD TO LOWER LEVELS OF PROFITS AND LOWER
KINDER MORGAN ENERGY PARTNERS, L.P.'S CASH FLOW. 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 affect demand for natural gas liquids.
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Refined product pipelines are generally the lowest cost method for
intermediate and long-haul overland refined product movement. Accordingly, the
most significant competitors to Kinder Morgan Energy Partners, L.P.'s product
pipelines are:
- proprietary pipelines owned and operated by major oil companies in the
areas where Kinder Morgan Energy Partners, L.P.'s pipelines deliver
products;
- refineries within the market areas served by Kinder Morgan Energy
Partners, L.P.'s product pipelines; and
- trucks.
Additional product pipelines may be constructed in the future to serve
specific markets now served by Kinder Morgan Energy Partners, L.P.'s pipelines.
Trucks competitively deliver products in certain markets. Recently, major
oil companies have increased the usage of trucks, resulting in minor but notable
reductions in product volumes delivered to certain shorter-haul destinations,
primarily Orange County and Colton, California served by the South and West
lines of the Pacific operations. Kinder Morgan Energy Partners, L.P. cannot
predict with certainty whether this trend towards increased short-haul trucking
will continue in the future.
Demand for terminaling services varies widely throughout the product
pipeline system. Certain major petroleum companies and independent terminal
operators directly compete with Kinder Morgan Energy Partners, L.P. at several
terminal locations. At those locations, pricing, service capabilities and
available tank capacity control market share.
Kinder Morgan Energy Partners, L.P.'s natural gas pipelines compete against
other existing natural gas pipelines originating from the same sources or
serving the same markets as Kinder Morgan Energy Partners, L.P.'s natural gas
pipelines. In addition, Kinder Morgan Energy Partners, L.P. also may face
competition from natural gas pipelines that may be built in the future.
Kinder Morgan Energy Partners, L.P.'s ability to compete also depends upon
general market conditions, which may change. Kinder Morgan Energy Partners, L.P.
conducts its operations without the benefit of exclusive franchises from
government entities. Kinder Morgan Energy Partners, L.P. provides common carrier
transportation services through its pipelines at posted tariffs and, with
respect to its Pacific operations, almost always without long-term contracts for
transportation service with customers. Demand for transportation services on
Kinder Morgan Energy Partners, L.P.'s pipelines is primarily a function of:
- total and per capita consumption;
- prevailing economic and demographic conditions;
- alternate modes of transportation;
- alternate sources; and
- price.
KINDER MORGAN ENERGY PARTNERS, L.P. GENERALLY DOES NOT OWN THE LAND ON
WHICH ITS PIPELINES ARE CONSTRUCTED AND KINDER MORGAN ENERGY PARTNERS, L.P. IS
SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR THE LOSS OF LAND USE. Kinder
Morgan Energy Partners, L.P. generally does not own the land on which its
pipelines are constructed. Instead, it obtains the right to construct and
operate the pipelines on other people's land for a period of time. If Kinder
Morgan Energy Partners, L.P. were to lose these rights, its business could be
affected negatively.
Southern Pacific Transportation Company has allowed Kinder Morgan Energy
Partners, L.P. to construct and operate a significant portion of its Pacific
operations' pipeline under their railroad tracks. Southern Pacific
Transportation Company and its predecessors were given the
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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,
Kinder Morgan Energy Partners, L.P. may be required to obtain permission from
the land owners in order to continue to maintain the pipelines. Although no
assurance can be given, Kinder Morgan Energy Partners, L.P. believes it could
obtain that permission over time at a cost that would not negatively affect it.
Whether Kinder Morgan Energy Partners, L.P. has the power of eminent domain
for its pipelines varies from state to state depending upon the type of
pipeline -- petroleum liquids, natural gas or carbon dioxide -- and the laws of
the particular state. Kinder Morgan Energy Partners, L.P.'s inability to
exercise the power of eminent domain could negatively affect its business if it
were to lose the right to use or occupy the property on which its pipelines are
located.
KINDER MORGAN ENERGY PARTNERS, L.P.'S RAPID GROWTH MAY CAUSE DIFFICULTIES
INTEGRATING NEW OPERATIONS. Part of Kinder Morgan Energy Partners, L.P.'s
business strategy includes acquiring additional businesses that will allow it to
increase distributions to its common unitholders. During the period from
December 31, 1996 to December 31, 2000, Kinder Morgan Energy Partners, L.P. made
several acquisitions that increased its asset base over 14 times and increased
its net income over 23 times. Kinder Morgan Energy Partners, L.P. believes that
it can profitably combine the operations of acquired businesses with its
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
often will not join our management team. The change in management may make it
more difficult to integrate an acquired business with Kinder Morgan Energy
Partners, L.P.'s existing operations.
KINDER MORGAN ENERGY PARTNERS, L.P.'S DEBT INSTRUMENTS MAY LIMIT ITS
FINANCIAL FLEXIBILITY. The instruments governing Kinder Morgan Energy Partners,
L.P. debt contain restrictive covenants that may prevent it from engaging in
certain transactions that it deems beneficial and that may be beneficial to us.
The agreements governing Kinder Morgan Energy Partners, L.P.'s debt generally
require it 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; and
- granting liens.
The instruments governing any future debt may contain similar restrictions.
RESTRICTIONS ON KINDER MORGAN ENERGY PARTNERS, L.P.'S ABILITY TO PREPAY THE
DEBT OF SFPP, L.P. MAY LIMIT ITS FINANCIAL FLEXIBILITY. SFPP, L.P. is subject
to restrictions with respect to its debt that may limit Kinder Morgan Energy
Partners, L.P.'s flexibility in structuring or refinancing existing or future
debt. These restrictions include the following:
- before December 15, 2002, Kinder Morgan Energy Partners, L.P. may prepay
SFPP, L.P.'s first mortgage notes with a make-whole prepayment premium;
and
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- Kinder Morgan Energy Partners, L.P. agreed as part of the acquisition of
the Pacific operations not to take actions with respect to $190 million
of SFPP, L.P.'s debt that would cause adverse tax consequences for the
prior general partner of SFPP, L.P.
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INFORMATION REGARDING
FORWARD LOOKING STATEMENTS
This prospectus and the documents of Kinder Morgan, Inc. and Kinder Morgan
Energy Partners, L.P. incorporated in this prospectus 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 actions, conditions or events or 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. Future actions,
conditions or events and future results of operations may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results are beyond the ability of us, Kinder Morgan Energy
Partners, L.P., Kinder Morgan, Inc. and their affiliates 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, oil, 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 Kinder Morgan Energy Partners, L.P.'s tariff rates implemented
by the Federal Energy Regulatory Commission or the California Public
Utilities Commission;
- Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s ability
to integrate any acquired operations into their respective existing
operations;
- any difficulties or delays experienced by railroads in delivering
products to the bulk terminals;
- Kinder Morgan Energy Partners, L.P.'s 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 or supply Kinder
Morgan Energy Partners, L.P.'s services;
- changes in laws or regulations, third party relations and approvals,
decisions of courts, regulators and governmental bodies may adversely
affect Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s
respective business or their ability to compete;
- Kinder Morgan, Inc.'s and Kinder Morgan Energy Partners, L.P.'s
respective indebtedness could make each of them vulnerable to general
adverse economic and industry conditions, limit their ability to borrow
additional funds, place them at competitive disadvantages compared to
their competitors that have less debt or have other adverse consequences;
- 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.
When considering forward-looking statements, one should keep in mind the
risk factors described under "Risk Factors" in this prospectus. We, Kinder
Morgan Energy Partners, L.P., and Kinder Morgan, Inc., disclaim any obligation
to update the above list or to announce publicly
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the result of any revisions to any of the forward-looking statements to reflect
future events or developments.
USE OF PROCEEDS
We expect that we will receive net proceeds of approximately $
million from the sale of the 8,500,000 shares we are offering, based on the
assumed initial public offering price of $ per share and after deducting
underwriting discounts and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we will receive net
proceeds of approximately $ million. We will use substantially all of
the net proceeds of this offering to purchase i-units from Kinder Morgan Energy
Partners, L.P. Kinder Morgan Energy Partners, L.P. will use the proceeds from
the sale of those i-units to us to reduce the short-term debt it expects to
incur in its acquisition of the domestic terminal and pipeline businesses of
GATX Corporation.
OUR POLICY REGARDING SHARE DISTRIBUTIONS
We will not make cash distributions to holders of shares except on our
liquidation. Prior to our liquidation, we will only make distributions to
holders of shares in additional shares or fractions of shares. Each quarter we
will calculate the fraction of a share to be distributed per outstanding share
by dividing the quarterly cash distribution to be made by Kinder Morgan Energy
Partners, L.P. on each common unit by the average market price of a share over
the ten consecutive trading days preceding the date on which the shares begin to
trade ex-dividend under the rules of the principal exchange on which they may be
listed. We expect to issue our quarterly distributions of shares at
approximately the same time as Kinder Morgan Energy Partners, L.P. pays its
quarterly distributions of cash to holders of common units. We will at the same
time make a distribution of an equivalent fraction of a voting share on our
voting shares owned by Kinder Morgan G.P., Inc. When we issue our quarterly
distribution, Kinder Morgan Energy Partners, L.P. will simultaneously issue to
us i-units equal in number to the number of all shares we distribute.
KINDER MORGAN ENERGY PARTNERS, L.P.'S DISTRIBUTION POLICY
The principal objective of Kinder Morgan Energy Partners, L.P. is to
generate cash from operations and to distribute available cash to its partners.
Available cash generally means, for any calendar quarter, all cash received by
Kinder Morgan Energy Partners, L.P. from all sources, less all of its cash
disbursements and net additions to reserves. The term available cash excludes
the amount paid in respect of the 0.5% special limited partner interest in SFPP,
L.P. owned by the former general partner of SFPP, L.P., which amount will equal
0.5% of the total cash distributions made each quarter by SFPP, L.P. to its
partners.
Decisions regarding amounts to be placed in or released from reserves may
have a direct impact on the amount of available cash. This is because increases
and decreases in reserves are taken into account in computing available cash. We
may, in our reasonable discretion, subject to various limits, including the
approval of Kinder Morgan G.P., Inc., determine the amounts to be placed in or
released from reserves each quarter.
When we refer to common units in this prospectus, we are referring both to
the common units and the Class B units of Kinder Morgan Energy Partners, L.P.,
unless the context otherwise requires. When we refer to units in connection with
distributions, we are referring to common units, including Class B units, and
i-units. Common unitholders and the general partner will receive any
distributions in cash. Holders of i-units will receive any distributions in
additional i-units. The "equivalent cash amount" per i-unit distribution, as
that term is used below, of a distribution made to us in additional i-units
means the cash distribution made on a common unit
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at the same time. The "calculated unit amount," as that term is used below, of a
distribution made to us in additional i-units means a number of i-units
calculated by dividing the equivalent cash amount by the average market price of
a share over the ten consecutive trading days preceding the date on which the
shares begin to trade ex-dividend under the rules of the principal exchange on
which the shares may be listed. The number of additional i-units to be
distributed to the holder of an i-unit will be the calculated unit amount. Such
distributions of additional i-units shall be treated as cash distributions for
purposes of determining the percentage of distributions to be made to the
general partner. Kinder Morgan Energy Partners, L.P. will not distribute the
equivalent cash amount but will use it in its business.
Distributions by Kinder Morgan Energy Partners, L.P. will be characterized
either as distributions of cash from operations or as distributions of cash from
interim capital transactions. This distinction affects the amount distributed to
a holder of common units or i-units relative to the amount distributed to the
general partner.
Cash from operations generally refers to the cash balance of Kinder Morgan
Energy Partners, L.P. on the date it commenced operations, plus all cash
generated by the operations of its business, after deducting related cash
expenditures, reserves, debt service and various other items.
Cash from interim capital transactions will generally be generated only by
borrowings, sales of debt and equity securities and sales or other dispositions
of assets for cash, other than inventory, accounts receivable and other current
assets and assets disposed of in the ordinary course of business.
To avoid the difficulty of trying to determine whether available cash
distributed by Kinder Morgan Energy Partners, L.P. is cash from operations or
cash from interim capital transactions, all available cash distributed by Kinder
Morgan Energy Partners, L.P. from any source will be treated as distributions of
cash from operations until the sum of all available cash distributed equals the
cumulative amount of cash from operations actually generated from the date
Kinder Morgan Energy Partners, L.P. commenced operations through the end of the
calendar quarter prior to that distribution. Any distribution of available cash
which, when added to the sum of all prior distributions, is in excess of the
cumulative amount of cash from operations, will be considered a distribution of
cash from interim capital transactions. For the purposes of calculating the sum
of all distributions of available cash, the total equivalent cash amount of all
distributions to i-unitholders will be included even though the distributions
are made in additional i-units rather than cash.
If cash from interim capital transactions is distributed to each common
unit in an aggregate amount per common unit equal to the initial common unit
price of $11.00, the distinction between cash from operations and cash from
interim capital transactions will cease, and both types of available cash will
be treated as cash from operations. Since the inception of Kinder Morgan Energy
Partners, L.P. no distributions of cash from interim capital transactions have
been made, and the general partner does not anticipate that there will be
significant amounts of cash from interim capital transactions distributed.
QUARTERLY DISTRIBUTIONS. The discussion below indicates the percentages of
distributions required to be made to the general partner and the holders of
units. All distributions to common unitholders and the general partner will be
made in cash. Distributions to i-unitholders will be made in additional i-units
or fractions of i-units. Such distributions of additional i-units will be
treated as cash distributions for purposes of determining the percentage of
distributions to be made to the general partner. Kinder Morgan Energy Partners,
L.P. will not distribute the equivalent cash amount but will use it in its
business, and the equivalent cash amount will be
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delivered to the holder of an i-unit by the delivery of the calculated unit
amount of i-units. Distributions of cash from operations for any quarter will be
made:
- first, 98% to the holders of units pro rata and 2% to the general partner
until the holders of units have received a total of $0.3025 per unit of
cash or equivalent cash amount for that quarter in respect of each unit;
- second, 85% of any available cash then remaining to the holders of units
pro rata and 15% to the general partner until the holders of units have
received a total of $0.3575 per unit of cash or equivalent cash amount
for that quarter in respect of each unit;
- third, 75% of any available cash then remaining to all holders of units
pro rata and 25% to the general partner until the holders of units have
received a total of $0.4675 per unit of cash or equivalent cash amount
for that quarter in respect of each unit; and
- fourth, 50% of any available cash then remaining to all holders of units
pro rata, paid to common units in cash and to i-units in the calculated
unit amount of i-units, and 50% to the general partner.
DISTRIBUTIONS FROM INTERIM CAPITAL TRANSACTIONS. Distributions on any date
by Kinder Morgan Energy Partners, L.P. of available cash that constitutes cash
from interim capital transactions will be distributed 98% to all holders of
common units and i-units pro rata and 2% to the general partner until Kinder
Morgan Energy Partners, L.P. shall have distributed in respect of each unit
available cash constituting cash from interim capital transactions in an
aggregate amount per unit equal to the initial common unit price of $11.00.
Distributions from interim capital transactions to holders of i-units will be
made in additional i-units. Such distributions of additional i-units will be
treated as cash distributions for purposes of determining the percentage of
distributions to be made to the general partner.
As cash from interim capital transactions is distributed, it is treated as
if it were a repayment of the initial public offering price of common units. To
reflect that repayment, the first three distribution levels will be adjusted
downward by multiplying each amount by a fraction, the numerator of which is the
unrecovered initial common unit price immediately after giving effect to that
repayment and the denominator of which is the unrecovered initial common unit
price, immediately prior to giving effect to that repayment. The unrecovered
initial common unit price includes the amount by which the initial common unit
price exceeds the aggregate distribution of cash from interim capital
transactions per common unit.
When payback of the initial common unit price is achieved, that is, when
the unrecovered initial common unit price is zero, then in effect the first
three distribution levels each will have been reduced to zero. Thereafter all
distributions of available cash from all sources will be treated as if they were
cash from operations and available cash will be distributed 50% to all holders
of common units and i-units pro rata and 50% to the general partner. The i-unit
distribution will be made in the calculated unit amount of i-units.
ADJUSTMENT OF TARGET DISTRIBUTION LEVELS. The first three distribution
levels will be proportionately adjusted upward or downward, as appropriate, in
the event of any combination or subdivision of units, whether effected by a
distribution payable in any type of units or otherwise, but not by reason of the
issuance of additional common units or i-units for cash or property. For
example, in connection with Kinder Morgan Energy Partners, L.P.'s 2-for-1 split
of the common units on October 1, 1997, each of the first three distribution
levels were reduced to 50% of its initial level.
In addition, if a distribution is made of available cash constituting cash
from interim capital transactions, the first three distribution levels will be
adjusted downward proportionately, by multiplying each amount, as the same may
have been previously adjusted, by a fraction, the numerator of which is the
unrecovered initial common unit price immediately after giving effect to
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that distribution and the denominator of which is the unrecovered initial common
unit price immediately prior to that distribution. For example, assuming the
unrecovered initial common unit price is $11.00 per common unit and if cash from
interim capital transactions of $5.50 per common unit is distributed to holders
of common units, assuming no prior adjustments, then the amount of the first
three distribution levels would each be reduced to 50% of its initial level. If
and when the unrecovered initial common unit price is zero, the first three
distribution levels each will have been reduced to zero, and the general
partner's share of distributions of available cash will increase, in general, to
50% of all distributions of available cash.
The first three distribution levels may also be adjusted if legislation is
enacted which causes Kinder Morgan Energy Partners, L.P. to become taxable as a
corporation or otherwise subjects Kinder Morgan Energy Partners, L.P. to
taxation as an entity for federal income tax purposes. In that event, the first
three distribution levels for each quarter thereafter would be reduced to an
amount equal to the product of:
- each of the first three distribution levels multiplied by;
- one minus the sum of;
- the maximum marginal federal income tax rate to which Kinder Morgan
Energy Partners, L.P. is subject as an entity; plus
- any increase that results from that legislation in the effective overall
state and local income tax rate to which Kinder Morgan Energy Partners,
L.P. is subject as an entity for the taxable year in which that quarter
occurs, after taking into account the benefit of any deduction allowable
for federal income tax purposes for the payment of state and local income
taxes.
For example, assuming Kinder Morgan Energy Partners, L.P. were not
previously subject to state and local income tax, if Kinder Morgan Energy
Partners, L.P. were to become taxable as an entity for federal income tax
purposes and Kinder Morgan Energy Partners, L.P. became subject to a maximum
marginal federal, and effective state and local, income tax rate of 38%, then
each of the distribution levels would be reduced to 62% of the amount
immediately prior to that adjustment.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of Kinder Morgan Energy Partners, L.P., unless Kinder
Morgan Energy Partners, L.P. is reconstituted and continued, the liquidator
authorized to wind up the affairs of Kinder Morgan Energy Partners, L.P. will,
acting with all power to act on behalf of Kinder Morgan Energy Partners, L.P.
that the liquidator deems necessary or desirable in its good faith judgment in
connection therewith, liquidate Kinder Morgan Energy Partners, L.P.'s assets and
apply the proceeds of the liquidation as follows:
- first towards the payment of all creditors of Kinder Morgan Energy
Partners, L.P. and the creation of a reserve for contingent liabilities;
and
- then to all partners in accordance with the positive balances in their
respective capital accounts.
Under some circumstances and subject to various limitations, the liquidator
may defer liquidation or distribution of Kinder Morgan Energy Partners, L.P.'s
assets for a reasonable period of time and/or distribute assets to partners in
kind if it determines that a sale would be impractical or would cause undue loss
to the partners.
Generally, any gain will be allocated between the holders of common units
and Kinder Morgan G.P., Inc., as the general partner, in a manner that
approximates their sharing ratios in the various distribution levels. Any loss
or unrealized loss will be allocated to the general partner
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and the holders of common units: first, in proportion to the positive balances
in the partners' capital accounts until all the balances are reduced to zero;
and thereafter, to the general partner. If there is a liquidation of Kinder
Morgan Energy Partners, L.P., it is intended that we will receive allocations of
income and gain, or deduction and loss, in an amount necessary for the capital
account attributable to each i-unit to be equal to that of a common unit.
In the event of a liquidation, Kinder Morgan, Inc. will be required to
purchase all outstanding shares for cash at a price equal to the greater of the
market value per unit of the common units and the market value per share of our
shares.
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CAPITALIZATION OF KINDER MORGAN MANAGEMENT, LLC
The following table describes our capitalization as of February 16, 2001:
- on a historical basis; and
- on an as adjusted basis to give effect to the sale of 8,500,000 shares
offered by us at an assumed initial public offering price of $59.75 per
share, after deducting underwriting discounts and estimated offering
expenses, and the application of the net proceeds as described in this
prospectus.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.
FEBRUARY 16, 2001
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(UNAUDITED)
(IN THOUSANDS)
Equity:
Voting shares............................................. $100 $ 100
Outstanding shares........................................ -- 476,000
Total equity........................................... $100 $476,100
==== ========
The historical and as adjusted information in the table excludes 1,275,000
shares issuable upon the exercise of the underwriters' over-allotment option.
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CAPITALIZATION OF KINDER MORGAN ENERGY PARTNERS, L.P.
The following table sets forth Kinder Morgan Energy Partners, L.P.'s
historical capitalization as of December 31, 2000, and its capitalization as
adjusted to give effect to:
- the acquisition of the U.S. terminals and pipeline operations of GATX
Corporation, and
- the payment by Kinder Morgan Management, LLC of substantially all of the
net proceeds from our public offering of shares to purchase i-units from
Kinder Morgan Energy Partners, L.P. and the use by Kinder Morgan Energy
Partners, L.P. of those net proceeds to retire short-term debt.
As of the date of this prospectus, the GATX acquisition has not been
completed.
DECEMBER 31, 2000
-------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- (UNAUDITED)
(IN THOUSANDS)
Current portion of long-term debt........................... $ 648,949 $1,159,119
Long-term debt.............................................. 1,255,453 1,385,199
Minority interest(1)........................................ 58,169 63,026
Partners' capital:
Common units, 64,858,109 issued and outstanding........... 1,957,357 1,957,357
Class B units, 2,656,700 issued and outstanding........... 125,961 125,961
i-units, 8,500,000 issued and outstanding after the
offering............................................... -- 476,000
General partner interest.................................. 33,749 33,749
---------- ----------
Total partners' capital..................................... 2,117,067 2,593,067
---------- ----------
Total capitalization........................................ $4,079,638 $5,205,513
========== ==========
---------------
(1) Change in minority interest results from capital contribution by our general
partner required pursuant to partnership agreement.
The unit numbers do not include:
- the i-units issuable if the underwriters exercise their over-allotment
option to purchase additional shares of Kinder Morgan Management, LLC;
- the 218,900 common units issuable, subject to vesting, upon exercise of
options granted by Kinder Morgan Energy Partners, L.P. and outstanding on
December 31, 2000; and
- the 5,000 units issued upon exercise of options since December 31, 2000.
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CAPITALIZATION OF KINDER MORGAN, INC.
The following table sets forth Kinder Morgan, Inc.'s capitalization as of
December 31, 2000:
DECEMBER 31, 2000
-----------------
(IN THOUSANDS)
Current Portion of Long-term Debt........................... $ 808,167
Long-term Debt.............................................. 2,478,983
Kinder Morgan-Obligated Mandatorily Redeemable Preferred
Capital Trust Securities of Subsidiary Trust Holding
Solely Debentures of Kinder Morgan........................ 275,000
Minority Interest in Equity of Subsidiaries................. 4,910
Stockholders' Equity:
Preferred Stock........................................... --
Common Stock; 150,000,000 Shares Authorized; Par Value $5
Per Share; Outstanding 114,578,800 Before Deducting
96,140 Shares Held in Treasury......................... 572,894
Additional Paid-in Capital................................ 1,189,270
Retained Earnings......................................... 37,584
Other, Including Shares Held in Treasury.................. (2,327)
----------
Total Stockholders' Equity........................ 1,797,421
----------
Total Capitalization........................................ $5,364,481
==========
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SELECTED FINANCIAL DATA OF
KINDER MORGAN ENERGY PARTNERS, L.P.
You should read the following selected financial data of Kinder Morgan
Energy Partners, L.P. below in conjunction with the financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere or incorporated by reference in
this prospectus. Our historical results are not necessarily indicative of
results to be expected for future periods.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998(4) 1999(5) 2000(6)
---- ---- ------- ------- -------
(IN THOUSANDS EXCEPT PER UNIT)
INCOME AND CASH FLOW DATA:
Revenues........................... $ 71,250 $ 73,932 $ 322,617 $ 428,749 $ 816,442
Cost of product sold............... 7,874 7,154 5,860 16,241 124,641
Operating expense.................. 22,347 17,982 77,162 111,275 190,329
Fuel and power..................... 4,916 5,636 22,385 31,745 43,216
Depreciation and amortization...... 9,908 10,067 36,557 46,469 82,630
General and administrative......... 9,132 8,862 39,984 36,612 60,065
-------- -------- ---------- ---------- ----------
Operating income................... 17,073 24,231 140,669 187,407 315,561
Earnings from equity investments... 5,675 5,724 25,732 42,918 71,603
Amortization of excess cost of
equity investments............... -- -- (764) (4,254) (8,195)
Interest (expense)................. (12,634) (12,605) (40,856) (54,336) (97,102)
Interest income and other, net..... 3,129 (353) (5,992) 22,988 10,415
Income tax (provision) benefit..... (1,343) 740 (1,572) (9,826) (13,934)
-------- -------- ---------- ---------- ----------
Income before extraordinary
charge........................... 11,900 17,737 117,217 184,897 278,348
Extraordinary charge............... -- -- (13,611) (2,595) --
======== ======== ========== ========== ==========
Net income......................... $ 11,900 $ 17,737 $ 103,606 $ 182,302 $ 278,348
======== ======== ========== ========== ==========
Basic Limited Partners' net income
per unit before extraordinary
charge(1)........................ $ 0.90 $ 1.02 $ 2.09 $ 2.63 $ 2.68
======== ======== ========== ========== ==========
Basic Limited Partners' net income
per unit......................... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.68
======== ======== ========== ========== ==========
Diluted Limited Partners' net
income per unit(2)............... $ 0.90 $ 1.02 $ 1.75 $ 2.57 $ 2.67
======== ======== ========== ========== ==========
Per unit cash distribution(3)...... $ 1.26 $ 1.80 $ 2.47 $ 2.85 $ 3.43
======== ======== ========== ========== ==========
Additions to property, plant and
equipment........................ $ 8,575 $ 6,884 $ 38,407 $ 82,725 $ 125,523
BALANCE SHEET DATA (AT END OF
PERIOD):
Net property, plant and
equipment........................ $235,994 $244,967 $1,763,386 $2,578,313 $3,306,305
Total assets....................... $303,603 $312,906 $2,152,272 $3,228,738 $4,625,210
Long-term debt..................... $160,211 $146,824 $ 611,571 $ 989,101 $1,255,453
Partners' capital.................. $118,344 $150,224 $1,360,663 $1,774,798 $2,117,067
---------------
(1) Represents income before extraordinary charge per unit adjusted for the
two-for-one split of units on October 1, 1997. Basic Limited Partners'
income per unit before extraordinary charge was computed by dividing the
interest of our unitholders in income before extraordinary charge by the
weighted average number of units outstanding during the period.
(2) Diluted Limited Partners' net income per unit reflects the potential
dilution, by application of the treasury stock method, that could occur if
options to issue units were exercised, which would result in the issuance of
additional units that would then share in Kinder Morgan Energy Partners,
L.P.'s net income.
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(3) Represents cash distributions declared for the four quarters of the calendar
year. Actual cash distributions paid during each year is different since
distributions are paid 45 days after the end of the respective quarter.
(4) Includes results of operations for Pacific operations, Kinder Morgan Bulk
Terminals and 24% interest in Plantation Pipe Line Company since dates of
acquisition.
(5) Includes results of operations for 51% interest in Plantation Pipe Line
Company, Product Pipelines' transmix operations and 33 1/3% interest in
Trailblazer Pipeline Company since dates of acquisition.
(6) Includes results of operations for Kinder Morgan Interstate Gas Transmission
LLC, 66 2/3% interest in Trailblazer Pipeline Company, 49% interest in Red
Cedar Gathering Company, Kinder Morgan CO(2) Company acquisitions, Buckeye
Transmix operations, Milwaukee and Dakota bulk terminals, 32.5% interest in
Cochin Pipeline System and Delta Terminal Services since dates of
acquisition.
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SELECTED PRO FORMA FINANCIAL DATA OF
KINDER MORGAN ENERGY PARTNERS, L.P.
The following table shows selected income and cash flow data and balance
sheet data for Kinder Morgan Energy Partners, L.P.:
- for the year ended December 31, 2000;
- pro forma to reflect the acquisition of the U.S. terminals and pipeline
operations of GATX Corporation; and
- as adjusted to reflect the payment by Kinder Morgan Management, LLC of
substantially all the net proceeds from our public offering of the shares
to purchase i-units from Kinder Morgan Energy Partners, L.P. and the use
by Kinder Morgan Energy Partners, L.P. of those net proceeds to retire
short-term debt.
As of the date of this prospectus, the GATX acquisition has not been
completed.
The unaudited pro forma for GATX data have been derived from the historical
balance sheets and income statements of Kinder Morgan Energy Partners, L.P. and
GATX Terminals Companies as of December 31, 2000 and for the year then ended.
The unaudited pro forma data have been prepared to give effect to the pending
acquisition of the United States terminals and pipeline operations of GATX
Terminals Companies for $983.8 million in cash plus assumed liabilities using
the purchase method of accounting. This amount is subject to a working capital
and debt adjustment based on a closing balance sheet to be provided on
consummation of the acquisition. The acquisition is expected to be consummated
in the first quarter of 2001. The unaudited pro forma data have been prepared
assuming the acquisition had been consummated on January 1, 2000.
The purchase price allocated in the unaudited pro forma data is based on
management of Kinder Morgan Energy Partners, L.P.'s preliminary estimate of the
fair market values of assets to be acquired and liabilities to be assumed and is
subject to adjustment.
The unaudited pro forma data include assumptions and adjustments as
described in the notes to the unaudited pro forma combined financial statements
incorporated herein by reference and should be read in conjunction with the
historical financial statements and related notes of Kinder Morgan Energy
Partners, L.P. and GATX Terminals Companies incorporated herein by reference.
The unaudited pro forma data may not be indicative of the results that
would have occurred if the acquisition had been consummated on the date
indicated or which will be obtained in the future.
(continued on next page)
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YEAR ENDED PRO FORMA AS ADJUSTED
DECEMBER 31, 2000 FOR GATX FOR SALE OF I-UNITS
----------------- --------- -------------------
(HISTORICAL) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
INCOME AND CASH FLOW DATA:
Revenues.................................. $ 816,442 $1,075,632 $1,075,632
Cost of product sold...................... 124,641 124,641 124,641
Operations and maintenance................ 164,379 263,125 263,125
Fuel and power............................ 43,216 43,216 43,216
Depreciation and amortization............. 82,630 109,583 109,583
General and administrative................ 60,065 91,728 91,728
Taxes, other than income taxes............ 25,950 25,950 25,950
---------- ---------- ----------
Operating income.................. 315,561 417,389 417,389
Earnings from equity investments.......... 71,603 71,603 71,603
Amortization of excess cost of equity
investments............................ (8,195) (8,195) (8,195)
Interest, net............................. (93,284) (175,506) (140,278)
Other, net................................ 14,584 14,584 14,584
Minority interest......................... (7,987) (8,185) (8,185)
---------- ---------- ----------
Income before income taxes................ 292,282 311,690 346,918
Income tax benefit (expense).............. (13,934) (13,934) (13,934)
---------- ---------- ----------
Net income................................ $ 278,348 $ 297,756 $ 332,984
========== ========== ==========
Basic limited partners' net income per
unit................................... $ 2.68 $ 2.78 $ 2.76
========== ========== ==========
Number of units used in computation....... 63,106 63,106 71,607
========== ========== ==========
Diluted limited partners' net income per
unit................................... $ 2.67 $ 2.78 $ 2.75
========== ========== ==========
Number of units used in computation....... 63,150 63,150 71,650
========== ========== ==========
Additions to property, plant and
equipment.............................. $ 125,523 $ 180,760 $ 180,760
========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Net property, plant and equipment......... $3,306,305 $4,433,818 $4,433,818
Total assets.............................. $4,625,210 $5,824,309 $5,824,309
Long-term debt............................ $1,255,453 $1,385,199 $1,385,199
Partners' capital......................... $2,117,067 $2,117,067 $2,593,067
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our "Selected Financial Data," and our financial statements and the related
notes appearing elsewhere in this prospectus. You should also read the Selected
Financial Data of Kinder Morgan Energy Partners, L.P. included herein as well as
the financial statements and related notes of Kinder Morgan Energy Partners,
L.P. and Kinder Morgan, Inc. incorporated by reference in this prospectus.
Kinder Morgan Management, LLC
Because Kinder Morgan Management, LLC was only formed in February 2001, it
has had no operations prior to the date of this prospectus. Upon the closing of
this offering, Kinder Morgan G.P., Inc. will delegate to us, to the fullest
extent permitted under Delaware law and the Kinder Morgan Energy Partners, L.P.
partnership agreement, all of its rights and powers to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P., subject to Kinder
Morgan G.P., Inc.'s right to approve specified actions.
KINDER MORGAN ENERGY PARTNERS, L.P.
RESULTS OF OPERATIONS
Kinder Morgan Energy Partners, L.P.'s financial results over the past two
years reflect significant growth in revenues, operating income and net income.
During this timeframe, Kinder Morgan Energy Partners, L.P. has consistently made
strategic business acquisitions and experienced ongoing strength in all of its
pipeline and terminal operations. The combination of targeted business
acquisitions, higher capital spending, favorable economic conditions and
management's continuing focus on controlling general and operating expenses
across Kinder Morgan Energy Partners, L.P.'s entire business portfolio led the
way to strong growth in all four of its business segments. In 2000, Kinder
Morgan Energy Partners, L.P. reported record levels of revenue, operating
income, net income and earnings per unit.
Kinder Morgan Energy Partners, L.P.'s net income was $278.3 million ($2.67
per diluted unit) on revenues of $816.4 million in 2000, compared to net income
of $182.3 million ($2.57 per diluted unit) on revenues of $428.7 million in
1999, and net income of $103.6 million ($1.75 per diluted unit) on revenues of
$322.6 million in 1998. Included in Kinder Morgan Energy Partners, L.P.'s net
income for 1999 and 1998 were extraordinary charges associated with debt
refinancing transactions in the amount of $2.6 million in 1999 and $13.6 million
in 1998. In addition, Kinder Morgan Energy Partners, L.P.'s 1999 net income
included a benefit of $10.1 million related to the sale of its 25% interest in
the Mont Belvieu fractionation facility, partially offset by special non-
recurring charges. Kinder Morgan Energy Partners, L.P.'s total consolidated
operating income was $315.6 million in 2000, $187.4 million in 1999 and $140.7
million in 1998. Kinder Morgan Energy Partners, L.P.'s total consolidated net
income before extraordinary charges was $278.3 million in 2000, $184.9 million
in 1999 and $117.2 million in 1998.
Kinder Morgan Energy Partners, L.P.'s increase in overall net income and
revenues in 2000 compared to 1999 primarily resulted from its inclusion of the
Natural Gas Pipelines segment, acquired from Kinder Morgan, Inc. on December 31,
1999, and its acquisition of the remaining 80% ownership interest in Kinder
Morgan CO(2) Company, L.P. (formerly Shell CO(2) Company, Ltd.) effective April
1, 2000. Prior to that date, Kinder Morgan Energy Partners, L.P. owned a 20%
equity interest in Kinder Morgan CO(2) Company, L.P. and reported its results
under the equity method of accounting. The results of Kinder Morgan CO(2)
Company, L.P. are included in Kinder Morgan Energy Partners, L.P.'s CO(2)
Pipelines segment. Kinder Morgan Energy Partners, L.P.'s acquisition of
substantially all of its Product Pipelines' transmix operations in September
1999, and Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc. in
January 2000, also contributed to its overall increase in period-to-period
revenues and net income.
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The inclusion of a full year of activity for Kinder Morgan Energy Partners,
L.P.'s Pacific operations and Bulk Terminals segment was the largest
contributing factor for the increase in total revenues and earnings in 1999
compared with 1998. Kinder Morgan Energy Partners, L.P. acquired its Pacific
operations in March 1998, Kinder Morgan Bulk Terminals, Inc. in July 1998 and
the Pier IX and Shipyard River terminals in December 1998.
PRODUCT PIPELINES
Kinder Morgan Energy Partners, L.P.'s Product Pipelines' segment revenues
increased 34%, from $314.1 million in 1999 to $421.4 million in 2000, and net
income increased 6%, from $209.0 million in 1999 to $221.2 million in 2000. The
year-to-year increase in revenues resulted primarily from the inclusion of a
full year of its transmix operations, which were mainly acquired in September
1999, and additional transmix assets acquired in October 2000. Furthermore,
higher throughput volumes on both Kinder Morgan Energy Partners, L.P.'s Pacific
operations and North System pipelines contributed to the increase in segment
revenues. On Kinder Morgan Energy Partners, L.P.'s Pacific operations, average
tariff rates remained relatively flat between 2000 and 1999, with an almost 3%
increase in mainline delivery volumes resulting in a 3% increase in revenues. On
Kinder Morgan Energy Partners, L.P.'s North System, revenues grew 14% in 2000
compared to 1999. The increase was due to an almost 10% increase in throughput
revenue volumes, primarily due to strong refinery demand in the Midwest, as well
as a 5% increase in average tariff rates.
In 1998, the Product Pipeline segment earned $156.9 million on revenues of
$258.7 million. The increase in revenues in 1999 over 1998 relates to the
inclusion in 1999 of a full year of results from Kinder Morgan Energy Partners,
L.P.'s Pacific operations, acquired in March 1998, and the inclusion of almost
four months of transmix operations, which were acquired in early September 1999.
With a full twelve months of activity reported in 1999, total mainline
throughput volumes on Kinder Morgan Energy Partners, L.P.'s Pacific operations
pipelines increased 22% in 1999 compared to 1998. The higher 1999 segment
revenues were partly offset by an almost 4% decrease in average tariff rates on
Kinder Morgan Energy Partners, L.P.'s Pacific pipelines. The decrease in average
tariff rates was mainly due to the reduction in transportation rates, effective
April 1, 1999, on Kinder Morgan Energy Partners, L.P.'s Pacific operation's East
Line.
Combined operating expenses for the Product Pipeline segment, which include
the segment's cost of sales, fuel, power and operating and maintenance expenses,
were $172.5 million in 2000, $76.5 million in 1999 and $56.3 million in 1998.
The increase in expenses in each year resulted mainly from the inclusion of
Kinder Morgan Energy Partners, L.P.'s transmix operations and the higher
delivery volumes on its Pacific operations pipelines. Depreciation and
amortization expense was $41.7 million in 2000, $38.9 million in 1999 and $32.7
million in 1998, reflecting Kinder Morgan Energy Partners, L.P.'s acquisitions,
continued investments in capital additions and pipeline expansions. Segment
operating income was $193.5 million in 2000, $186.1 million in 1999 and $159.2
million in 1998. Earnings from Kinder Morgan Energy Partners, L.P.'s equity
investments, net of amortization of excess costs, were $29.1 million in 2000,
$21.4 million in 1999 and $5.9 million in 1998. The increases in Kinder Morgan
Energy Partners, L.P.'s equity earnings each year were chiefly due to Kinder
Morgan Energy Partners, L.P.'s investments in Plantation Pipe Line Company.
Kinder Morgan Energy Partners, L.P. acquired a 24% ownership interest in
September 1998 and an additional 27% ownership interest in June 1999.
Additionally, the Product Pipeline segment benefited from favorable changes in
non-operating income/ expense in 1999 compared to 1998, primarily the result of
lower 1999 expense accruals made for Kinder Morgan Energy Partners, L.P.'s FERC
rate case reserve (as a result of the FERC's opinion relating to an outstanding
rate case dispute), 1999 insurance recoveries and favorable adjustments to
employee post-retirement benefit liabilities.
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NATURAL GAS PIPELINES
Kinder Morgan Energy Partners, L.P.'s Natural Gas Pipelines segment
reported earnings of $112.9 million on revenues of $173.0 million in 2000. These
results were produced from assets that Kinder Morgan Energy Partners, L.P.
acquired from Kinder Morgan, Inc. on December 31, 1999. For comparative
purposes, transported gas volumes on our natural gas assets increased almost 6%
in 2000 compared with 1999 when these assets were owned by Kinder Morgan, Inc.
The overall increase includes an almost 9% increase in volumes shipped on the
Trailblazer Pipeline. Higher receipt-side pressure on the Trailblazer Pipeline
during 2000 resulted in an increase in the available quantity of gas delivered
to the Trailblazer Pipeline. Segment operating expenses totaled $51.2 million in
2000 and segment operating income was $97.2 million. Earnings for 2000 from the
segment's 49% equity investment in Red Cedar Gathering Company, net of
amortization of excess costs, were $15.0 million.
Segment results from 1999 and 1998 primarily represent activity from Kinder
Morgan Energy Partners, L.P.'s since divested partnership interest in the Mont
Belvieu fractionation facility. Segment earnings of $16.8 million in 1999
includes $2.5 million in equity earnings from its interest in the fractionation
facility and $14.1 million from Kinder Morgan Energy Partners, L.P.'s third
quarter gain on the sale of that interest to Enterprise Products Partners, L.P.
In 1998, the segment reported earnings of $4.9 million, including equity income
of $4.6 million. This amount represents earnings from our interest in the Mont
Belvieu facility for a full twelve-month period.
CO(2) PIPELINES
Kinder Morgan Energy Partners, L.P.'s CO(2) Pipelines segment consists of
Kinder Morgan CO(2) Company, L.P. After Kinder Morgan Energy Partners, L.P.'s
acquisition of the remaining 80% interest in Kinder Morgan CO(2) Company, L.P.,
on April 1, 2000, Kinder Morgan Energy Partners, L.P. no longer accounted for
its investment on an equity basis. Kinder Morgan Energy Partners, L.P.'s 2000
results also include the segment's acquisition of significant CO(2) pipeline
assets and oil-producing property interests on June 1, 2000. For the year 2000,
the segment reported earnings of $68.0 million on revenues of $89.2 million.
CO(2) Pipelines reported operating expenses of $26.8 million and operating
income of $47.9 million. Equity earnings from the segment's 50% interest in the
Cortez Pipeline Company, net of amortization of excess costs, were $19.3
million.
Segment results from 1999 and 1998 primarily represent equity earnings from
Kinder Morgan Energy Partners, L.P.'s original 20% interest in Kinder Morgan
CO(2) Company, L.P. Segment earnings of $15.2 million in 1999 include $14.5
million in equity earnings from our interest in Kinder Morgan CO(2) Company,
L.P. In 1998, Kinder Morgan Energy Partners, L.P.'s CO(2) Pipelines segment
reported earnings of $15.5 million, including $14.5 million in equity earnings
from our Kinder Morgan CO(2) Company, L.P. investment. Under the terms of the
prior Kinder Morgan CO(2) Company, L.P. partnership agreement, Kinder Morgan
Energy Partners, L.P. received a priority distribution of $14.5 million per year
during 1998, 1999 and the first quarter of 2000. After Kinder Morgan Energy
Partners, L.P.'s acquisition of the remaining 80% ownership interest, it amended
its partnership agreement, among other things, to eliminate the priority
distribution and other provisions rendered irrelevant by its sole ownership.
BULK TERMINALS
Kinder Morgan Energy Partners, L.P.'s Bulk Terminals segment reported its
highest amount of revenues, operating income and earnings in 2000. Following
Kinder Morgan Energy Partners, L.P.'s acquisition of Kinder Morgan Bulk
Terminals, Inc. effective July 1, 1998, it continued to make selective
acquisitions and increase capital spending in order to grow and expand its bulk
terminal businesses. Kinder Morgan Energy Partners, L.P.'s 2000 results include
the operations
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of Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc., effective
January 1, 2000, and Delta Terminal Services, Inc., acquired on December 4,
2000. The 1999 results include the full-year of operations for Kinder Morgan
Bulk Terminals, Inc. and the Pier IX and Shipyard River terminals, acquired on
December 18, 1998.
The Bulk Terminals segment reported earnings of $37.6 million in 2000,
$35.0 million in 1999 and $19.2 million in 1998. Segment revenues were $132.8
million in 2000, $114.6 million in 1999 and $62.9 million in 1998. In addition
to Kinder Morgan Energy Partners, L.P.'s acquisitions, its Bulk Terminals
segment's overall increases in year-to-year revenues were due to a 10% increase
in revenues earned by the segment's Cora and Grand Rivers coal terminals in 1999
and 2000. The 16% increase in segment revenues in 2000 over 1999 reflects a 6%
increase in transloaded coal volumes accompanied by a 4% increase in average
coal transfer rates. The increase in 1999 was impacted by an 18% increase in
transloaded coal volumes, partially offset by a 7% decrease in average transfer
rates. The growth in the Bulk Terminals segment revenues over the two-year
period was partially offset by lower revenue from coal marketing activities.
Bulk Terminals combined operating expenses totaled $81.7 million in 2000
compared to $66.6 million in 1999 and $36.9 million in 1998. The increase in
2000 versus 1999 was the result of acquisitions made in 2000, higher operating
expenses associated with the transfer of higher coal volumes and an increase in
fuel costs. The increase in 1999 compared to 1998 was the result of including a
full year of operations for Kinder Morgan Bulk Terminals, Inc., partially offset
by higher 1998 cost of sales expenses related to purchase/sale marketing
contracts. Depreciation and amortization expense was $9.6 million in 2000, $7.5
million in 1999 and $3.9 million in 1998. The increases in depreciation were
primarily due to the addition of Kinder Morgan Bulk Terminals, Inc. and the Pier
IX and Shipyard River terminal in 1998 and the Milwaukee and Dakota Bulk
Terminals in 2000, as well as to higher property balances as a result of
increased capital spending.
OTHER
Items not attributable to any segment include general and administrative
expenses, interest income and expense and minority interest. General and
administrative expenses totaled $60.1 million in 2000 compared with $35.6
million in 1999 and $40.0 million in 1998. The increase in Kinder Morgan Energy
Partners, L.P.'s 2000 general and administrative expenses over the prior year
was mainly due to its larger and more diverse operations. During 2000, Kinder
Morgan Energy Partners, L.P. assimilated the operations of its Natural Gas
Pipelines and CO(2) Pipelines business segments. Kinder Morgan Energy Partners,
L.P. continues to manage aggressively its infrastructure expense and to focus on
its productivity and expense controls. Kinder Morgan Energy Partners, L.P.'s
total interest expense, net of interest income, was $93.3 million in 2000, $52.6
million in 1999 and $38.6 million in 1998. The increases were primarily due to
debt Kinder Morgan Energy Partners, L.P. assumed as part of the acquisition of
its Pacific operations as well as additional debt related to the financing of
its 2000 and 1999 investments. Minority interest increased to $8.0 million in
2000 compared with $2.9 million in 1999 and $1.0 million in 1998. The $5.1
million increase in 2000 over 1999 primarily resulted from the inclusion of
earnings attributable to the Trailblazer Pipeline Company. The $1.9 million
increase in 1999 over 1998 resulted from higher earnings attributable to Kinder
Morgan Energy Partners, L.P.'s Pacific operations as well as to Kinder Morgan
Energy Partners, L.P.'s higher overall income.
OUTLOOK
Kinder Morgan Energy Partners, L.P. actively pursues a strategy to increase
its operating income. Kinder Morgan Energy Partners, L.P. will use a
three-pronged strategy to accomplish this goal.
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- Cost Reductions. Kinder Morgan Energy Partners, L.P. has substantially
reduced the operating expenses of those operations that it owned at the
time Kinder Morgan (Delaware), Inc. acquired Kinder Morgan Energy
Partners, L.P.'s general partner in February 1997. In addition, Kinder
Morgan Energy Partners, L.P. has made substantial reductions in the
operating expenses of the businesses and assets that it acquired since
February 1997. Kinder Morgan Energy Partners, L.P. intends to continue to
seek further reductions where appropriate.
- Internal Growth. Kinder Morgan Energy Partners, L.P. intends to expand
the operations of its current facilities. Kinder Morgan Energy Partners,
L.P. has taken a number of steps that management believes will increase
revenues from existing operations, including the following:
- completing the expansion of Kinder Morgan Energy Partners, L.P.'s San
Diego Line in June 2000. The expansion project cost approximately $18
million and consisted of the construction of 23 miles of 16-inch
diameter pipe and other appurtenant facilities. The new facilities will
increase capacity on Kinder Morgan Energy Partners, L.P.'s San Diego
Line by approximately 25%;
- entering into an agreement to provide pipeline transportation services
on the North System for Aux Sable Liquid Products, L.P. in the Chicago
area beginning in first quarter 2001;
- constructing a multi-million dollar cement import and distribution
facility at the Shipyard River terminal, which was completed in the
fourth quarter 2000, as part of a 30 year cement contract with Blue
Circle Cement;
- announcing an expansion project on the Trailblazer Pipeline in August
2000. The project will involve the installation of two new compressor
stations and the addition of horsepower at an existing compressor
station;
- continuing a $13 million upgrade to the coal loading facilities at the
Cora and Grand Rivers coal terminals. The two terminals handled an
aggregate of 17.0 million tons of coal during 2000 compared with 16.0
million tons in 1999; and
- increasing earnings and cash flow, as a result of our investments,
acquisitions and operating performance.
Strategic Acquisitions. Since January 1, 2000, Kinder Morgan Energy
Partners, L.P. has made the following acquisitions:
- Milwaukee Bulk Terminals, Inc. January 1, 2000
- Dakota Bulk Terminal, Inc. January 1, 2000
- Kinder Morgan CO(2) Company, L.P. (80%) April 1, 2000
- CO(2) Assets June 1, 2000
- Transmix Assets October 25, 2000
- Cochin Pipeline System November 3, 2000
- Delta Terminal Services, Inc. December 1, 2000
- Kinder Morgan Texas Pipeline, L.P. December 21, 2000
- Casper-Douglas Gas Gathering and Processing Assets December 21, 2000
- Coyote Gas Treating, LLC (50%) December 21, 2000
- Thunder Creek Gas Services, LLC (25%) December 21, 2000
- CO(2) Investment to be contributed to Joint Venture December 28, 2000
with Marathon
- Colton Transmix Processing Facility (50%) December 31, 2000
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Kinder Morgan Energy Partners, L.P. regularly seeks opportunities to make
additional strategic acquisitions, to expand existing businesses and to enter
into related businesses. Kinder Morgan Energy Partners, L.P. periodically
considers potential acquisition opportunities as such opportunities are
identified. No assurance can be given that Kinder Morgan Energy Partners, L.P.
will be able to consummate any such acquisition. Kinder Morgan Energy Partners,
L.P.'s management anticipates that it will finance acquisitions temporarily by
borrowings under its bank credit facilities or by issuing commercial paper, and
permanently by issuing new debt securities and/or units.
On January 17, 2001, Kinder Morgan Energy Partners, L.P. announced a
quarterly distribution of $0.95 per unit for the fourth quarter of 2000. The
distribution for the fourth quarter of 1999 was $0.725 per unit.
LIQUIDITY AND CAPITAL RESOURCES
Kinder Morgan Energy Partners, L.P.'s primary cash requirements, in
addition to normal operating expenses, are debt service, sustaining capital
expenditures, expansion capital expenditures and quarterly distributions to its
common unitholders. In addition to utilizing cash generated from operations,
Kinder Morgan Energy Partners, L.P. could meet its cash requirements through
borrowings under its credit facilities or issuing short-term commercial paper,
long-term notes or additional units. Kinder Morgan Energy Partners, L.P. expects
to fund:
- future cash distributions and sustaining capital expenditures with
existing cash and cash flows from operating activities;
- expansion capital expenditures through additional borrowings or issuance
of additional units;
- interest payments from cash flows from operating activities; and
- debt principal payments with additional borrowings as they become due or
by issuance of additional units.
OPERATING ACTIVITIES
Net cash provided by operating activities was $301.6 million in 2000
compared to $182.9 million in 1999. Increases in our period-to-period cash flows
from operations resulted from:
- a $93.4 million increase in net earnings;
- a $36.2 million increase in non-cash depreciation and amortization
charges;
- a $28.4 million increase in cash inflows relative to net changes in
working capital items;
- a $14.0 million increase in cash inflows relative to other non-cash
operating activities;
- a $13.8 million increase in distributions from equity investments; and
- a $10.1 million gain on the sale of our equity interest in the Mont
Belvieu fractionation facility, net of special charges, in the third
quarter of 1999.
Higher earnings and higher non-cash depreciation charges in 2000 compared
to 1999 were primarily due to the business acquisitions and capital investments
Kinder Morgan Energy Partners, L.P. made during 2000. Higher cash inflows from
working capital items were mainly due to favorable changes in Kinder Morgan
Energy Partners, L.P.'s accounts receivable-trade balances, particularly from
its Pacific operations and its newly acquired CO(2) businesses, and from higher
collections on its Pacific operations' insurance receivables. The $14.0 million
increase in other non-cash operating activities was primarily due to favorable
changes in accrued gas transportation imbalances recorded by Kinder Morgan
Energy Partners, L.P.'s Natural Gas Pipelines. The increase in distributions
from equity investments was mainly due to distributions
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Kinder Morgan Energy Partners, L.P. received in 2000 from its 50% ownership
interest in Cortez Pipeline Company and its 49% ownership interest in Red Cedar
Gathering Company. Following its acquisition of the remaining ownership interest
in Kinder Morgan CO(2) Company, L.P. on April 1, 2000 Kinder Morgan Energy
Partners, L.P. accounted for its investment in Cortez Pipeline Company under the
equity method of accounting. Kinder Morgan Energy Partners, L.P. acquired its
interest in Red Cedar Gathering Company from Kinder Morgan, Inc. on December 31,
1999. The overall increase in distributions from equity investments was
partially offset by the absence of distributions from Kinder Morgan Energy
Partners, L.P.'s original 20% interest in Kinder Morgan CO(2) Company, L.P. from
April 1, 2000 through December 31, 2000 due to the fact Kinder Morgan Energy
Partners, L.P. no longer accounted for this investment on an equity basis.
Kinder Morgan Energy Partners, L.P.'s overall increase in cash provided by
operating activities was offset by:
- a $52.5 million payment of accrued rate refund liabilities; and
- a $24.7 million increase in undistributed earnings from equity
investments, net of amortization of excess costs.
The payment of the rate refunds was made under settlement agreements with
shippers on Kinder Morgan Energy Partners, L.P.'s natural gas pipelines. The
increase in undistributed earnings from equity investments, net of amortization
of excess costs, resulted primarily from earnings generated from Kinder Morgan
Energy Partners, L.P.'s investments in Cortez Pipeline Company and Red Cedar
Gathering Company. Higher overall equity earnings were partly offset by the
absence of earnings in 2000 from Kinder Morgan Energy Partners, L.P.'s
investment in the Mont Belvieu fractionation facility, and, as was the case in
distributions, the absence of earnings from its original 20% interest in Kinder
Morgan CO(2) Company, L.P. from April 1, 2000 through December 31, 2000 due to
the fact Kinder Morgan Energy Partners, L.P. no longer accounted for this
investment on an equity basis.
INVESTING ACTIVITIES
Net cash used in investing activities was $1,197.6 million in 2000 compared
to $196.5 million in 1999, an increase of $1,001.1 million chiefly attributable
to the $1,008.6 million of asset acquisitions Kinder Morgan Energy Partners,
L.P. made in 2000. Kinder Morgan Energy Partners, L.P.'s 2000 acquisition
outlays included:
- a $478.3 million payment to Kinder Morgan, Inc. for the Natural Gas
Pipelines assets;
- a $188.9 million net payment for the remaining 80% interest in Kinder
Morgan CO(2) Company, L.P.;
- a $120.5 million payment for our 32.5% ownership interest in the Cochin
Pipeline System;
- a $114.3 million payment for Bulk Terminal acquisitions, including
Milwaukee Bulk Terminals, Inc., Dakota Bulk Terminal, Inc. and Delta
Terminal Services, Inc.;
- a $53.4 million payment for our interests in the Canyon Reef Carriers
CO(2) pipeline and SACROC Unit; and
- a $45.7 million payment for the acquisition of Buckeye Refining Company,
LLC.
Kinder Morgan Energy Partners, L.P. expended an additional $42.8 million
for capital expenditures in 2000 compared to 1999. Including expansion and
maintenance projects, Kinder Morgan Energy Partners, L.P.'s capital expenditures
were $125.5 million in 2000 and $82.7 million in 1999. The increase was driven
primarily by continued investment in Kinder Morgan Energy Partners, L.P.'s
Pacific operations and in its Bulk Terminals business segment. Proceeds from the
sale of investments, property, plant and equipment, net of removal costs, were
lower by
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$29.7 million in 2000 versus 1999. Proceeds received from sales and retirements
of investments, property, plant and equipment were $13.4 million in 2000 and
$43.1 million in 1999. The decrease was due to the $41.8 million Kinder Morgan
Energy Partners, L.P. received for the sale of its interest in the Mont Belvieu
fractionation facility in September 1999.
The overall increase in funds used in investing activities was offset by a
$82.4 million decrease in cash used for acquisitions of investments. Kinder
Morgan Energy Partners, L.P. used $79.4 million for acquisitions of investments
in 2000 compared with $161.8 million in 1999.
Kinder Morgan Energy Partners, L.P.'s 2000 investment outlays included:
- $34.2 million for a 7.5% interest in the Yates field unit subsequently
contributed to the CO(2) joint venture with Marathon Oil Company;
- $44.6 million for its 25% interest in Thunder Creek Gas Services, LLC and
its 50% interest in Coyote Gas Treating, LLC.
Kinder Morgan Energy Partners, L.P.'s 1999 investment outlays consisted of:
- $124.2 million for our second investment in Plantation Pipe Line Company;
and
- $37.6 million for our first one-third interest in Trailblazer Pipeline
Company.
FINANCING ACTIVITIES
Net cash provided by financing activities amounted to $915.3 million in
2000, an increase of $893.3 million from the prior year was mainly the result of
an additional $817.1 million Kinder Morgan Energy Partners, L.P. received from
overall debt financing activities. The increase in borrowings was mainly due to
2000 acquisitions. Kinder Morgan Energy Partners, L.P. completed a private
placement of $400 million in debt securities during the first quarter of 2000,
resulting in a cash inflow of $397.9 million net of discounts and issuing costs.
Kinder Morgan Energy Partners, L.P. completed a second private placement of $250
million in debt securities during the fourth quarter of 2000, resulting in a
cash inflow of $246.8 million net of discounts and issuing costs. In addition,
Kinder Morgan Energy Partners, L.P. received $171.4 million as proceeds from
Kinder Morgan Energy Partners, L.P.'s issuance of units during 2000, most
significantly realized from Kinder Morgan Energy Partners, L.P.'s 4,500,000-unit
public offering on April 4, 2000. The overall increase in funds provided by
Kinder Morgan Energy Partners, L.P.'s financing activities was partially offset
by a $102.8 million increase in its distributions to partners. Distributions to
all partners increased to $293.6 million in 2000 compared to $190.8 million in
1999. The increase in distributions was due to:
- an increase in its per unit distributions paid;
- an increase in its number of units outstanding;
- Kinder Morgan Energy Partners, L.P.'s general partner incentive
distributions, which resulted from increased distributions to its
unitholders; and
- distributions paid by Trailblazer Pipeline Company, which were included
in Kinder Morgan Energy Partners, L.P.'s consolidated results following
the acquisition of our controlling 66 2/3% interest on December 31, 1999.
Kinder Morgan Energy Partners, L.P. paid distributions of $3.20 per unit in
2000 compared to $2.775 per unit in 1999. The 15% increase in paid distributions
per unit resulted from favorable operating results in 2000. Kinder Morgan Energy
Partners, L.P. believes that future operating results will continue to support
similar or higher levels of quarterly cash distributions, however, no assurance
can be given that future distributions will continue at such levels.
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PARTNERSHIP DISTRIBUTIONS
Kinder Morgan Energy Partners, L.P.'s partnership agreement requires that
it distribute 100% of its Available Cash to its partners within 45 days
following the end of each calendar quarter in accordance with their respective
percentage interests. Kinder Morgan Energy Partners, L.P.'s available cash
consists generally of all of its cash receipts, including cash received by its
operating partnerships, less cash disbursements and net additions to reserves
(including any reserves required under debt instruments for future principal and
interest payments) and amounts payable to the former general partner of Santa Fe
Pacific Pipeline, L.P. in respect of its remaining 0.5% interest in SFPP, L.P.
Kinder Morgan Energy Partners, L.P.'s available cash is initially
distributed 98% to its limited partners and 2% to its general partner, Kinder
Morgan G.P., Inc. These distribution percentages are modified to provide for
incentive distributions to be paid to Kinder Morgan Energy Partners, L.P.'s
general partner in the event that quarterly distributions to unitholders exceed
certain specified targets.
Kinder Morgan Energy Partners, L.P.'s available cash for each quarter is
distributed:
- first, 98% to its limited partners and 2% to its general partner until
its limited partners have received a total of $0.3025 per unit for such
quarter;
- second, 85% to its limited partners and 15% to its general partner until
its limited partners have received a total of $0.3575 per unit for such
quarter;
- third, 75% to its limited partners and 25% to its general partner until
its limited partners have received a total of $0.4675 per unit for such
quarter; and
- fourth, thereafter 50% to its limited partners and 50% to its general
partner.
Incentive distributions are generally defined as all cash distributions
paid to Kinder Morgan Energy Partners, L.P.'s general partner that are in excess
of 2% of the aggregate amount of cash being distributed. The general partner's
incentive distributions declared by Kinder Morgan Energy Partners, L.P. for 2000
were $107,764,885, while the incentive distributions paid during 2000 were
$89,399,771.
Concurrently with the closing of this offering, the Kinder Morgan Energy
Partners, L.P. partnership agreement will be amended to provide for
distributions to common unitholders, i-unitholders and the general partner as
described under "Kinder Morgan Energy Partners, L.P.'s Distribution Policy."
Distributions will be made in cash to holders of common units and to the general
partner and in additional i-units to holders of i-units.
DEBT AND CREDIT FACILITIES
Kinder Morgan Energy Partners, L.P.'s debt and credit facilities as of
December 31, 2000, consist primarily of:
- a $600 million unsecured 364-day credit facility due October 25, 2001;
- a $300 million unsecured five-year credit facility due September 29,
2004;
- $250 million of 6.30% Senior Notes due February 1, 2009;
- $200 million of 8.00% Senior Notes due March 15, 2005;
- $250 million of 7.50% Senior Notes due November 1, 2010;
- $200 million of Floating Rate Senior Notes due March 22, 2002;
- $119 million of Series F First Mortgage Notes (Kinder Morgan Energy
Partners, L.P.'s subsidiary, SFPP, is the obligor on the notes);
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- $20.2 million of Senior Secured Notes (Trailblazer Pipeline Company, of
which we own 66 2/3%, is the obligor on the notes);
- $23.7 million of tax-exempt bonds due 2024 (Kinder Morgan Energy
Partners, L.P.'s subsidiary, Kinder Morgan Operating L.P. "B" is the
obligor on these bonds); and
- a $600 million short-term commercial paper program.
Kinder Morgan Energy Partners, L.P. has a $300 million unsecured five-year
credit facility and a $600 million unsecured 364-day credit facility with a
syndicate of financial institutions. First Union National Bank is the
administrative agent under the agreements.
Interest on borrowings is payable quarterly. Interest on the credit
facilities accrues at Kinder Morgan Energy Partners, L.P.'s option at a floating
rate equal to either:
- First Union National Bank's base rate (but not less than the Federal
Funds Rate, plus .5%); or
- LIBOR, plus a margin, which varies depending upon the credit rating of
its long-term senior unsecured debt.
The LIBOR margins under the 364-day credit facility are lower than the
margins under the five-year credit facility. The five-year credit facility also
permits Kinder Morgan Energy Partners, L.P. to obtain bids for fixed rate loans
from members of the lending syndicate.
The credit facilities include restrictive covenants that are customary for
these types of facilities, including without limitation:
- requirements to maintain certain financial ratios;
- restrictions on the incurrence of additional indebtedness;
- restrictions on entering into mergers, consolidations and sales of
assets;
- restrictions on granting liens;
- prohibitions on making cash distributions to holders of units more
frequently than quarterly;
- prohibitions on making cash distributions in excess of 100% of Available
Cash for the immediately preceding calendar quarter; and
- prohibitions on making any distribution to holders of units if an event
of default exists or would exist upon making such distribution.
As of December 31, 2000, Kinder Morgan Energy Partners, L.P. had
outstanding borrowings under its credit facilities of $789.6 million. At
December 31, 2000, the interest rate on Kinder Morgan Energy Partners, L.P.'s
credit facilities was 7.115% per annum. Kinder Morgan Energy Partners, L.P.'s
borrowings at December 31, 2000 included the following:
- $193 million borrowed to fund the purchase price of natural gas pipelines
assets acquired in December 2000;
- $175 million used to pay the outstanding balance on SFPP, L.P.'s credit
facility;
- $118 million borrowed to fund the purchase price of its 32.5% interest in
the Cochin Pipeline system in December 2000;
- $114 million borrowed to fund the purchase price of Delta Terminal
Services, Inc. in December, 2000;
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- $72 million borrowed to fund principal and interest payments on SFPP,
L.P.'s Series F Notes in December 2000;
- $34 million borrowed to fund the purchase price of Kinder Morgan Energy
Partners, L.P.'s 7.5% interest in the Yates field unit in December 2000;
and
- $83.6 million borrowed to fund expansion capital projects.
Kinder Morgan Energy Partners, L.P.'s short-term debt at December 31, 2000,
consisted of:
- $582 million of borrowings under its unsecured 364-day credit facility
due October 25, 2001;
- $52 million of commercial paper borrowings;
- $35 million under the SFPP 10.70% First Mortgage Notes; and
- $14.6 million in other borrowings.
During 2000, Kinder Morgan Energy Partners, L.P.'s cash used for
acquisitions and expansions exceeded $600 million. Historically, Kinder Morgan
Energy Partners, L.P. has utilized its short-term credit facilities to fund
acquisitions and expansions and then refinanced its short-term borrowings
utilizing long-term credit facilities and by issuing equity or long-term debt
securities. Kinder Morgan Energy Partners, L.P. intends to refinance its
short-term debt during 2001 through a combination of long-term debt and equity.
Based on prior successful short-term debt refinancings and current market
conditions, Kinder Morgan Energy Partners, L.P. does not anticipate any
liquidity problems.
Kinder Morgan Energy Partners, L.P. has an outstanding letter of credit
issued under its five-year credit facility in the amount of $23.7 million that
backs-up its tax-exempt bonds due 2024. The letter of credit reduces the amount
available for borrowing under that credit facility. The $23.7 million principal
amount of tax-exempt bonds due 2024 were issued by the Jackson-Union Counties
Regional Port District. These bonds bear interest at a weekly floating market
rate. At December 31, 2000, the interest rate was 5.00%.
In addition, as of December 31, 1999, Kinder Morgan Energy Partners, L.P.
financed $330 million through Kinder Morgan, Inc. to fund part of the
acquisition of assets acquired from Kinder Morgan, Inc. on December 31, 1999. In
accordance with the Closing Agreement entered into as of January 20, 2000,
Kinder Morgan Energy Partners, L.P. paid Kinder Morgan, Inc. a per diem fee of
$180.56 for each $1,000,000 financed. Kinder Morgan Energy Partners, L.P. paid
Kinder Morgan, Inc. $200 million on January 21, 2000, and the remaining $130
million on March 23, 2000 with a portion of the proceeds from its issuance of
notes on March 22, 2000.
In December 1999, Kinder Morgan Energy Partners, L.P. established a
commercial paper program providing for the issuance of up to $200 million of
commercial paper, subsequently increased to $300 million in January, 2000 and
then on October 25, 2000, in conjunction with Kinder Morgan Energy Partners,
L.P.'s new 364-day credit facility, we increased the commercial paper program to
provide for the issuance of up to $600 million of commercial paper. Borrowings
under Kinder Morgan Energy Partners, L.P.'s commercial paper program reduce the
borrowings allowed under its 364-day and five-year credit facilities combined.
As of December 31, 2000, Kinder Morgan Energy Partners, L.P. had $52 million of
commercial paper outstanding with an interest rate of 7.02%.
At December 31, 2000, the outstanding balance under SFPP, L.P.'s Series F
notes was $119.0 million. The annual interest rate on the Series F notes is
10.70%, the maturity is December 2004, and interest is payable semiannually in
June and December. The Series F notes are payable in annual installments of
$39.5 million in 2001, $42.5 million in 2002 and $37.0 million in 2003. The
Series F notes may also be prepaid in full or in part at a price equal to par
plus, in certain circumstances, a premium. The Series F notes are secured by
mortgages on substantially
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all of the properties of SFPP, L.P. The Series F notes contain certain covenants
limiting the amount of additional debt or equity that may be issued and limiting
the amount of cash distributions, investments, and property dispositions.
At December 31, 1999, the outstanding balance under SFPP, L.P.'s bank
credit facility was $174.0 million. On August 11, 2000, Kinder Morgan Energy
Partners, L.P. replaced the outstanding balance under SFPP, L.P.'s secured
credit facility with a $175.0 million unsecured borrowing under Kinder Morgan
Energy Partners, L.P.'s five-year credit facility. SFPP, L.P. executed a $175
million intercompany note in favor of Kinder Morgan Energy Partners, L.P. to
evidence this obligation.
In December 1999, Trailblazer Pipeline Company entered into a 364-day
revolving credit agreement with Toronto Dominion, Inc. providing for loans up to
$10 million. At December 26, 2000, the outstanding balance due under Trailblazer
Pipeline Company's bank credit facility was $10 million. On December 27, 2000,
Trailblazer Pipeline Company paid the outstanding balance under its credit
facility with a $10 million borrowing under an intercompany account payable in
favor of Kinder Morgan, Inc. In January 2001, Trailblazer Pipeline Company
entered into a 364-day revolving credit agreement with Credit Lyonnais New York
Branch, providing for loans up to $10 million. The agreement expires December
27, 2001. The borrowings were used to pay the account payable to Kinder Morgan,
Inc. At January 31, 2001, the outstanding balance under Trailblazer Pipeline
Company's revolving credit agreement was $10 million. The agreement provides for
an interest rate of LIBOR plus 0.875%. At January 31, 2001 the interest rate on
the credit facility debt was 6.625%. Pursuant to the terms of the revolving
credit agreement with Credit Lyonnais New York Branch, Trailblazer Pipeline
Company partnership distributions are restricted by certain financial covenants.
From time to time Kinder Morgan Energy Partners, L.P. issues long-term debt
securities. All of Kinder Morgan Energy Partners, L.P.'s long term debt
securities issued to date, other than those issued under its revolving credit
facilities, generally have the same terms except for interest rates, maturity
dates and prepayment restrictions. All of Kinder Morgan Energy Partners, L.P.'s
outstanding debt securities are unsecured obligations that rank equally with all
of its other senior debt obligations. Kinder Morgan Energy Partners, L.P.'s
outstanding debt securities consist of the following:
- $250 million in principal amount of 6.3% senior notes due February 1,
2009. These notes were issued on January 29, 1999 at a price to the
public of 99.67% per note. In the offering, Kinder Morgan Energy
Partners, L.P. received proceeds, net of underwriting discounts and
commissions, of approximately $248 million. Kinder Morgan Energy
Partners, L.P. used the proceeds to pay the outstanding balance on its
credit facility and for working capital and other partnership purposes.
At December 31, 2000, the unamortized liability balance on the 6.30%
senior notes was $249.3 million;
- $200 million of floating rate notes due March 22, 2002 and $200 million
of 8.0% notes due March 15, 2005. Kinder Morgan Energy Partners, L.P.
used the proceeds to reduce outstanding commercial paper. At December 31,
2000, the interest rate on its floating rate notes was 7.0%.
- $250 million of 7.5% notes due November 1, 2010. These notes were issued
on November 8, 2000. The proceeds from this offering, net of underwriting
discounts, were $246.8 million. These proceeds were used to reduce Kinder
Morgan Energy Partners, L.P.'s outstanding commercial paper. At December
31, 2000, the unamortized liability balance on the 7.5% notes was $248.4
million.
The fixed rate notes provide that Kinder Morgan Energy Partners, L.P. may
redeem the notes at any time at a price equal to 100% of the principal amount of
the notes plus accrued
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interest to the redemption date plus a make-whole premium. Kinder Morgan Energy
Partners, L.P. may not prepay the floating rate notes prior to their maturity.
On September 23, 1992, pursuant to the terms of a Note Purchase Agreement,
Trailblazer Pipeline Company issued and sold an aggregate principal amount of
$101 million of Senior Secured Notes to a syndicate of fifteen insurance
companies. Trailblazer Pipeline Company provided security for the notes
principally by an assignment of certain Trailblazer Pipeline Company
transportation contracts. Effective April 29, 1997, Trailblazer Pipeline Company
amended the Note Purchase Agreement. This amendment allowed Trailblazer Pipeline
Company to include several additional transportation contracts as security for
the notes, added a limitation on the amount of additional money that Trailblazer
Pipeline Company could borrow and relieved Trailblazer Pipeline Company from its
security deposit obligation. At December 31, 2000, Trailblazer Pipeline
Company's outstanding balance under the Senior Secured Notes was $20.2 million.
The Senior Secured Notes have a fixed annual interest rate of 8.03% and will be
repaid in semiannual installments of $5.05 million from March 1, 2001 through
September 1, 2002, the final maturity date. Interest is payable semiannually in
March and September. Pursuant to the terms of this Note Purchase Agreement,
Trailblazer Pipeline Company partnership distributions are restricted by certain
financial covenants. Currently, Trailblazer Pipeline Company's proposed
expansion project is pending before the FERC. If the expansion is approved,
which is expected in the first quarter of 2001, we plan to refinance these
notes.
CAPITAL REQUIREMENTS FOR RECENT TRANSACTIONS
Milwaukee Bulk Terminals, Inc. Effective January 1, 2000, Kinder Morgan
Energy Partners, L.P. acquired Milwaukee Bulk Terminals, Inc. for approximately
$14.6 million in aggregate consideration consisting of $0.6 million and 0.3
million common units.
Dakota Bulk Terminal, Inc. Effective January 1, 2000, Kinder Morgan Energy
Partners, L.P. acquired Dakota Bulk Terminal, Inc. for approximately $9.5
million in aggregate consideration consisting of $0.2 million and 0.2 million
common units.
Kinder Morgan CO(2) Company, L.P. On April 1, 2000, Kinder Morgan Energy
Partners, L.P. acquired the remaining 80% ownership interest in Shell CO(2)
Company, Ltd. that it did not own for approximately $212.1 million before
purchase price adjustments. Kinder Morgan Energy Partners, L.P. paid this amount
with approximately $171.4 million received from its public offering of 4.5
million units on April 4, 2000 and approximately $40.7 million received from the
issuance of commercial paper.
CO(2) Assets. On June 1, 2000, Kinder Morgan Energy Partners, L.P.
acquired certain CO(2) assets from Devon Energy Production Company, L.P. for
approximately $55 million before purchase price adjustments. Kinder Morgan
Energy Partners, L.P. borrowed the necessary funds under its commercial paper
program.
Transmix Operations. On November 3, 2000, Kinder Morgan Energy Partners,
L.P. acquired Buckeye Refinery Company, LLC for $45.6 million after purchase
price adjustments. Kinder Morgan Energy Partners, L.P. borrowed the necessary
funds under its commercial paper program.
Delta Terminal Services, Inc. On December 4, 2000, Kinder Morgan Energy
Partners, L.P. acquired Delta Terminal Services, Inc. for $114.1 million. Kinder
Morgan Energy Partners, L.P. borrowed $114 million under its credit facilities
and its commercial paper program.
Cochin Pipeline. On October 31, 2000, Kinder Morgan Energy Partners, L.P.
acquired a 32.5% ownership interest in the Cochin Pipeline system for $120.5
million from NOVA Chemicals Corporation. Kinder Morgan Energy Partners, L.P.
borrowed $118 million under its credit facilities.
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Colton Transmix Processing Facility. On December 31, 2000 Kinder Morgan
Energy Partners, L.P. acquired an additional 50% ownership interest in the
Colton Transmix Processing Facility from Duke Energy Merchants for $11.2
million. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under
its commercial paper program.
CO(2) Joint Venture With Marathon Oil Company. On December 28, 2000,
Kinder Morgan Energy Partners, L.P. paid $34.2 million for a 7.5% interest in
the Yates field unit which was subsequently contributed to a CO(2) joint venture
with Marathon Oil Company. The joint venture was formed on January 1, 2001.
Kinder Morgan Energy Partners, L.P. borrowed $34 million under its credit
facilities.
Natural Gas Pipelines. Effective December 31, 2000, Kinder Morgan Energy
Partners, L.P. acquired certain assets of Kinder Morgan Inc. for approximately
$349.0 million in aggregate consideration consisting of $192.7 million, 0.64
million common units and 2.7 million class B units. Kinder Morgan Energy
Partners, L.P. borrowed $193 million under its credit facilities.
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DESCRIPTION OF THE SHARES
The following is a summary of the principal documents which establish the
terms of the shares, as well as documents establishing the terms of the i-units
owned by us. Copies of those documents are on file with the SEC as part of our
registration statement. See "Where You Can Find Additional Information" for
information on how to obtain copies. Although we believe the material provisions
of those documents have been accurately summarized, you should refer to the
provisions of each of the following agreements because they, and not this
summary, will govern your rights as a holder of shares. These agreements
include:
- our limited liability company agreement which provides for the issuance
of the shares and their distribution and voting rights and which
establishes rights, obligations and the limited circumstances for the
mandatory and optional purchase of the shares by Kinder Morgan, Inc. as
provided in the Kinder Morgan, Inc. purchase agreement;
- the Kinder Morgan, Inc. purchase agreement which provides for the
optional and mandatory purchase of the shares in the limited
circumstances set forth in our limited liability company agreement;
- the Kinder Morgan, Inc. exchange agreement which provides the holders of
shares the right to exchange the shares for common units, subject to
Kinder Morgan, Inc.'s election to settle the exchange in cash rather than
common units;
- the Kinder Morgan Energy Partners, L.P. registration rights agreement
which provides for the registration with the SEC of the exchange of
common units by Kinder Morgan, Inc. for shares, as contemplated in the
Kinder Morgan, Inc. exchange agreement;
- the Kinder Morgan, Inc. tax indemnity agreement which indemnifies us for
any tax liability attributable to our formation or our management of the
business and affairs of Kinder Morgan Energy Partners, L.P., and for any
taxes arising out of a transaction involving our i-units to the extent
the transaction does not generate sufficient cash to pay our taxes; and
- the Kinder Morgan Energy Partners, L.P. amended and restated limited
partnership agreement which establishes the i-units as a class and
specifies the relative rights and preferences of the i-units.
DISTRIBUTIONS
General. Under the terms of our limited liability company agreement,
except in connection with our liquidation, we will not pay distributions on
shares in cash but we will make distributions of additional shares or fractions
of shares. Within 45 days after the end of each quarter, beginning with the
quarter ending , 2001, we will distribute on each
share that fraction of a share determined by dividing the cash distribution to
be made by Kinder Morgan Energy Partners, L.P. on each common unit for that
quarter by an average market price of a share as of the declaration date of the
distribution. The manner in which we determine the average market price is
described below.
Within approximately 45 days after the end of each quarter, Kinder Morgan
Energy Partners, L.P. has been distributing all of its available cash to its
common unitholders of record on the applicable record date and the general
partner. "Available cash" is generally, for any calendar quarter, all cash
received by Kinder Morgan Energy Partners, L.P. from all sources less all of its
cash disbursements and net additions to reserves. On February 14, 2001, Kinder
Morgan Energy Partners, L.P. paid a quarterly distribution to holders of common
units to $0.95 per common unit, or $3.80 on an annual basis.
Concurrently with the closing of this offering, the Kinder Morgan Energy
Partners, L.P. partnership agreement will be amended to provide for
distributions to the extent of available cash to common unitholders and the
general partner in cash and to us in additional i-units. Therefore,
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future distributions will be made in cash to holders of common units and to the
general partner and in additional i-units to us.
We also will distribute to holders of shares additional shares if holders
of common units receive a cash distribution or other payment on their common
units other than a regular quarterly distribution. In that event, we will
distribute on each share that fraction of an additional share determined by
dividing the cash distribution made by Kinder Morgan Energy Partners, L.P. on
each common unit in the distribution by an average market price of a share as of
the declaration date of the distribution.
Our limited liability company agreement provides that we may not declare
any distribution on the shares after Kinder Morgan, Inc. gives notice to us of
an optional purchase of the shares or after the occurrence of an event
triggering a mandatory purchase of the shares.
There will be no public market for trading fractional shares. We will issue
fractional shares in payment of the distribution to holders of shares. No
fraction of a share can be traded on any exchange on which the shares are listed
until a holder acquires the remainder of the fraction and has a whole share.
The term "average market price" is used above in connection with the share
distributions and it is used below in connection with optional and mandatory
purchase of the shares. When we refer to the average market price of a share or
a common unit for the purpose of a regular quarterly distribution, we mean the
average closing price of a share or common unit during the 10 consecutive
trading days prior to the day before the relevant ex-dividend date, declaration
date or other date for the share or common unit, respectively, but not including
that date.
The "closing price" of securities on any date means:
- the last sale price for that day, regular way, if there are no sales on
that day, the average of the closing bid and asked prices for that day,
regular way, in either case as reported in the principal composite
transactions reporting system for the principal United States national or
regional securities exchange on which the securities are listed; or
- if the securities are not listed on a United States national or regional
securities exchange on that date, the last quoted price on that day, or
if no price is quoted, the average of the high bid and low asked prices
on that day, each as reported by the NASDAQ; or
- if on that day the securities are not so quoted, the average of the
closing bid and asked prices on that day furnished by a professional
market maker in the securities selected by our board of directors; or
- if on that day no market maker is making a market in the securities, the
fair value of the securities as determined by our board of directors.
A "trading day" for securities means a day on which:
- the principal national or regional securities exchange on which the
securities are listed is open for business, or
- if the securities are not listed, on any national or regional securities
exchange, a day in which banking institutions in New York City generally
are open.
LIMITED VOTING RIGHTS
Under the terms of our limited liability company agreement, you have
limited voting rights as a holder of our shares. The limited liability company
agreement provides that:
- We will not, without the approval of the holders of at least a majority
of the shares then outstanding, amend, alter or repeal any of the
provisions of our limited liability company agreement, the Kinder Morgan,
Inc. purchase agreement, the Kinder Morgan, Inc.
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exchange agreement, the Kinder Morgan Energy Partners, L.P. registration
rights agreement or the Kinder Morgan, Inc. tax indemnification agreement
in a manner that materially adversely affects the powers, preferences or
rights of our company or the holders of the shares or reduces the time
for any notice to which the holders of the shares may be entitled.
- We will not, without the approval of the holders of a majority of the
shares then outstanding, consent to an amendment, alteration or repeal
any of the provisions of Kinder Morgan Energy Partners, L.P.'s
partnership agreement in a manner that materially adversely affects the
preferences or rights of holders of the i-units as compared to the
preferences or rights of the holders of other classes of units.
- On any matter submitted to us as the holder of i-units, the i-units we
own will be voted as directed by the holders of shares. Under the terms
of the Kinder Morgan Energy Partners, L.P. limited partnership agreement,
the i-units vote on all matters on which the common units vote. Except
with respect to the amendments to Kinder Morgan Energy Partners, L.P.'s
partnership agreement noted above, the i-units and common units will
generally vote together as a single class with each i-unit having one
vote.
A person or group owning 20% or more of the aggregate number of issued and
outstanding common units and shares cannot vote common units or shares. This
limitation does not apply to Kinder Morgan G.P., Inc., the general partner, and
its affiliates.
Notwithstanding the foregoing, shares held by Kinder Morgan Energy
Partners, L.P. or any of its affiliates will not have any voting rights. In
determining if the holders of a majority of the shares approval has been
received, shares held by Kinder Morgan Energy Partners, L.P. and its affiliates
will be treated as if they are not outstanding. This limitation on voting of
shares by Kinder Morgan Energy Partners, L.P. or its affiliates will not affect
the rights of Kinder Morgan G.P., Inc. to vote our voting shares.
Our board of directors, Kinder Morgan Energy Partners, L.P. and Kinder
Morgan Energy Partners, L.P. have reserved the right to make changes in the
terms of the shares, the exchange agreement, tax indemnification agreement,
purchase agreement and related agreements in order to meet the requirements of
applicable securities laws and regulations, exchange rules and other changes
which our board of directors determines in its sole discretion will not have a
material adverse effect on the rights and privileges associated with the shares.
ANTI-DILUTION ADJUSTMENTS
Concurrently with the closing of this offering, Kinder Morgan Energy
Partners, L.P. will amend its partnership agreement to provide that Kinder
Morgan Energy Partners, L.P. will adjust proportionately the number of i-units
held by us through the payment to us of an i-unit distribution or by causing an
i-unit share split if various events occur, including:
- the payment of a common unit distribution on the common units; and
- a subdivision, split or combination of the common units.
Our limited liability company agreement provides that the number of shares
outstanding shall at all times equal the number of i-units held by us. If there
is to be a change in the number of i-units held by us, we will pay to you a
share distribution or effect a share split of the shares to provide that at all
times the number of shares outstanding equals the number of i-units held by us.
Through the combined effect of the provisions in the Kinder Morgan Energy
Partners, L.P. partnership agreement and the provisions of our limited liability
company agreement, the number of shares and i-units will maintain a one-to-one
equivalency.
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COVENANTS
Our limited liability company agreement provides that our activities will
be limited to being a partner in, and controlling and managing the business and
affairs of, Kinder Morgan Energy Partners, L.P. and its operating partnerships
and subsidiaries. It also includes provisions that are intended to maintain a
one-to-one relationship between the number of i-units owned by us and the shares
outstanding, including provisions:
- prohibiting our sale, pledge or other transfer of i-units;
- requiring the proceeds from the sale of shares by us to be used for the
purchase of i-units from Kinder Morgan Energy Partners, L.P.;
- prohibiting our issuance of options, warrants or other securities
entitling the holder to subscribe for or purchase shares;
- prohibiting us from borrowing money or issuing debt;
- prohibiting a merger or recapitalization or similar transactions
involving us; and
- prohibiting our purchase of shares.
The performance of the covenants contained in our limited liability company
agreement may be waived by the affirmative vote of the holders of 50% of shares.
For this purpose shares held by Kinder Morgan Energy Partners, L.P. and its
affiliates will be treated as not outstanding.
Under the terms of the Kinder Morgan Energy Partners, L.P. partnership
agreement, Kinder Morgan Energy Partners, L.P. agrees that prior to a date on
which all shares have been purchased by Kinder Morgan, Inc. pursuant to the
optional or mandatory purchase provisions in the Kinder Morgan, Inc. purchase
agreement, Kinder Morgan Energy Partners, L.P. will not:
- pay a distribution on a common unit other than in cash, common units or a
security which has in all material respects the same or more favorable
rights and privileges of common units, provided the more favorable rights
and privileges are also granted to i-units;
- allow a holder of common units to receive any consideration other than
cash or common units or a security which has in all material respects the
same or more favorable rights and privileges of common units, provided
the more favorable rights and privileges are also granted to i-units in
a:
-- merger in which Kinder Morgan Energy Partners, L.P. is not the
survivor, if the unitholders of Kinder Morgan Energy Partners, L.P.
immediately prior to the transaction own more than 50% of the total
voting power of the voting stock of the survivor immediately after
the transaction;
-- merger in which Kinder Morgan Energy Partners, L.P. is the
survivor; or
-- recapitalization, reorganization or similar transaction;
or
- merge into another person, sell substantially all of its assets to
another person or enter into similar transactions if:
-- the other person is to be controlled by Kinder Morgan, Inc. after
the transaction; and
-- the transaction will be a mandatory purchase event;
or
- make a tender offer for common units unless the consideration:
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-- is exclusively cash; and
-- together with any cash payable in respect of any tender offer by
Kinder Morgan Energy Partners, L.P. for the common units concluded
within the preceding 12 months and the aggregate amount of any cash
distributions to all holders of common units made within the
preceding 12 months, is less than 12% of Kinder Morgan Energy
Partners, L.P.'s aggregate market capitalization on the expiration
of the tender offer.
The Kinder Morgan Energy Partners, L.P. partnership agreement provides that
when any cash is to be received by a common unitholder as a result of a merger,
recapitalization, reorganization or similar transaction, that payment will
require Kinder Morgan Energy Partners, L.P. to issue additional i-units to us.
This will result in us also issuing a matching number of shares to the holders
of shares.
OPTIONAL PURCHASE
Our limited liability company agreement provides that if at any time Kinder
Morgan, Inc. and its affiliates own 80% or more of our outstanding shares, then
Kinder Morgan, Inc. has the right to purchase all of the outstanding shares that
it does not own. Kinder Morgan, Inc. can exercise its right to make that
purchase by giving notice to the transfer agent for the shares of its election
to make the purchase not less than ten days and not more than 60 days prior to
the date which it picks for the purchase. Kinder Morgan, Inc. shall also cause
the transfer agent to mail that notice of the purchase to the record holders of
the shares.
The price at which Kinder Morgan, Inc. may make the purchase is equal to
the higher of 110%:
- of the average closing price for the shares for the 10 consecutive
trading days ending five days prior to the date the notice of the
purchase is mailed to the holders; and
- the highest price Kinder Morgan, Inc. or its affiliates paid in cash for
the shares, excluding exchanges, in the 90-days prior to the giving of
the notice.
Our limited liability company agreement and Kinder Morgan Energy Partners,
L.P.'s partnership agreement each provide that if at any time Kinder Morgan Inc.
and its affiliates own 80% or more of the outstanding common units and the
shares on a combined basis, then Kinder Morgan, Inc. and its affiliates have the
right to purchase all of the shares and common units at a price equal to the
higher of the average closing price of the shares or common units for the twenty
consecutive trading days ending five days prior to the date on which the notice
of the purchase is mailed to the holders and the highest price Kinder Morgan,
Inc. or its affiliates paid in cash for such shares, excluding exchanges, or
common units in the 90 days prior to the giving of the notice. Kinder Morgan,
Inc. or its affiliates may exercise its right to make that purchase by giving
notice to the transfer agent for the shares or common units of its election to
make the purchase not less than 10 days and not more than 60 days prior to the
date which it selects for the purchase. The general partner or Kinder Morgan,
Inc. shall also cause the transfer agent to mail that notice of the purchase to
the record holders of the shares or common units.
If it elects to purchase either the shares or the combination of the common
units and shares, Kinder Morgan, Inc. will deposit the aggregate purchase price
for the shares with the transfer agent. On and after the date set for the
purchase, the holders of the shares shall have no rights as holders of shares,
except to receive the purchase price, and their shares will be deemed to be
transferred to Kinder Morgan, Inc. for all purposes.
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MANDATORY PURCHASE
General. Under the terms of the Kinder Morgan, Inc. purchase agreement,
upon the occurrence of any of the following purchase events, Kinder Morgan, Inc.
will be required to purchase all of the shares at a purchase price equal to the
higher of the average market price of the shares or the common units as
determined as of the trading day immediately prior to the date of the applicable
event.
A purchase event means any of the following:
- aggregate distributions or other payments during the immediately
preceding four quarter period of an amount exceeding 50% of the average
market price of a common unit during the 10 consecutive trading day
period prior to that four quarter period.
- the occurrence of an event resulting in Kinder Morgan, Inc. ceasing to be
the beneficial owner, as defined in Rule 13d-3 and 13d-5 under the
Securities Exchange Act of 1934 of more than 50% of the total voting
power of all shares of capital stock of the general partner of Kinder
Morgan Energy Partners, L.P., unless:
-- the event results in another person becoming the beneficial owner
of more than 50% of the total voting power of all shares of capital
stock of the general partner of Kinder Morgan Energy Partners,
L.P.;
-- that other person is organized under the laws of a state in the
United States;
-- the surviving entity has long term unsecured debt with an
investment grade credit rating, as determined by Moody's Investor
Services, Inc. and Standard & Poor's Rating Service, immediately
prior to the closing of the transaction; and
-- the controlling entity assumes all obligations of Kinder Morgan,
Inc. to us and to the holders of the shares.
- the merger of Kinder Morgan Energy Partners, L.P. with or into another
person in any case where Kinder Morgan Energy Partners, L.P. is not the
surviving entity, or the sale of all or substantially all of the assets
of Kinder Morgan Energy Partners, L.P. and its restricted subsidiaries
taken as a whole to another person, except where:
-- in the transaction the holders of common units receive a security
which has in all material respects the same or more favorable
rights and privileges as the common units, provided the more
favorable rights and privileges are also granted to the i-units;
-- in the transaction we receive a security which has in all material
respects the same or more favorable rights and privileges as the
i-units, provided the more favorable rights are also granted to the
common units;
-- the surviving entity or an entity related to the surviving entity
assumes all obligations of Kinder Morgan, Inc. to Kinder Morgan
Management, LLC and to the holders of the shares; and
-- no consideration is received in the transaction by a holder of
common units other than securities which have in all material
respects the same or more favorable rights and privileges as the
common units, provided the more favorable rights and privileges are
also granted to the i-units, and/or cash and the amount of cash
received per common unit does not exceed 33 1/3% of the average
market price of a common unit as determined as of the date of the
transaction.
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Procedure. Within three business days following any purchase event
requiring a mandatory purchase by Kinder Morgan, Inc., Kinder Morgan, Inc. shall
mail a notice to each holder of record of the shares on the date of the purchase
event stating, among other things:
- that a purchase event has occurred and that Kinder Morgan, Inc. will
purchase such holder's shares for the purchase price described above;
- the circumstances and relevant facts regarding the purchase event;
- the purchase date which shall be no later than five business days from
the date such notice is mailed; and
- the instructions you must follow in order to have your shares purchased.
The average market price shall be determined using the 10 consecutive
trading days ending on the trading day prior to the purchase event.
Within five business days following any purchase event, Kinder Morgan, Inc.
shall irrevocably deposit with the transfer agent funds sufficient to pay the
purchase price. Following the purchase date a share held by any person other
than Kinder Morgan, Inc. shall only represent the right to receive the purchase
price.
EXCHANGE FEATURE
Concurrently with the closing of this offering, Kinder Morgan, Inc. and we
will enter into the Kinder Morgan, Inc. exchange agreement. Pursuant to the
Kinder Morgan, Inc. exchange agreement, you will have the right, at your option,
after the 45th day following the closing of this offering, to exchange any or
all shares for common units owned by Kinder Morgan, Inc., at an exchange rate of
one common unit per one share. Any shares received for exchange after the
occurrence of a purchase event or after Kinder Morgan, Inc. has given notice of
optional purchase of the shares will not be exchanged and will be held for
purchase as if it had been delivered for that purpose.
At any time Kinder Morgan, Inc. may elect to make a cash settlement in
respect of any share surrendered for exchange by delivering notice thereof to
the tendering holder not more than three trading days after such share is
surrendered for exchange. This cash settlement shall be in an amount, per share
delivered for exchange, equal to the average of the closing price of common
units on the three trading days commencing two trading days after delivery by
Kinder Morgan, Inc. of such notice to such holder. Kinder Morgan, Inc. will pay
this cash settlement amount as promptly as practicable after the completion of
such three trading day period.
The right of exchange attaching to any share may be exercised by the holder
by delivering the share to Kinder Morgan, Inc. by book entry through the
depositary accompanied by a duly signed and completed notice of exchange, a copy
of which may be obtained from the transfer agent for the shares. Any notice of
exchange shall be irrevocable. The exchange date will be the date on which the
share and the duly signed and completed notice of exchange are so delivered.
Unless Kinder Morgan, Inc. has elected cash settlement, Kinder Morgan, Inc.
will, within three trading days of the exchange date, deliver to a certificate
or certificates for the number of full common units deliverable upon exchange.
Common units deliverable upon exchange of the shares will be fully paid and
nonassessable.
A holder delivering a share for exchange will not be required to pay any
transfer taxes or duties in respect of the issue or delivery of common units on
exchange. However, we and Kinder Morgan, Inc. will not be required to pay any
tax or duty which may be payable in respect of any transfer involved in the
issue or delivery of the common units in a name other than that of the holder of
the share. Certificates representing common units will not be issued or
delivered unless the person requesting such issue has paid to us the amount of
any such tax or duty or has
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established to our satisfaction that such tax or duty has been paid. An exchange
of shares for common units or cash will be a taxable event for federal and state
income tax purposes.
Kinder Morgan, Inc. from time to time may increase the exchange rate by any
amount for any period of at least 20 days, in which case we shall give at least
15 days' notice of such increase.
Holders of shares have no rights in respect of the common units unless and
until the shares are exchanged for common units.
Kinder Morgan, Inc. and its subsidiaries currently own 11,312,000 common
units and approximately 2,656,700 Class B units which are convertible into
common units on a one-for-one basis at the time Kinder Morgan Energy Partners,
L.P. is advised by the New York Stock Exchange that the common units issuable
upon conversion are eligible for listing on the New York Stock Exchange. Kinder
Morgan, Inc. agrees to reserve common units equal to 20% of the number of
outstanding shares not held by Kinder Morgan, Inc. This reserve will serve as a
source of common units that will be available. Kinder Morgan, Inc. may use the
reserved common units or other common units acquired by it to satisfy its
exchange obligations with you. The reserve will be adjusted from time to time to
reflect the number of outstanding shares not held by Kinder Morgan, Inc. Kinder
Morgan Energy Partners, L.P. has agreed to indemnify Kinder Morgan, Inc. for all
costs and expenses associated with any claims arising out of the exchange of
shares for common units or cash between a shareholder and Kinder Morgan, Inc.
REGISTRATION RIGHTS
Concurrently with the closing of this offering, Kinder Morgan, Inc. and
Kinder Morgan Energy Partners, L.P. will enter into a registration rights
agreement. Pursuant to the Kinder Morgan Energy Partners, L.P. registration
rights agreement, Kinder Morgan Energy Partners, L.P. agrees to file and to use
its best efforts to cause to be effective no later than the effective date of
our registration statement for a continuous offering of common units delivered
by Kinder Morgan, Inc. upon the exchange of shares, and to maintain the
effectiveness of that registration statement. Pursuant to the registration
rights agreement, Kinder Morgan Energy Partners, L.P. has the right to defer the
initial filing of its registration statement, or any time and from time to time
after such registration statement has been filed and declared effective, require
us to suspend the use of any resale prospectus or prospectus supplement included
therein for a reasonable period of time, not to exceed 90 days in any one
instance or an aggregate of 120 days in any 12-month period, if Kinder Morgan
Energy Partners, L.P. is conducting or about to conduct an underwritten public
offering of its securities for its own account, or would be required to disclose
information regarding Kinder Morgan Energy Partners, L.P. it was not otherwise
then required by law to publicly disclose where such disclosure would reasonably
be expected to adversely affect any material business transaction or negotiation
in which Kinder Morgan Energy Partners, L.P. is then engaged. Kinder Morgan,
Inc. will be required to satisfy share exchanges for cash if there is a
suspension of the Kinder Morgan Energy Partners, L.P. registration statement.
Kinder Morgan Energy Partners, L.P. has filed such a registration statement with
the SEC.
TAX INDEMNITY OF KINDER MORGAN, INC.
Concurrently with the closing of this offering, we will enter into a tax
indemnification agreement with Kinder Morgan, Inc. Pursuant to the Kinder
Morgan, Inc. tax indemnification agreement, Kinder Morgan, Inc. has agreed to
indemnify us for any tax liability attributable to our formation or our
management of Kinder Morgan Energy Partners, L.P., and for any taxes arising out
of a transaction involving our i-units to the extent the transaction does not
generate sufficient cash to pay our taxes.
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TRANSFER AGENT AND REGISTRAR
has agreed to serve as registrar and transfer agent for the
shares and will receive a fee from us for serving in those capacities. All fees
charged by the transfer agent for transfers of shares will be borne by us and
not by you, except that fees similar to those customarily paid by shareholders
for surety bond premiums to replace lost or stolen certificates, taxes and other
governmental charges, special charges for services requested by you and other
similar fees or charges will be borne by you. There will be no charge to you for
disbursements by us of cash distributions. We will indemnify the transfer agent,
our agents and each of their respective shareholders, directors, officers and
employees against all claims and losses that may arise out of acts performed or
omitted in respect of our activities, except for any liability due to any
negligence, gross negligence, bad faith or intentional misconduct of the
indemnified person or entity.
The transfer agent may at any time resign, by notice to us, or be removed
by us, that resignation or removal to become effective upon the appointment by
us of a successor transfer agent and registrar and its acceptance of that
appointment. If no successor has been appointed and accepted that appointment
within 30 days after notice of that resignation or removal, we are authorized to
act as the transfer agent and registrar until a successor is appointed.
BOOK ENTRY SYSTEM
The Depositary Trust Company will act as securities depositary for the
shares. The shares will be issued only as fully-registered securities registered
in the name of Cede & Co. (the depositary's nominee). One or more
fully-registered global security certificates, representing the total aggregate
number of shares, will be issued and deposited with the depositary and will bear
a legend regarding the restrictions on exchanges and registration of transfer
referred to below.
The laws of some jurisdictions require that some purchasers of securities
take physical delivery of securities of definitive form. Those laws may impair
the ability to transfer beneficial interest in the shares so long as the shares
are represented by global security certificates.
The depositary 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 Federal Reserve Banking System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1994.
The depositary holds securities that its participants deposit with the
depositary. The depositary also facilitates the settlement among participants of
securities transactions, including transfers and pledges, in deposited
securities through electronic computerized book-entry changes in participants'
accounts, thus eliminating the need for physical movement of securities
certificates. Direct participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. The
depositary is owned by a number of its direct participants and by the New York
Stock Exchange, the American Stock Exchange, Inc., and the National Association
of Securities Dealers, Inc., collectively referred to as participants. Access to
the depositary system is also available to others, including securities brokers
and dealers, bank and trust companies that clear transactions through or
maintain a direct or indirect custodial relationship with a direct participant
either directly or indirectly collectively referred to as indirect participants.
The rules applicable to the depositary and its participants are on file with the
Securities and Exchange Commission.
No shares represented by global security certificates may be exchanged in
whole or in part for shares, and no transfer of global security certificates in
whole or in part may be registered in the name of any person other than the
depositary or any nominee of the depositary unless, however, the depositary has
notified us that it is unwilling or unable to continue as depositary for
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the global security certificates or has ceased to be qualified to act as
required in connection with this offering. All shares represented by one or more
global security certificates or any portion of them will be registered in those
names as the depositary may direct.
As long as the depositary or its nominee is the registered owner of the
global security certificates, the depositary or that nominee will be considered
the sole owner and holder of the global security certificates and all units
represented by those certificates for all purposes under the units and the
purchase contract agreement. Except in the limited circumstances referred to
above, owners of beneficial interests in global security certificates will not
be entitled to have the global security certificates or the shares represented
by those certificates registered in their names, will not be considered to be
owners or holders of the global security certificates or any shares represented
by those certificates for any purpose. All payments on the shares represented by
the global security certificates and all related transfers and deliveries will
be made to the depositary or its nominee as their holder.
Ownership of beneficial interests in the global security certificates will
be limited to participants or persons that may hold beneficial interest through
institutions that have accounts with the depositary or its nominee. Ownership of
beneficial interests in global security certificates will be shown only on, and
the transfer of those ownership interests will be effected only through, records
maintained by the depositary or its nominee with respect to participants'
interest or by the participant with respect to interests of persons held by the
participants on their behalf.
Procedures for settlement will be governed by arrangements among the
depositary, participants and persons that may hold beneficial interests through
participants designed to permit the settlement without the physical movement of
certificates. Payments, transfers, deliveries, exchanges and other matters
relating to beneficial interests in global security certificates may be subject
to various policies and procedures adopted by the depositary from time to time.
Neither we nor any of our agents, nor the purchase contract agent nor any
of its agents will have any responsibility or liability for any aspect of the
depositary's or any participant's records relating to, or for payments made on
account of, beneficial interests in global security certificates, or for
maintaining, supervising or reviewing any of the depositary's records or any
participant's records relating to those beneficial ownership interests.
The information in this section concerning the depositary and its
book-entry system has been obtained from sources that we believe to be reliable,
but neither we nor the depositary take responsibility for its accuracy.
REPLACEMENT OF SHARE CERTIFICATES
If physical certificates are issued, we will replace any mutilated
certificate at your expense upon surrender of that certificate to the shares
agent. We will replace certificates that become destroyed, lost or stolen at
your expense upon delivery to us and the purchase contract agent of satisfactory
evidence that the certificate has been destroyed, lost or stolen, together with
any indemnity that may be contractually required by us.
FRACTIONAL SHARES
We will make distributions of additional shares, including fractional
shares. Records of fractional interests held by the holders of shares will be
maintained by the Depositary Trust Company. You will be able to sell such
fractional shares on the exchange only when they equal, in the
aggregate, whole shares. Certificates representing fractional shares will not be
issued under any condition. Fractional shares will receive distributions when
distributions are made on our shares.
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DESCRIPTION OF THE i-UNITS
The i-units are a separate class of limited partner interests in Kinder
Morgan Energy Partners, L.P. All the i-units will be owned by us and will not be
publicly traded.
VOTING RIGHTS
Holders of i-units generally will vote as a single class together with the
common units and sometimes will vote as a class separate from the holders of
common units. The i-units will have the same voting rights as the common units
voting together as a single class on the following matters:
- a sale or exchange of all or substantially all of Kinder Morgan Energy
Partners, L.P.'s assets;
- the election of a successor general partner in connection with the
removal of the general partner;
- a dissolution or reconstitution of Kinder Morgan Energy Partners, L.P.;
- a merger of Kinder Morgan Energy Partners, L.P.; and
- some amendments to the partnership agreement, including any amendment
that would cause Kinder Morgan Energy Partners, L.P. to be treated as an
association taxable as a corporation.
i-units will vote separately as a class on amendments to the Kinder Morgan
Energy Partners, L.P. partnership agreement that would have a material adverse
effect on the rights or preferences of holders of the i-units in relation to the
rights or preferences of other classes of units. The i-units will also vote
separately as a class with respect to the approval of the withdrawal of the
general partner or the transfer to a non-affiliate of all of its interest as a
general partner.
In all cases, i-units will be voted as directed by the vote of holders of
the shares.
DISTRIBUTIONS
The number of i-units distributed to us from Kinder Morgan Energy Partners,
L.P. will be based upon the amount of cash that may be distributed by Kinder
Morgan Energy Partners, L.P. to a holder of a common unit. Kinder Morgan Energy
Partners, L.P. will distribute to us a number of i-units equal to the number of
shares distributed by us.
MERGER, CONSOLIDATION OR SALE OF ASSETS
In case of any consolidation or merger of Kinder Morgan Energy Partners,
L.P. with or into another person or any merger of another person into Kinder
Morgan Energy Partners, L.P. (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of the Kinder Morgan
Energy Partners, L.P. common units), or in the case of any conveyance, sale,
transfer or lease of all or substantially all of the properties and assets of
Kinder Morgan Energy Partners, L.P. each i-unit then outstanding will, without
the consent of the holder of any i-unit, become exchangeable only into the kind
and amount of securities, cash and other property receivable upon such
consolidation, merger, sale, conveyance, lease or other transfer by a holder of
the number of shares of Kinder Morgan Energy Partners, L.P. common units into
which such i-unit was exchangeable immediately prior thereto, assuming such
holder of Kinder Morgan Energy Partners, L.P. common units failed to exercise
any rights of election and that such i-unit was then exchangeable. Under these
circumstances, Kinder Morgan, Inc. will have been required to purchase the
shares. See "Description of Shares -- Mandatory Purchase."
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FEDERAL INCOME TAX CHARACTERISTICS
The terms of the i-units provide that no allocations of income, gain, loss
or deduction will be made in respect of the i-units until such time as there is
a liquidation of Kinder Morgan Energy Partners, L.P. If there is a liquidation
of Kinder Morgan Energy Partners, L.P., it is intended that we will receive
allocations of income and gain, or deduction and loss, in an amount necessary
for the capital account attributable to each i-unit to be equal to that of a
common unit. As a result, we would likely realize taxable income or loss upon
the liquidation of Kinder Morgan Energy Partners, L.P. However, no assurance can
be given that there will be sufficient amounts of income and gain, or deduction
or loss, to cause the capital account attributable to each i-unit to be equal to
that of a common unit. If they are not equal, we may receive less value than
would be received by a holder of common units.
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BUSINESS
KINDER MORGAN MANAGEMENT, LLC
Pursuant to an agreement among Kinder Morgan G.P., Inc., Kinder Morgan
Energy Partners, L.P. of Kinder Morgan Energy Partners, L.P. and us, the parties
have agreed that:
- Kinder Morgan G.P., Inc., as general partner of Kinder Morgan Energy
Partner, L.P., will delegate to us, to the fullest extent permitted under
Delaware law and the Kinder Morgan Energy Partners, L.P. partnership
agreement and we will assume, on the closing of this offering, all of
Kinder Morgan G.P. Inc.'s rights and powers to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P.; and
- Kinder Morgan Management, LLC will not take any of the following actions
without the approval of Kinder Morgan G.P., Inc.:
- amend or propose an amendment to the Kinder Morgan Energy Partners,
L.P. partnership agreement,
- change the amount of the distribution made on the Kinder Morgan Energy
Partners, L.P. units,
- allow a merger or consolidation involving Kinder Morgan Energy
Partners, L.P.,
- allow a sale or exchange of all or substantially all of the assets of
Kinder Morgan Energy Partners, L.P.,
- dissolve or liquidate Kinder Morgan Energy Partners, L.P.,
- take any action requiring unitholder approval,
- call any meetings of the Kinder Morgan Energy Partners, L.P.
unitholders,
- take any action that, under the terms of the partnership agreement of
Kinder Morgan Energy Partners, L.P., must or should receive a special
approval of the conflicts and audit committee of Kinder Morgan G.P.,
Inc.,
- take any action that, under the terms of the partnership agreement of
Kinder Morgan Energy Partners, L.P., cannot be taken by the general
partner without the approval of all outstanding units,
- settle or compromise any claim or action directly against or otherwise
relating to indemnification of officers, directors, managers or
members or relating to our structure or securities,
- settle or compromise any claim or action involving tax matters,
- allow Kinder Morgan Energy Partners, L.P. to incur indebtedness
exceeding 50% of the market value of then outstanding units of Kinder
Morgan Energy Partners, L.P., or
- allow Kinder Morgan Energy Partners, L.P. to issue units in one
transaction, or in a series of related transactions, having a market
value in excess of 20% of the market value of then outstanding units
of Kinder Morgan Energy Partners, L.P.
- Kinder Morgan G.P., Inc.:
- is not relieved of any responsibilities or obligations to Kinder
Morgan Energy Partners, L.P. or its unitholders as a result of such
delegation,
- will own all of our voting stock,
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- will, at all times, cause its directors and officers to be the
directors and officers of Kinder Morgan Management, LLC, and we will
have at least one additional member of our board, which will be Kinder
Morgan, Inc., acting through its duly appointed delegate,
- will not withdraw as general partner, or transfer to a non-affiliate
all of its interest as a general partner, unless approved by the
holders of a majority of each of the i-units and the common units,
other than Kinder Morgan, Inc. and its affiliates.
- Kinder Morgan Energy Partners, L.P. will:
- recognize the delegation of rights and powers to us,
- indemnify and protect us and our officers and directors to the same
extent as it does with respect to Kinder Morgan G.P. Inc. as general
partner; and
- reimburse our expenses to the same extent as it does with respect to
Kinder Morgan G.P. Inc. as general partner.
These agreements will continue as long as Kinder Morgan G.P., Inc. is the
general partner of Kinder Morgan Energy Partners, L.P. and all of our voting
shares are owned by Kinder Morgan, Inc. and its affiliates. The partnership
agreement of Kinder Morgan Energy Partners, L.P. will be amended to reflect
these agreements. These agreements will also apply to the operating subsidiary
partnerships of Kinder Morgan Energy Partners, L.P. and their partnership
agreements will be amended accordingly.
Kinder Morgan G.P., Inc. will remain the only general partner of Kinder
Morgan Energy Partners, L.P. and all of its operating partnerships. Kinder
Morgan G.P., Inc. will retain all of its general partner interests and shares in
the profits, losses and distributions from all of these partnerships.
The withdrawal or removal of Kinder Morgan G.P., Inc. as general partner of
Kinder Morgan Energy Partners, L.P. will simultaneously result in termination of
our power and authority to manage and control the business and affairs of Kinder
Morgan Energy Partners, L.P. Similarly, if Kinder Morgan G.P., Inc.'s power and
authority as general partner are modified in the partnership agreement of Kinder
Morgan Energy Partners, L.P., then the power and authority delegated to us will
be modified on the same basis. The delegation by Kinder Morgan G.P., Inc. to us
cannot be revoked or amended voluntarily unless all three parties agree and
holders, other than Kinder Morgan, Inc. and its affiliates, of 50% of the
outstanding shares consent.
We are a partner in Kinder Morgan Energy Partners, L.P. We do not expect to
have any cash flow attributable to our ownership of the i-units, but we expect
that we will regularly receive distributions in-kind of additional i-units from
Kinder Morgan Energy Partners, L.P. The number of additional i-units we may
receive will be based on the amount of cash that may be distributed by Kinder
Morgan Energy Partners, L.P. to a holder of a common unit. The amount of cash
distributed by Kinder Morgan Energy Partners, L.P. to its holders of common
units will be determined by the operations of Kinder Morgan Energy Partners,
L.P. and its operating limited partnerships and subsidiaries.
An election has been made with the IRS to treat us as a corporation for
federal income tax purposes. Because we will be treated as a corporation for
federal income tax purposes, an owner of our shares will not report on its
federal income tax return any of our items of income, gain, loss and deduction.
We will be subject to federal income tax on our taxable income; however,
the i-units owned by us generally will not be entitled to allocations of income,
gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time
as there is a liquidation of Kinder Morgan Energy Partners, L.P. Therefore, we
do not anticipate that we will have material amounts of taxable
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income resulting from our ownership of the i-units unless we enter into a sale
or exchange of the i-units or Kinder Morgan Energy Partners, L.P. is liquidated.
We are not a party to any litigation.
KINDER MORGAN ENERGY PARTNERS, L.P.
Kinder Morgan Energy Partners, L.P. is a Delaware limited partnership
formed in August 1992. Kinder Morgan Energy Partners, L.P. is the largest
publicly-traded pipeline master limited partnership in the United States and has
the second largest products pipeline system based on volumes delivered. Its
operations are grouped into four reportable business segments. These segments
and their major assets are as follows:
- Product Pipelines, consisting of:
- the Pacific operations, including 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; and 13 truck-loading terminals with an aggregate
usable tankage capacity of approximately 8.2 million barrels;
- a 51% operating interest in Plantation Pipe Line Company, which owns
and operates a 3,100 mile refined petroleum products pipeline system
throughout the southeastern United States, serving major metropolitan
areas including Birmingham, Alabama; Atlanta, Georgia; Charlotte,
North Carolina; and the Washington, D.C. area;
- 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;
- the Cypress Pipeline, which transports natural gas liquids from Mont
Belvieu, Texas to a major petrochemical producer in Lake Charles,
Louisiana;
- a 32.5% interest in the Cochin Pipeline System, a 1,900 mile natural
gas liquids pipeline originating in Alberta, Canada extending through
seven U.S. states and terminating in Ontario, Canada;
- transmix operations, which include the processing and marketing of
petroleum pipeline transmix via transmix processing plants in Colton,
California; Richmond, Virginia; Dorsey Junction, Maryland; Indianola,
Pennsylvania; and Wood River, Illinois; and
- a 50% interest in Heartland Pipeline Company, which ships refined
petroleum products in the Midwest;
- Natural Gas Pipelines, consisting of assets acquired in late 1999 and
2000, 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;
- Kinder Morgan Texas Pipeline, L.P., which owns a 2,700-mile intrastate
pipeline along the Texas Gulf Coast;
- a 66 2/3% interest in Trailblazer Pipeline Company, which transmits
natural gas from Colorado through southeastern Wyoming to Beatrice,
Nebraska;
- 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;
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- the Casper and Douglas Gathering Systems, consisting of approximately
1,560 miles of natural gas gathering pipelines and 210 million cubic
feet per day of natural gas processing capability at two facilities
located in Wyoming;
- a 25% interest in Thunder Creek Gas Services LLC, which gathers,
transports and processes coal bed methane gas in the Powder River
Basin of Wyoming; and
- a 50% interest in Coyote Gas Treating Limited Liability Company, which
owns a 250 million cubic feet per day natural gas treating facility in
La Plata County, Colorado;
- CO(2) Pipelines, consisting of:
- interests in four CO(2) pipelines, including: 50% of Cortez Pipeline,
100% of Central Basin Pipeline, 81% of Canyon Reef Carriers CO(2)
Pipeline, 13% of Bravo Pipeline; and
- interests in two CO(2) source fields, including 45% of McElmo Dome and
11% of Bravo Dome; and
- interests in four unitized fields in West Texas, including in 71%
working interest in the SACROC Unit, and minority interests in the
Sharon Ridge Unit, the Reirecke Unit, and the Yates Unit.
- Bulk Terminals, consisting of over 25 owned and operated bulk terminal
facilities, including:
- coal terminals located in Cora, Illinois; Paducah, Kentucky; Newport
News, Virginia; Mount Vernon, Indiana; and Los Angeles, California;
- liquid bulk storage terminals in New Orleans and Cincinnati, Ohio;
- petroleum coke terminals located on the lower Mississippi River; and
- other bulk terminals handling alumina, cement, salt, soda ash,
fertilizer and other dry bulk materials.
BUSINESS STRATEGY
Kinder Morgan Energy Partners, L.P.'s management's objective is to operate
Kinder Morgan Energy Partners, L.P. as a low-cost, growth-oriented master
limited partnership by:
- focusing on stable, fee-based assets which are core to the energy
infrastructure of growing markets;
- increasing utilization of assets while controlling costs;
- leveraging economies of scale from incremental acquisitions; and
- maximizing the benefits of the unique financial structure of Kinder
Morgan Energy Partners, L.P.
Since February 1997, Kinder Morgan Energy Partners, L.P. has announced 20
acquisitions valued at over $4.7 billion. These acquisitions and associated cost
reductions have assisted Kinder Morgan Energy Partners, L.P. in growing from
$17.7 million of net income in 1997 to $278.3 million of net income in 2000.
Kinder Morgan Energy Partners, L.P. regularly considers and enters into
discussions regarding potential acquisitions, including from Kinder Morgan, Inc.
or its affiliates, and is currently contemplating potential acquisitions. While
there are currently no unannounced purchase agreements for the acquisition of
any material business or assets, such transactions can be effected quickly, may
occur at any time and may be significant in size relative to Kinder Morgan
Energy Partners, L.P.'s existing assets or operations.
Kinder Morgan Energy Partners, L.P. 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, L.P. does not
face significant risks relating directly to shifts in commodity prices.
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Product Pipelines. Kinder Morgan Energy Partners, L.P. plans to continue
to expand its presence in the rapidly growing refined products markets in the
western and southeastern United States through incremental expansions of its
Pacific operations and its Plantation system and through acquisitions that
increase its unitholder distributions. Because the North system serves a
relatively mature market, Kinder Morgan Energy Partners, L.P. intends 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. Kinder Morgan Energy
Partners, L.P. recently assumed operation of Plantation Pipe Line Company and
expects to increase cash flows from Plantation through cost savings and
operating efficiencies.
The acquisition of the transmix operations in September 1999, October 2000
and December 2000 strengthened Kinder Morgan Energy Partners, L.P.'s existing
transmix processing business and added fee-based services related to its core
refined products pipeline business.
Natural Gas Pipeline. Kinder Morgan Interstate Gas Transmission also
serves a stable, mature market, and thus Kinder Morgan Energy Partners, L.P. is
focused on reducing costs and securing throughput for this pipeline. New
measurement systems and other improvements will aid in managing expenses. Kinder
Morgan Energy Partners, L.P. will explore expansion and storage opportunities to
increase utilization levels. Kinder Morgan Texas Pipeline, L.P. intends to grow
its transportation and storage businesses by identifying and serving significant
new customers with demand for capacity on its intrastate pipeline system.
Trailblazer Pipeline Company is currently pursuing an expansion of its system
supported by commitments secured in August 2000. Red Cedar Gathering Company, a
partnership with the Southern Ute Indian Tribe, is pursuing additional gathering
and processing opportunities on tribal land.
CO(2) Pipelines. Kinder Morgan CO(2) Company's Permian Basin strategy is
to offer customers "one-stop shopping" for carbon dioxide supply, transportation
and technical support service. Outside the Permian Basin, Kinder Morgan CO(2)
Company intends to compete aggressively for new supply and transportation
projects. Kinder Morgan Energy Partners, L.P.'s management believes these
projects will arise as other U.S. oil producing basins mature and made the
transition from primary production to enhanced recovery methods.
Bulk Terminals. Kinder Morgan Energy Partners, L.P. is dedicated to
growing its bulk terminals business through selective acquisitions, expansions,
and the development of new terminals. The bulk terminals industry in the United
States is highly fragmented, leading to opportunities for us to make selective,
accretive acquisitions. Kinder Morgan Energy Partners, L.P. will make
investments to expand and improve existing facilities, particularly those
facilities that handle low-sulfur western coal. Additionally, Kinder Morgan
Energy Partners, L.P. plans to design, construct and operate new facilities for
current and prospective customers. Kinder Morgan Energy Partners, L.P.'s
management believes Kinder Morgan Energy Partners, L.P. can use newly acquired
or developed facilities to leverage its operational expertise and customer
relationships.
RECENT DEVELOPMENTS
On November 30, 2000, Kinder Morgan Energy Partners, L.P. announced that it
had signed a definitive agreement with GATX Corporation to purchase GATX
Corporation's U.S. pipeline and terminal businesses for approximately $1.15
billion, consisting of cash, assumed debt and other obligations. Primary assets
included in the transaction are the CALNEV Pipe Line Company and the Central
Florida Pipeline Company, along with 12 terminals that store refined petroleum
products and chemicals. CALNEV is a 550-mile refined petroleum products pipeline
system originating in Colton, California and extending to the Las Vegas, Nevada
market. The central Florida pipeline is a 195-mile refined petroleum products
pipeline system consisting of a 16-inch gasoline pipeline and a 10-inch jet fuel
and diesel pipeline, transporting product from Tampa to
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the Orlando, Florida market. The 12 liquids terminals Kinder Morgan Energy
Partners, L.P. is acquiring from GATX have a storage capacity of 35.6 million
barrels, and the largest of these terminals are located in Houston, New York
Harbor, Los Angeles and Chicago, with a total capacity of approximately 31.2
million barrels. The other terminals are located in Philadelphia, Portland,
Oregon, San Francisco and Seattle. In addition, Kinder Morgan Energy Partners,
L.P. is acquiring six other terminals from GATX with a capacity of 3.6 million
barrels that are part of the CALNEV and Central Florida pipeline systems.
On October 25, 2000, Kinder Morgan Energy Partners, L.P. entered into a new
$600 million 364-day bank revolving facility that replaced and expanded its then
existing $300 million facility and contains substantially the same covenants.
On December 21, 2000, Kinder Morgan Energy Partners, L.P. completed a
transaction whereby Kinder Morgan, Inc. contributed approximately $300 million
of its assets to Kinder Morgan Energy Partners, L.P. As consideration for these
assets, Kinder Morgan Energy Partners, L.P. paid Kinder Morgan, Inc.
approximately 50% of the fair value of the assets in cash and the remaining 50%
of the fair value of the assets in units. The largest asset contributed was
Kinder Morgan Texas Pipeline, L.P., a 2,600-mile natural gas pipeline system
that extends from south Texas to Houston along the Texas gulf coast. Other
assets contributed included the Casper and Douglas Natural Gas Gathering and
Processing Systems, Kinder Morgan, Inc.'s 50% interest in Coyote Gas Treating,
LLC and Kinder Morgan, Inc.'s 25% interest in Thunder Creek Gas Services, LLC.
On December 28, 2000, Kinder Morgan Energy Partners, L.P. completed the
purchase of a 32.5% interest in the Cochin Pipeline System from NOVA Chemicals
Corporation. The Cochin pipeline consists of approximately 1,900 miles of
12-inch pipeline operating between Fort Saskatchewan, Alberta and Sarnia,
Ontario. It transports high vapor pressure ethane, ethylene, propane, butane and
natural gas liquids to the midwestern United States and eastern Canadian
petrochemical and fuel markets, and is a joint venture of Kinder Morgan Energy
Partners, L.P.'s subsidiary and subsidiaries of BP Amoco, Conoco, Shell and NOVA
Chemicals.
On December 4, 2000, Kinder Morgan Energy Partners, L.P. announced that it
had purchased Delta Terminal Services, Inc. for approximately $114 million in
cash. The acquisition included two liquid bulk storage terminals in New Orleans,
Louisiana, and Cincinnati, Ohio. The facilities provide services to producers of
petroleum, chemicals and other products. The New Orleans terminal has a storage
capacity of 2.5 million barrels. It is located at the 98.5-mile point on the
Mississippi River close to the Harvey Canal and the Greater New Orleans Bridge.
The terminal serves the New Orleans/Baton Rouge corridor and is situated on
approximately 100 acres of land. The Cincinnati terminal has a storage capacity
of 500,000 barrels. It is located at the 465.7-mile point on the Ohio River and
is situated on approximately 60 acres of land.
On October 25, 2000, Kinder Morgan Energy Partners, L.P. acquired from a
subsidiary of Buckeye Partners, L.P. transmix processing plants in Indianola,
Pennsylvania and Wood River, Illinois for approximately $37 million plus net
working capital. The two facilities are projected to process over 4.3 million
barrels of transmix in 2000.
On December 21, 2000, Kinder Morgan Energy Partners, L.P. reached agreement
with the other owner of Plantation Pipe Line Company to become the operator of
Plantation, a 3,100 mile pipeline system throughout the southeastern United
States.
On December 28, 2000, Kinder Morgan Energy Partners, L.P. entered into a
definitive agreement to form a joint venture with Marathon Oil Company in the
southern Permian Basin of West Texas. The joint venture will consist of a nearly
13% interest in the SACROC unit and a 49.9% interest in the Yates Field Unit,
the largest single interest in that Unit. The joint venture will be owned 85% by
Marathon Oil Company and 15% by Kinder Morgan CO(2) Company. In connection with
the formation of the joint venture, Kinder Morgan Energy Partners, L.P. entered
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into a 10-year contract to supply Marathon with an aggregate of 30 Bcf of carbon
dioxide expected to be used to enhance oil recovery in the area.
On December 31, 2000, Kinder Morgan Energy Partners, L.P. increased its
ownership in the Colton, California transmix processing facility to 100% by
purchasing Duke Energy Merchants' 50% interest in the facility. The facility's
transmix processing agreements with third parties were transferred to Duke, and
in turn, Kinder Morgan Energy Partners, L.P. entered into a ten-year fee-based
processing agreement to process transmix for Duke at the facility. Duke will
market all of the transmix Kinder Morgan Energy Partners, L.P. processes for it
at the Colton facility.
KINDER MORGAN, INC.
Kinder Morgan, Inc., a Kansas corporation, with its common stock traded on
the New York Stock Exchange under the symbol "KMI," is one of the largest
midstream energy companies in America, operating more than 30,000 miles of
natural gas and products pipelines. It also has significant retail natural gas
distribution and electric generation assets. Kinder Morgan, Inc. through an
indirect general partner interest, operates Kinder Morgan Energy Partners, L.P.
Kinder Morgan also holds a significant limited partnership interest in Kinder
Morgan Energy Partners, L.P.
MANAGEMENT OF KINDER MORGAN MANAGEMENT, LLC
DIRECTORS AND EXECUTIVE OFFICERS
Our business and affairs will be managed by a board of managers which we
call our directors.
Our directors and executive officers have served since our formation on
February 14, 2001.
The following table sets forth specific information for our executive
officers and directors. All of our directors are elected annually by, and may be
removed by, Kinder Morgan G.P., Inc. as the sole owner of our voting shares.
Executive officers are elected for one-year terms.
NAME AGE POSITION WITH KINDER MORGAN MANAGEMENT, LLC
---- --- -------------------------------------------
Richard D. Kinder.................... 56 Director, Chairman and CEO
William V. Morgan.................... 57 Director, Vice Chairman and President
Edward O. Gaylord.................... 69 Director
Gary L. Hultquist.................... 57 Director
Perry Waughtal....................... 65 Director
William V. Allison................... 53 President, Natural Gas Pipeline Operations
Thomas A. Bannigan................... 47 President, Products Pipeline Operations
David G. Dehaemers, Jr............... 40 Vice President, Corporate Development
Joseph Listengart.................... 32 Vice President, General Counsel and Secretary
Michael C. Morgan.................... 32 Vice President, Strategy and Investor Relations
C. Park Shaper....................... 32 Vice President, Treasurer and Chief Financial Officer
Thomas B. Stanley.................... 50 President Bulk Terminals
James E. Street...................... 44 Vice President, Human Resources and Administration
Richard D. Kinder was elected Director, Chairman, and Chief Executive
Officer of Kinder Morgan Management, LLC upon its formation. Mr. Kinder was
appointed to Kinder Morgan, Inc.'s Board of Directors upon completion of its
acquisition by merger of Kinder Morgan (Delaware), Inc. on October 7, 1999, as
one of his own designees, in accordance with a governance
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agreement entered into between Mr. Kinder and Kinder Morgan, Inc. Mr. Kinder has
been Kinder Morgan, Inc.'s Chairman of the Board of Directors and Chief
Executive Officer since October 7, 1999. Mr. Kinder was elected Director,
Chairman, and Chief Executive Officer of Kinder Morgan G.P., Inc. in February
1997. From 1992 to 1994, Mr. Kinder served as Chairman of the general partner.
From October 1990 until December 1996, Mr. Kinder was President of Enron Corp.
Mr. Kinder was employed by Enron and its affiliates and predecessors for over 16
years. Mr. Kinder is also a director of TransOcean Offshore Inc. and Baker
Hughes Incorporated.
William V. Morgan was elected Director, Vice Chairman and President of
Kinder Morgan Management, LLC upon its formation. Mr. Morgan was appointed to
Kinder Morgan, Inc.'s Board of Directors upon completion of its acquisition by
merger of Kinder Morgan (Delaware), Inc. on October 7, 1999, as a designee of
Morgan Associates, Inc., in accordance with the governance agreement entered
into between Morgan Associates, Inc. and Kinder Morgan, Inc. Mr. Morgan is
Kinder Morgan, Inc.'s Vice Chairman of the Board and its President. Mr. Morgan
was President and a Director of Kinder Morgan (Delaware), Inc. since October
1996. In February 1997, he was also elected Vice Chairman of Kinder Morgan
(Delaware), Inc. In addition, Mr. Morgan was elected as Director of Kinder
Morgan G.P., Inc. in June 1994, Vice Chairman of Kinder Morgan G.P., Inc. in
February 1997 and President of Kinder Morgan G.P., Inc. in November 1998. Mr.
Morgan has held legal and management positions in the energy industry since
1975, including the presidencies of three major interstate natural gas companies
which are now part of Enron Corp. (namely, Florida Gas Transmission Company,
Transwestern Pipeline Company and Northern Natural Gas Company). Prior to
joining Florida Gas in 1975, Mr. Morgan was engaged in the private practice of
law. Mr. Morgan is the father of Michael C. Morgan, our Vice President, Strategy
and Investor Relations.
Edward O. Gaylord was elected Director of Kinder Morgan Management, LLC
upon its formation. Mr. Gaylord was elected Director of Kinder Morgan G.P., Inc.
in February 1997. Mr. Gaylord is the Chairman of the Board of Directors of
Jacintoport Terminal Company, a liquid bulk storage terminal on the Houston,
Texas ship channel. Mr. Gaylord also serves as Chairman of the Board for EOTT
Energy Corporation, an oil trading and transportation company also located in
Houston, Texas. Mr. Gaylord is also a Director of Seneca Foods Corporation and
Imperial Sugar Company.
Gary L. Hultquist was elected Director of the Kinder Morgan Management, LLC
upon its formation. Mr. Hultquist was elected Director of Kinder Morgan G.P.,
Inc. in October 1999. Mr. Hultquist is the Managing Director of Hultquist
Capital, LLC, a San Francisco-based strategic and merger advisory firm. He also
serves as Chairman and Chief Executive Officer of TitaniumX Corporation, a
supplier of high-performance storage disk substrates and magnetic media to the
disk drive industry. He is also a member of the Board of Directors of Rodel,
Inc. Previously, Mr. Hultquist practiced law in two San Francisco area firms for
over 15 years, specializing in business, intellectual property, securities and
venture capital litigation.
Perry M. Waughtal was elected Director of Kinder Morgan Management, LLC
upon its formation. Mr. Waughtal was elected Director of Kinder Morgan, Inc. in
April 2000. Mr. Waughtal is a Limited Partner and 40% owner of Songy Partners
Limited, an Atlanta, Georgia based real estate investment company. Mr. Waughtal
advises Songy's management on real estate investments and has overall
responsibility for strategic planning, management and operations. Previously,
Mr. Waughtal served for over 30 years as Vice Chairman of Development and
Operations and as Chief Financial Officer for Hines Interests Limited
Partnership, a real estate and development entity based in Houston, Texas.
William V. Allison was elected President, Natural Gas Pipeline Operations
of Kinder Morgan Management, LLC upon its formation. Mr. Allison was elected
President, Natural Gas Pipeline Operations of Kinder Morgan G.P., Inc. in
September 1999. He served as President, Pipeline Operations of Kinder Morgan
G.P., Inc. from February 1999 to September 1999. From April 1998
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to February 1999, he served as Vice President and General Counsel of Kinder
Morgan G.P., Inc. From 1997 to April 1998, Mr. Allison was employed at Enron
Corp. where he held various executive positions, including President of Enron
Liquid Services Corporation, Florida Gas Transmission Company and Houston
Pipeline Company and Vice President and Associate General Counsel of Enron Corp.
Prior to joining Enron Corp., he was an attorney at the FERC.
Thomas A. Bannigan was elected President, Product Pipeline Operations of
Kinder Morgan Management, LLC upon its formation. Mr. Bannigan was elected
President, Products Pipeline Operations of the Kinder Morgan G.P., Inc. in
October 1999. Since 1980, Mr. Bannigan has held various legal and management
positions in the energy industry, including General Counsel and Secretary of
Plantation Pipe Line Company, and from May 1998 until October 1999, President
and Chief Executive Officer of Plantation Pipe Line Company.
David G. Dehaemers, Jr. was elected Vice President, Corporate Development
of Kinder Morgan Management, LLC upon its formation. Mr. Dehaemers was elected
Vice President, Corporate Development of Kinder Morgan, Inc. in January 2000.
Mr. Dehaemers was elected Vice President, Corporate Development of Kinder Morgan
G.P., Inc. in January 2000. He was Treasurer of Kinder Morgan G.P., Inc. from
February 1997 to January 2000 and Vice President and Chief Financial Officer of
Kinder Morgan G.P., Inc. from July 1997 to January 2000. He served as Secretary
of the general partner from February 1997 to August 1997. From October 1992 to
January 1997, he was Chief Financial Officer of Morgan Associates, Inc., an
energy investment and pipeline management company. Mr. Dehaemers was previously
employed by the national CPA firms of Ernst & Whinney and Arthur Young. He is a
CPA, and received his undergraduate Accounting degree from Creighton University
in Omaha, Nebraska. Mr. Dehaemers received his law degree from the University of
Missouri-Kansas City and is a member of the Missouri Bar.
Joseph Listengart was elected Vice President and General Counsel of Kinder
Morgan Management, LLC upon its formation. Joseph Listengart was elected Vice
President, Secretary and General Counsel of Kinder Morgan, Inc. in October 1999.
Mr. Listengart was elected Vice President and General Counsel of Kinder Morgan
G.P., Inc. in October 1999. Mr. Listengart became an employee of Kinder Morgan
G.P., Inc. in March 1998 and was elected its Secretary in November 1998. From
March 1995 through February 1998, Mr. Listengart worked as an attorney for
Hutchins, Wheeler & Dittmar, a Professional Corporation. Mr. Listengart received
his Juris Doctor, magna cum laude, from Boston University in May 1994, his
Masters in Business Administration from Boston University in January 1995 and
his Bachelors of Arts degree in Economics from Stanford University in June 1990.
Michael C. Morgan was elected Vice President, Strategy and Investor
Relations Kinder Morgan Management, LLC upon its formation. Mr. Morgan was
elected Vice President, Strategy and Investor Relations of Kinder Morgan, Inc.
in January 2000. Mr. Morgan was elected Vice President, Strategy and Investor
Relations of Kinder Morgan G.P., Inc. in January 2000. He was Vice President,
Corporate Development of Kinder Morgan G.P., Inc. from February 1997 to January
2000. From August 1995 until February 1997, Mr. Morgan was a consultant with
McKinsey & Company, an international management consulting firm. In 1995, Mr.
Morgan received a Masters in Business Administration from the Harvard Business
School. From March 1991 to June 1993, Mr. Morgan held various positions at PSI
Energy, Inc., an electric utility, including Assistant to the Chairman. Mr.
Morgan received a Bachelor of Arts in Economics and a Masters of Arts in
Sociology from Stanford University in 1990. Mr. Morgan is the son of William V.
Morgan.
C. Park Shaper was elected Vice President, Treasurer and Chief Financial
Officer of Kinder Morgan Management, LLC upon its formation. Mr. Shaper was
elected Vice President, Treasurer and Chief Financial Officer of Kinder Morgan
G.P., Inc. and Kinder Morgan, Inc. in January 2000. Previously, Mr. Shaper was
President and Director of Altair Corporation, an enterprise focused
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on the distribution of web-based investment research for the financial services
industry. He also served as Vice President and Chief Financial Officer of First
Data Analytics, a wholly-owned subsidiary of First Data Corporation, from 1997
until June 1999. From 1995 to 1997, he was a consultant with The Boston
Consulting Group. Mr. Shaper has prior experience with TeleCheck Services, Inc.
and as a management consultant with the Strategic Services Division of Andersen
Consulting. Mr. Shaper has a Bachelor of Science degree in Industrial
Engineering and a Bachelor of Arts degree in Quantitative Economics from
Stanford University. He also received a Master of Management degree from the J.
L. Kellogg Graduate School of Management at Northwestern University.
Thomas B. Stanley was elected President, Bulk Terminals of Kinder Morgan
Management, LLC upon its formation. Mr. Stanley was elected President, Bulk
Terminals of Kinder Morgan G.P., Inc. in August 1998. From 1993 to July 1998, he
was President of Hall-Buck Marine, Inc. (now known as Kinder Morgan Bulk
Terminals, Inc.), for which he has worked since 1980. Mr. Stanley is a CPA with
ten years' experience in public accounting, banking, and insurance accounting
prior to joining Hall-Buck. He received his bachelor's degree from Louisiana
State University in 1972.
James E. Street was elected Vice President, Human Resources and
Administration of Kinder Morgan Management, LLC upon its formation. Mr. Street
was elected Vice President, Human Resources and Administration of the Kinder
Morgan G.P., Inc. in August 1999. Mr. Street was elected Vice President, Human
Resources and Administration of Kinder Morgan, Inc. in October 1999. From
October 1996 to August 1999, Mr. Street was Senior Vice President, Human
Resources and Administration for Coral Energy. Prior to joining Coral Energy, he
was Vice President, Human Resources of Enron.
BOARD OF DIRECTORS AND COMMITTEES
We anticipate that we will have an audit committee composed of our three
independent directors, Perry Waughtal, Edward Gaylord and Gary Hultquist, upon
the closing of the sale of shares offered by this prospectus.
DIRECTOR COMPENSATION
Directors of Kinder Morgan Management, LLC, other than our independent
directors, do not receive compensation for their services as directors nor do
they receive compensation for attending our board meetings. However, each
director will be reimbursed for travel expenses incurred for each meeting of the
board or for each board committee meeting attended. Each of our three
independent directors receives $ per year to serve as directors.
EXECUTIVE COMPENSATION
Because Kinder Morgan Management, LLC was formed in 2001, our directors and
executive officers received no compensation in 2000. We have made no decision
regarding 2001 compensation for our executive officers. We will be reimbursed
for the aggregate amount of compensation we pay our executive officers and other
employees by Kinder Morgan Energy Partners, L.P.
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RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
OUR RELATIONSHIP WITH KINDER MORGAN, INC. AND
KINDER MORGAN ENERGY PARTNERS, L.P.
The following chart depicts our pro forma organizational structure and
operating relationship with Kinder Morgan, Inc. and Kinder Morgan Energy
Partners, L.P. following the offering.
[KINDER MORGAN RELATIONSHIP CHART]
TAX INDEMNIFICATION AND OTHER AGREEMENTS.
We have entered into the tax indemnification agreement, exchange agreement
and purchase agreement with Kinder Morgan, Inc. and a registration rights
agreement with Kinder Morgan Energy Partners, L.P. which are described under
"Description of the Shares."
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Conflicts of interest may arise because of the relationships between Kinder
Morgan, Inc., Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners, L.P. and
us. Our directors and officers have fiduciary duties to manage our business in a
manner beneficial to us and to the holders of our shares; provided however such
fiduciary duties have been limited pursuant to the terms of our limited
liability company agreement. Simultaneously, some of our managers and officers
are also directors and officers of Kinder Morgan, Inc. and Kinder Morgan G.P.,
Inc. and have fiduciary duties to manage the businesses of Kinder Morgan, Inc.
or Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P. in a manner
beneficial to Kinder Morgan, Inc. and its shareholders or Kinder Morgan G.P.,
Inc., Kinder Morgan Energy Partners, L.P. and their respective shareholders or
unitholders, as the case may be. The resolution of these conflicts may not
always be in our best interest or in the interest of the holders of our shares.
Kinder Morgan G.P., Inc. holds 100% of our voting shares. As the owner of
all of our voting shares, Kinder Morgan G.P., Inc. is entitled to elect all of
our directors. Our directors and officers are the same as those of Kinder Morgan
G.P., Inc. except that we will have at least one additional member of our board
of directors, which will be Kinder Morgan, Inc., acting through its duly
appointed delegate. In addition, because of its exclusive ownership of the
voting shares, Kinder Morgan G.P., Inc. has the exclusive right to vote on all
matters other than:
- those submitted to a vote of the holders of i-units, for which the
i-units will be voted as directed by a vote of the holders of shares;
- amendments to our limited liability company agreement, the Kinder Morgan
Energy Partners, L.P. purchase agreement and tax indemnity agreement, and
the Kinder Morgan, Inc. exchange agreement and registration rights
agreement; but only if any of these amendments would have an adverse
effect on us or the holders of the common units; and
- amendments to the Kinder Morgan Energy Partners, L.P. partnership
agreement that would have an adverse effect on the holders of the i-units
in relation to the common units.
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LIMITED LIABILITY COMPANY AGREEMENT
FORMATION
Our certificate of formation has been filed in the office of the Secretary
of State of the State of Delaware and is effective.
PURPOSE AND POWERS
Our business purpose is to engage in any lawful business or activity in
which limited liability companies are permitted to engage under the Delaware
Limited Liability Company Act. We possess and may exercise all the powers and
privileges granted by this Act, by any other law or by our limited liability
company agreement, together with any incidental powers necessary, appropriate,
advisable or convenient to the conduct, promotion or attainment of our business
purposes or activities. Our limited liability company agreement provides that as
long as the shares are outstanding, our activities will be limited to being a
partner in and managing and controlling the business and affairs of Kinder
Morgan Energy Partners, L.P.
MEMBERS
Kinder Morgan G.P., Inc. owns all of our regular voting securities and is
our sole voting member. Our other members are the holders of the class of shares
being sold in this offering. All of our debts, obligations and liabilities,
whether arising in contract, tort or otherwise, will be our debts, obligations
and liabilities alone, and no member will be obligated for any of that debt,
obligation or liability because it is a member.
The voting member may approve a matter or take any action at a meeting or
without a meeting by written consent. It may call meetings of the voting member
at any time. In limited circumstances described in "Business -- Kinder Morgan
Management, LLC," the holders of our outstanding shares, by a majority vote,
have the right to approve a number of significant actions.
THE BOARD
Our business and affairs will be managed by a board of managers which we
call our directors. Members of the board will be selected only by the managing
member. The board will consist of no less than five members, with the exact
number to be established from time to time by resolution of the board.
The board will hold regular and special meetings at any time as may be
necessary. Regular meetings may be held without notice on dates set by the board
from time to time. Special meetings of the board may be called on one days'
notice to each director upon the written request of any one director. A quorum
for a regular or special meeting will exist when a majority of the directors are
participating in the meeting either in person or by conference telephone. Any
action required or permitted to be taken at a meeting may be taken without a
meeting, without prior notice and without a vote if the required number of
directors sign a written consent authorizing the action. The Board can establish
committees composed of two or more directors and can delegate power and
authority to these committees.
OFFICERS AND EMPLOYEES
Subject to the terms of any of our employment agreements, the board can
appoint and terminate officers and retain and terminate employees, agents and
consultants. The board can delegate power and authority to officers, employees,
agents and consultants, including the power to represent us and bind us in
accordance with the scope of their duties. An affiliate of Kinder Morgan G.P.,
Inc. provides us and the general partner with our employees through a contract
staffing arrangement.
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CAPITAL STRUCTURE
Our present capital structure consists of two classes of membership equity
interests: (1) the class of nonvoting shares being sold in this offering; and
(2) the class of voting shares held by Kinder Morgan G.P., Inc. Additional
classes of equity interests may be created with the approval of the board and
the vote of the holders of a majority of the outstanding shares.
DISSOLUTION AND LIQUIDATION
Until all of the class of shares are owned by Kinder Morgan, Inc. or its
affiliates, we will be dissolved only upon a judicial decree or upon the
approval by the voting member and by the holders of a majority of the
outstanding shares. In the event that we are dissolved, we will be liquidated
and our affairs will be wound up. All proceeds from the liquidation will be
distributed in accordance with the terms of our ownership interests.
EXCULPATION AND INDEMNIFICATION
Notwithstanding any express or implied provision of our limited liability
company agreement, or any other legal duty or obligation, none of our members,
managers, directors or officers will be liable to us, our affiliates or any
other person for any act or omission taken or omitted by the person in the
reasonable belief that the act or omission is in or is not contrary to our best
interests.
Our limited liability company agreement provides that we will indemnify our
directors, members and officers from liabilities arising in the course of such
persons' service to us, provided that the indemnitee acted in good faith and in
a manner which such indemnitee believed to be in or not opposed to our best
interests and, with respect to any criminal proceeding, had no reasonable cause
to believe such indemnitee's conduct was unlawful. We expect that we will be
covered by directors' and officers' liability insurance for potential liability
under such indemnification. The holders of shares will not be personally liable
for such indemnification.
AMENDMENTS
Amendments to our limited liability company agreement and to our
certificate of formation can be approved in writing solely by the managing
member, except for amendments which have a material adverse effect on the class
of shares being sold in this offering. This type of amendment must also be
approved by the holders of a majority of the outstanding shares of the class
being sold in this offering.
PURCHASE EVENTS
Our limited liability company agreement requires holders of the shares
being sold in this offering to sell their shares to Kinder Morgan, Inc. under
limited circumstances. These purchase events are described under the caption
"Description of the Shares -- Optional Purchase."
DESCRIPTION OF COMMON UNITS
NUMBER OF COMMON UNITS
As of December 31, 2000, Kinder Morgan Energy Partners, L.P. had 64,858,109
common units and 2,656,700 Class-B units outstanding. Its partnership agreement
does not limit the number of common units it may issue.
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WHERE COMMON UNITS ARE TRADED
Kinder Morgan Energy Partners, L.P.'s outstanding common units are listed
on the New York Stock Exchange under the symbol "KMP". Any additional common
units it issues will also be listed on the NYSE.
QUARTERLY DISTRIBUTIONS
Kinder Morgan Energy Partners, L.P.'s partnership agreement requires it to
distribute 100% of "available cash" to the partners within 45 days following the
end of each calendar quarter. Concurrently with the closing of this offering,
the Kinder Morgan Energy Partners, L.P. partnership agreement will be amended to
provide for distributions to common unitholders, i-unitholders and the general
partner as described under "Kinder Morgan Energy Partners, L.P.'s Distribution
Policy." Distributions will be made in cash to holders of common units and the
general partner and in additional i-units to holders of i-units.
TRANSFER AGENT AND REGISTRAR
Kinder Morgan Energy Partners, L.P.'s transfer agent and registrar for the
common units is First Chicago Trust Company of New York, which may be contacted
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 Kinder Morgan Energy Partners,
L.P.'s partnership agreement is included in the reports filed with the SEC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for or holders of
our shares, and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time.
FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE SHARES AND THE COMMON UNITS
This section is a summary of material federal income tax considerations
that may be relevant to prospective owners of shares or common units and, unless
otherwise noted in the following discussion, expresses the opinion of our
counsel, Bracewell & Patterson, L.L.P., in so far as it relates to matters of
the United Stated federal income tax law and legal conclusions with respect to
those matters. All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless otherwise noted,
reflect the opinion of counsel and are based on the accuracy of the
representations made by us and Kinder Morgan G.P., Inc. This section is based
upon current provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed regulations thereunder and current administrative rulings
and court decisions.
The following discussion does not address all federal income tax matters
affecting us or the holders of shares or common units, nor does it address all
state, local or foreign tax matters. Moreover, the discussion does not address
the federal income tax consequences that may be relevant to certain types of
investors subject to special treatment under the federal income tax laws, such
as financial institutions, insurance companies, estates, trusts, non-resident
aliens, dealers, persons entering into hedging transactions and foreign persons.
ACCORDINGLY, PROSPECTIVE HOLDERS OF SHARES OR COMMON UNITS SHOULD CONSULT, AND
DEPEND ON, THEIR OWN TAX ADVISORS IN ANALYZING THE TAX CONSEQUENCES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, PARTICULAR
TO THEIR OWNERSHIP OR DISPOSITION OF SHARES OR COMMON UNITS.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective holders of shares or common units. An opinion of
counsel represents only that counsel's best legal judgment and does not bind the
IRS or the courts. Accordingly, the opinions and statements made here may not be
sustained by a court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for shares and common units
and the prices at which shares and common units trade. The cost of any contest
with the IRS will be borne directly or indirectly by us and the holders of
shares and common units. Furthermore, the tax considerations discussed herein
may be significantly modified by future legislative or administrative changes or
court decisions. Any modification may or may not be retroactively applied.
FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE OWNERSHIP
AND DISPOSITION OF SHARES
Kinder Morgan Management, LLC STATUS AS A CORPORATION FOR FEDERAL INCOME TAX
PURPOSES
An election has been made with the IRS to treat us as a corporation for
federal income tax purposes. Thus, we will be subject to federal income tax on
our taxable income at tax rates up to 35%. Additionally, in certain instances we
could be subject to the alternative minimum tax of 20% on our alternative
minimum taxable income to the extent that the alternative minimum tax exceeds
our regular tax.
The i-units owned by us will not be entitled to allocations of income,
gain, loss or deduction of Kinder Morgan Energy Partners, L.P. until such time
as it is liquidated. See "Ownership of i-units by Kinder Morgan Management, LLC"
below. Thus, we do not anticipate that we will have material amounts of either
taxable income or alternative minimum taxable income resulting from
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our ownership of the i-units unless we dispose of the i-units in a taxable
transaction or Kinder Morgan Energy Partners, L.P. is liquidated. See "Ownership
of i-units by Kinder Morgan Management, LLC" below.
TAX CONSEQUENCES OF SHARE OWNERSHIP
NO FLOW-THROUGH OF TAXABLE INCOME OF Kinder Morgan Management,
LLC. Because we will be treated as a corporation for federal income tax
purposes, an owner of shares will not report on its federal income tax return
any of our items of income, gain, loss and deduction.
DISTRIBUTIONS OF ADDITIONAL SHARES. Under the terms of our limited
liability company agreement, except in connection with our liquidation, we will
not make distributions of cash in respect of shares but rather will make
distributions of additional shares. Within 45 days after the end of each
quarter, beginning with the quarter ending , 2001, we
will distribute with respect to each share that fraction of a share determined
by dividing the cash distribution to be made by Kinder Morgan Energy Partners,
L.P. on each common unit for that quarter by the average market price of a share
as of the declaration date of the distribution. Because these distributions of
additional shares will be made proportionately to all holders of shares, the
receipt of these additional shares will not be includable in the gross income of
a holder of shares for federal income tax purposes. As each holder of shares
receives distributions of additional shares, the holder will be required to
allocate its basis in the shares in the manner described below. See "Basis of
Shares" below.
BASIS OF SHARES. A holder's initial tax basis for its shares will be the
amount paid for the shares. As additional shares are distributed to a holder of
shares, that holder will be required to allocate its tax basis in its shares
equally between the old shares and the new shares received. If the old shares
were acquired for different prices, and the holder can identify each separate
lot, then the basis of each old lot of shares can be used separately in the
allocation. If a holder of shares cannot identify each lot, then the holder must
use the first-in first-out tracing approach.
DISPOSITION OF SHARES OR EXCHANGE OF SHARES FOR COMMON UNITS OR CASH. Gain
or loss will be recognized on a sale or other disposition of shares, whether to
a third party or to Kinder Morgan, Inc. pursuant to the Kinder Morgan, Inc.
purchase agreement or in connection with the liquidation of us, equal to the
difference between the amount realized and the holder's tax basis for the shares
sold or otherwise disposed of. A holder's amount realized will be measured by
the sum of the cash and the fair market value of other property received by it.
Any sale or exchange of shares with Kinder Morgan, Inc. for common units or
cash will be a taxable transaction to the holder of the shares sold or
exchanged. Accordingly, gain or loss will be recognized on the sale or exchange
equal to the difference between the fair market value of the common units or
cash received and the holder's tax basis in the shares sold or exchanged.
Except as noted below, gain or loss recognized by a holder, other than a
"dealer" in shares, on the sale or exchange of a share will generally be taxable
as capital gain or loss. Capital gain recognized by an individual on the sale of
shares held more than 12 months will generally be taxed at a maximum rate of
20%, subject to the discussion below relating to straddles. Capital gain
recognized by a corporation on the sale of shares will generally be taxed at a
maximum rate of 35%. Net capital loss may offset capital gains and no more than
$3,000 of ordinary income, in the case of individuals, and may only be used to
offset capital gain in the case of corporations.
One instance in which capital gain treatment may not result from a
disposition of shares is if our shareholders as a group own 50% or more of the
stock of Kinder Morgan, Inc. In this case, if either we or Kinder Morgan, Inc.
has earnings and profits, then the amount received by a seller of shares may be
taxed as ordinary income to the extent of its portion of those earnings and
profits, but only if the seller sells less than all of its shares or is a
shareholder of Kinder Morgan, Inc. after applying the ownership attribution
rules.
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For purposes of determining whether capital gains or losses on the
disposition of shares are long or short term, subject to the discussion below
relating to straddles, a holder's holding period begins on its acquisition of
shares pursuant to this offering. As additional shares are distributed to a
holder of shares, the holding period of each new share received will also
include the period for which the holder held the old shares to which the new
share relates.
Because the purchase and exchange rights in respect of the shares, arise as
a result of agreements other than solely with us, these rights do not appear to
constitute inherent features of the shares for tax purposes, See "Description of
the Shares -- Optional Purchase, -- Mandatory Purchase, -- Exchange Feature." As
such, it is possible that the IRS would assert that shares and the related
purchase and exchange rights constitute a straddle for federal income tax
purposes to the extent that such rights are viewed as resulting in a substantial
dimunition of a share purchaser's risk of loss from holding its shares. In that
case, any holder who incurs interest or other carrying charges that are
allocable to the shares (as would be the case if the holder finances its
acquisition of shares with debt) would have to capitalize such interest or
carrying charges to the basis of the related shares and purchase and exchange
rights. In addition, the holding period of the shares would be suspended,
resulting in short-term capital gain or loss (generally taxed at ordinary income
rates) upon a taxable disposition even if the shares were held for more than 12
months. However, we believe that the purchase and exchange rights have minimal
value and do not result in a substantial dimunition of a share purchaser's risk
of loss from holding shares. Based on that, the shares and the related purchase
and exchange rights should not constitute a straddle for federal income tax
purposes and therefore should not result in any suspension of a holder's holding
period or interest and carrying charge capitalization, although there can be no
assurance that the IRS or the courts would agree with this conclusion.
If a holder receives common units in exchange for its shares, the holder
will then own common units in Kinder Morgan Energy Partners, L.P. which is
treated as a partnership for federal income tax purposes. For a discussion of
the federal income tax consequences of owning common units, see "Federal Income
Tax Considerations Associated with the Ownership and Disposition of Common
Units" below.
INVESTMENT IN SHARES BY TAX-EXEMPT INVESTORS AND REGULATED INVESTMENT
COMPANIES. Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and other
retirement plans, are subject to federal income tax on unrelated business
taxable income. Because we will be treated as a corporation for federal income
tax purposes, a holder of shares will not report on its federal income tax
return any of our items of income, gain, loss and deduction. Therefore, a
tax-exempt investor will not have unrelated business taxable income attributable
to its ownership or sale of shares unless its ownership of the shares is debt
financed. In general, a share would be debt financed if the tax-exempt holder of
shares incurs debt to acquire a share or otherwise incurs or maintains a debt
that would not have been incurred or maintained if that share had not been
acquired.
A regulated investment company, or "mutual fund," is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. As stated
above, a holder of shares will not report on its federal income tax return any
of our items of income, gain, loss and deduction. Thus, ownership of shares will
not result in income which is not qualifying income to a mutual fund.
Furthermore, any gain from the sale or other disposition of the shares, and the
associated purchase and exchange rights, will constitute gain from the sale of
stock or securities and will qualify for purposes of the 90% test described
above. Finally, shares, and the associated purchase and exchange rights, will
constitute qualifying assets to mutual funds which also must own at least 50
percent qualifying assets at the end of each quarter.
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OWNERSHIP OF i-UNITS BY Kinder Morgan Management, LLC. A partner in a
partnership is generally required to report on its federal income tax return its
share of the partnership's income, gain, loss and deduction. However, the terms
of the i-units provide that no allocations of income, gain, loss or deduction
will be made in respect of the i-units until such time as there is a liquidation
of Kinder Morgan Energy Partners, L.P. If there is a liquidation of Kinder
Morgan Energy Partners, L.P., it is intended that we will receive allocations of
income and gain, or deduction and loss, in an amount necessary for the capital
account attributable to each i-unit to be equal to that of a common unit. As a
result, we would likely realize taxable income or loss upon the liquidation of
Kinder Morgan Energy Partners, L.P. However, no assurance can be given that
there will be sufficient amounts of income and gain, or deduction or loss, to
cause the capital account attributable to each i-unit to be equal to that of a
common unit. If they are not equal, we may receive less value than would be
received by a holder of common units. We would also likely realize taxable
income or loss upon any sale or other disposition of our i-units.
FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE OWNERSHIP
AND DISPOSITION OF COMMON UNITS
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account that partner's share of items of income, gain, loss, deduction and
credit of the partnership in computing the partner's own federal income tax
liability, regardless of whether cash distributions are made to the partner by
the partnership. Distributions by a partnership to a partner are generally not
taxable unless the amount of cash distributed is in excess of the partner's
adjusted tax basis in that partner's partnership interest.
Pursuant to Treasury Regulations Sections 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, Kinder
Morgan Energy Partners, L.P. and the operating partnerships were each 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:
- the entity had a reasonable basis for the claimed classification;
- the entity recognized the federal tax consequences of any change in
classification within five years prior to January 1, 1997; and
- the entity was not notified prior to May 8, 1996 that the entity
classification was under examination.
Based on these regulations and the applicable federal income tax law,
counsel is of the opinion that Kinder Morgan Energy Partners, L.P. and the
operating partnerships each have been and will be classified as a partnership
for federal income tax purposes.
In rendering its opinion, counsel has relied on certain factual
representations made by Kinder Morgan Energy Partners, L.P. and its general
partner, including:
- neither Kinder Morgan Energy Partners, L.P. nor the operating
partnerships has elected or will elect to be treated as an association
taxable as a corporation;
- prior to January 1, 1997, Kinder Morgan Energy Partners, L.P. and the
operating partnerships were operated in accordance with all applicable
partnership statutes and their partnership agreements and in the manner
described herein;
- prior to January 1, 1997, except as otherwise required by Section 704 of
the Internal Revenue Code and regulations promulgated thereunder, the
general partner had an interest in each material item of Kinder Morgan
Energy Partners, L.P.'s income, gain, loss,
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deduction or credit equal to at least 1% at all times during Kinder
Morgan Energy Partners, L.P.'s existence;
- prior to January 1, 1997, the general partner had, in the aggregate, a
minimum capital account balance in Kinder Morgan Energy Partners, L.P.
equal to 1% of Kinder Morgan Energy Partners, L.P.'s total positive
capital account balances;
- for each taxable year, less than 10% of Kinder Morgan Energy Partners,
L.P.'s gross income has been and will be derived from sources other than
(i) the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource, including
oil, gas or products thereof and naturally occurring carbon dioxide or
(ii) other items of income which counsel has opined or will opine is
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code.
This would be true even in the event of a change in the general partner,
assuming the new general partner will satisfy the same representations.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the exploration, development, mining or
production, processing, refining, transportation or marketing of any mineral or
natural resource. 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 assets held for the production of
income that otherwise constitutes qualifying income. Kinder Morgan Energy
Partners, L.P. has represented that in excess of 90% of its gross income has
been and will be derived from fees and charges for transporting natural gas,
refined petroleum products, natural gas liquids, naturally occurring carbon
dioxide and other hydrocarbons through its pipelines, dividends, and interest
(other than from a financial business). Based upon that representation, counsel
is of the opinion that at least 90% of Kinder Morgan Energy Partners, L.P.'s
current gross income constitutes qualifying income. Kinder Morgan Energy
Partners, L.P. believes that less than 1% of its gross income is not qualifying
income.
If Kinder Morgan Energy Partners, L.P. fails to meet the Qualifying Income
Exception, other than a failure which is determined by the IRS to be inadvertent
and which is cured within a reasonable time after discovery, it will be treated
as if it had transferred all of its assets, subject to liabilities, to a newly
formed corporation, on the first day of the year in which it fails to meet the
Qualifying Income Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of their interests in
it. This contribution and liquidation should be tax-free to unitholders and
Kinder Morgan Energy Partners, L.P., so long as it, at that time, does not have
liabilities in excess of the tax basis of its assets. Thereafter, it would be
treated as a corporation for federal income tax purposes.
If Kinder Morgan Energy Partners, L.P. were treated as an association or
otherwise taxable as a corporation in any taxable year, as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income, gain,
loss, deduction and credit would be reflected only on its tax return rather than
being passed through to its unitholders, and its net income would be taxed to it
at corporate rates. In addition, any distribution made to a unitholder would be
treated as either taxable dividend income, to the extent of Kinder Morgan Energy
Partners, L.P.'s current or accumulated earnings and profits, or, in the absence
of earnings and profits, a nontaxable return of capital, to the extent of the
unitholder's tax basis in the unitholder's units, or taxable capital gain, after
the unitholder's tax basis in the unitholder's units is reduced to zero.
Accordingly, Kinder Morgan Energy Partners, L.P.'s treatment as an association
taxable as a corporation would result in a material reduction in a unitholder's
cash flow and after-tax return and thus would likely result in a substantial
reduction of the value of the units.
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The discussion below is based on the conclusion of counsel that Kinder
Morgan Energy Partners, L.P. and the operating partnerships will be classified
as partnerships for federal income tax purposes.
LIMITED PARTNER STATUS
Common unitholders who have become limited partners of Kinder Morgan Energy
Partners, L.P. will be treated as partners of Kinder Morgan Energy Partners,
L.P. for federal income tax purposes. Moreover, the IRS has ruled that assignees
of partnership interests who have not been admitted to a partnership as
partners, but who have the capacity to exercise substantial dominion and control
over the assigned partnership interests, will be treated as partners for federal
income tax purposes. On the basis of this ruling, except as otherwise described
herein, (a) assignees who have executed and delivered transfer applications and
are awaiting admission as limited partners and (b) unitholders whose common
units are held in street name or by a nominee and who have the right to direct
the nominee in the exercise of all substantive rights attendant to the ownership
of their units will be treated as partners of Kinder Morgan Energy Partners,
L.P. for federal income tax purposes. Because 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's opinion does not extend to these persons. Furthermore, a purchaser or
other transferee of common 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 common 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 for those units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale may lose the beneficial owner's status as
a partner with respect to those units for federal income tax purposes. See "Tax
Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions, losses or credits would not appear to be
reportable by a common unitholder who is not a partner for federal income tax
purposes, and any cash distributions received by a common unitholder who is not
a partner for federal income tax purposes would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in Kinder Morgan Energy Partners, L.P. for
federal income tax purposes.
TAX CONSEQUENCES OF COMMON UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. Kinder Morgan Energy Partners, L.P. will
not pay any federal income tax. Instead, each common unitholder will be required
to report on that unitholder's federal income tax return the unitholder's share
of Kinder Morgan Energy Partners, L.P.'s income, gains, losses and deductions
without regard to whether corresponding cash distributions are received by the
unitholder. Consequently, Kinder Morgan Energy Partners, L.P. may allocate
income to a common unitholder even if the unitholder has not received a cash
distribution. Each common unitholder will be required to include in income that
unitholder's share of Kinder Morgan Energy Partners, L.P.'s income, gains,
losses, deductions and credits for its taxable year ending with or within the
unitholder's taxable year.
TREATMENT OF DISTRIBUTIONS. Distributions by Kinder Morgan Energy
Partners, L.P. to a common unitholder generally will not be taxable to the
unitholder for federal income tax purposes to the extent of the unitholder's tax
basis in the unitholder's common units immediately before the distribution.
Kinder Morgan Energy Partners, L.P.'s cash distributions in excess of a common
unitholder's tax 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 Common Units"
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below. Any reduction in a common unitholder's share of Kinder Morgan Energy
Partners, L.P.'s liabilities for which no partner, including the general
partner, bears the economic risk of loss, known as "nonrecourse liabilities,"
will be treated as a distribution of cash to that unitholder. To the extent
Kinder Morgan Energy Partners, L.P.'s distributions cause a common unitholder's
"at risk" amount to be less than zero at the end of any taxable year, the
unitholder must recapture as additional income any losses deducted in previous
years. See "Limitations on Deductibility of Losses" below.
A decrease in a common unitholder's percentage interest in Kinder Morgan
Energy Partners, L.P. because of its issuance of additional units will decrease
the unitholder's share of nonrecourse liabilities, and thus will result in a
corresponding deemed distribution of cash. A non-pro rata distribution of money
or property may result in ordinary income to a common unitholder, regardless of
the unitholder's tax basis in the unitholder's units, if the distribution
reduces the unitholder's share of Kinder Morgan Energy Partners, L.P.'s
"unrealized receivables," including depreciation recapture, and/or substantially
appreciated "inventory items," both as defined in the Internal Revenue Code, and
collectively, "Section 751 Assets."
To that extent, the common unitholder will be treated as having been
distributed the unitholder's proportionate share of the Section 751 Assets and
having exchanged those assets with Kinder Morgan Energy Partners, L.P. in return
for the non-pro rata portion of the actual distribution made to the unitholder.
This latter deemed exchange will generally result in the common unitholder's
realization of ordinary income. That income will equal the excess of (i) the
non-pro rata portion of that distribution over (ii) the common unitholder's tax
basis for the share of Section 751 Assets deemed relinquished in the exchange.
BASIS OF UNITS. A common unitholder's initial tax basis for the
unitholder's units will be the amount paid for the units plus the unitholder's
share of Kinder Morgan Energy Partners, L.P.'s nonrecourse liabilities. That
basis will be increased by the common unitholder's share of Kinder Morgan Energy
Partners, L.P.'s income and by any increases in the unitholder's share of Kinder
Morgan Energy Partners, L.P.'s nonrecourse liabilities. That basis will be
decreased, but not below zero, by distributions from Kinder Morgan Energy
Partners, L.P., by any decreases in the common unitholder's share of Kinder
Morgan Energy Partners, L.P.'s nonrecourse liabilities, by the unitholder's
share of Kinder Morgan Energy Partners, L.P.'s losses and by the unitholder's
share of Kinder Morgan Energy Partners, L.P.'s expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
common unitholder will have no share of Kinder Morgan Energy Partners, L.P.'s
debt which is recourse to the general partner, but will have a share, generally
based on the unitholder's share of its profits, of its nonrecourse liabilities.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The deduction by a common
unitholder of the unitholder's share of Kinder Morgan Energy Partners, L.P.'s
losses will be limited to the tax basis in the unitholder's units and, in the
case of an individual unitholder or a corporate unitholder, if more than 50% of
the value of the corporate unitholder's stock is owned directly or indirectly by
five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to Kinder Morgan
Energy Partners, L.P.'s activities, if that is less than the unitholder's tax
basis. A common unitholder must recapture losses deducted in previous years to
the extent that distributions cause the unitholder's at risk amount to be less
than zero at the end of any taxable year. Losses disallowed to a common
unitholder or recaptured as a result of these limitations will carry forward and
will be allowable to the extent that the unitholder's tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a common unit, any gain recognized by a common unitholder
can be offset by losses that were previously suspended by the at risk limitation
but may not be offset by losses suspended by the basis limitation. Any excess
loss above that gain previously suspended by the at risk or basis limitations is
no longer utilizable.
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In general, a common unitholder will be at risk to the extent of the tax
basis of the unitholder's units, excluding any portion of that basis
attributable to the unitholder's share of Kinder Morgan Energy Partners, L.P.'s
nonrecourse liabilities, reduced by any amount of money the unitholder borrows
to acquire or hold the unitholder's units, if the lender of those borrowed funds
owns an interest in Kinder Morgan Energy Partners, L.P., is related to the
unitholder or can look only to the units for repayment. A common unitholder's at
risk amount will increase or decrease as the tax basis of the unitholder's units
increases or decreases, other than tax basis increases or decreases attributable
to increases or decreases in the unitholder's share Kinder Morgan Energy
Partners, L.P.'s nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses Kinder Morgan Energy Partners, L.P. generates
will only be available to offset its passive income generated in the future and
will not be available to offset income from other passive activities or
investments, including its investments or investments in other publicly-traded
partnerships, or salary or active business income. Passive losses that are not
deductible because they exceed a common unitholder's share of the income Kinder
Morgan Energy Partners, L.P. generates may be deducted in full when the
unitholder disposes of the unitholder's entire investment in it in a fully
taxable transaction with an unrelated party. The passive activity loss rules are
applied after other applicable limitations on deductions, including the at risk
rules and the basis limitation.
A common unitholder's share of Kinder Morgan Energy Partners, L.P.'s net
income may be offset by any of its suspended passive losses, but it may not be
offset by any other current or carryover losses from other passive activities,
including those attributable to other publicly-traded partnerships.
LIMITATIONS ON INTEREST DEDUCTIONS. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has announced that treasury
regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest. In addition, the common
unitholder's share of Kinder Morgan Energy Partners, L.P.'s portfolio income
will be treated as investment income. Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- Kinder Morgan Energy Partners, L.P.'s interest expense attributed to
portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a common unitholder's investment interest expense will
take into account interest on any margin account borrowing or other loan
incurred to purchase or carry a unit. Net investment income includes gross
income from property held for investment and amounts treated as portfolio income
under the passive loss rules, less deductible expenses, other than interest,
directly connected with the production of investment income, but generally does
not include gains attributable to the disposition of property held for
investment.
ENTITY-LEVEL COLLECTIONS. If Kinder Morgan Energy Partners, L.P. is
required or elects under applicable law to pay any federal, state or local
income tax on behalf of any common unitholder, the general partner or any former
unitholder, the general partner is authorized to pay such taxes from Kinder
Morgan Energy Partners, L.P.'s funds. That payment, if made, will be treated as
a distribution of cash to the partner on whose behalf the payment was made. The
general partner
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is authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by
Kinder Morgan Energy Partners, L.P. as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event the partner
would be required to file a claim in order to obtain a credit or refund.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION. In general, if Kinder
Morgan Energy Partners, L.P. has a net profit, its items of income, gain, loss
and deduction will be allocated among the general partner and the unitholders in
accordance with their percentage interests in Kinder Morgan Energy Partners. A
class of Kinder Morgan Energy Partners, L.P.'s unitholders that receives more
cash than another class, on a per unit basis, with respect to a year, will be
allocated additional income equal to that excess. If Kinder Morgan Energy
Partners, L.P. has a net loss, that loss will generally be allocated, first, to
the general partner and the common unitholders in accordance with their
percentage interests in it to the extent of their positive capital accounts and,
second, to the general partner.
Notwithstanding the above, as required by Section 704(c) of the Internal
Revenue Code, certain items of Kinder Morgan Energy Partners, L.P.'s income,
deduction, gain and loss will be allocated to account for the difference between
the tax basis and fair market value of property contributed to Kinder Morgan
Energy Partners, L.P., referred to in this discussion as "Contributed Property."
In addition, certain items of recapture income will be allocated to the extent
possible to the unitholder who was allocated the deduction giving rise to the
treatment of the gain as recapture income in order to minimize the recognition
of ordinary income by some unitholders, but these allocations may not be
respected by the IRS or the courts. If these allocations of recapture income are
not respected, the amount of the income or gain allocated to a unitholder will
not change, but instead a change in the character of the income allocated to a
unitholder would result. Finally, although Kinder Morgan Energy Partners, L.P.
does not expect that its operations will result in the creation of negative
capital accounts, if negative capital accounts nevertheless result, items of its
income and gain will be allocated in an amount and manner sufficient to
eliminate the negative balance as quickly as possible.
An allocation of items of Kinder Morgan Energy Partners, L.P.'s income,
gain, loss, deduction or credit, other than an allocation required by the
Internal Revenue Code to eliminate the difference between a common unitholder's
"book" capital account, credited with the fair market value of Contributed
Property, and "tax" capital account, credited with the tax basis of Contributed
Property, referred to in this discussion as the "Book-Tax Disparity", will
generally be given effect for federal income tax purposes in determining a
unitholder's share of an item of income, gain, loss or deduction only if the
allocation has substantial economic effect. In any other case, a unitholder's
share of an item will be determined on the basis of the unitholder's interest in
Kinder Morgan Energy Partners, L.P., which will be determined by taking into
account all the facts and circumstances, including the unitholder's relative
contributions to Kinder Morgan Energy Partners, L.P., the interests of all the
unitholders in profits and losses, the interest of all the unitholders in cash
flow and other nonliquidating distributions and rights of all the unitholders to
distributions of capital upon liquidation.
Under the Internal Revenue Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount of any such item
recognized by that partnership in a particular taxable period. This rule, often
referred to as the "ceiling limitation," is not expected to have significant
application to allocations with respect to Contributed Property and thus, is not
expected to prevent Kinder Morgan Energy Partners, L.P. common unitholders from
receiving allocations of depreciation, gain or loss from such properties equal
to that which they would have received had such properties actually had a basis
equal to fair market value at the outset. However, to the extent the ceiling
limitation is or becomes applicable, Kinder Morgan
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Energy Partners, L.P.'s partnership agreement requires that certain items of
income and deduction be allocated in a way designed to effectively "cure" this
problem and eliminate the impact of the ceiling limitation. Such allocations
will not have substantial economic effect because they will not be reflected in
the capital accounts of our unitholders.
The legislative history of Section 704(c) of the Internal Revenue Code
states that Congress anticipated that treasury regulations would permit partners
to agree to a more rapid elimination of Book-Tax Disparities than required
provided there is no tax avoidance potential. Further, under final treasury
regulations under Section 704(c) of the Internal Revenue Code, allocations
similar to the curative allocations would be allowed. Although the curative
allocations are consistent with the final treasury regulations, since the final
treasury regulations are not applicable to Kinder Morgan Energy Partners, L.P.,
counsel is unable to opine on the validity of the curative allocations.
Counsel is of the opinion that, with the exception of curative allocations
and the allocation of recapture income discussed above and the issues described
in "Tax Consequences of Common Unit Ownership -- Section 754 Election" and
"Disposition of Common Units -- Allocations Between Transferors and
Transferees," allocations under Kinder Morgan Energy Partners, L.P.'s
partnership agreement will be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the treasury regulations relating to
allocations of partnership income, and investors should be aware that some of
the allocations in Kinder Morgan Energy Partners, L.P.'s partnership agreement
could be successfully challenged by the IRS.
TREATMENT OF SHORT SALES. A common unitholder whose units are loaned to a
"short seller" to cover a short sale of units may be considered as having
disposed of those units. If so, the unitholder would no longer be a partner for
federal income tax purposes for those units during the period of the loan and
may recognize gain or loss from the disposition. As a result, during this
period, any of Kinder Morgan Energy Partners, L.P.'s income, gain, deduction,
loss or credit with respect to those common units would not be reportable by the
unitholder, any cash distributions received by the unitholder as to those units
would be fully taxable and all of these distributions would likely be ordinary
income.
Counsel has not rendered an opinion regarding the treatment of a common
unitholder where units are loaned to a short seller to cover a short sale of the
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is studying issues relating
to the tax treatment of short sales of partnership interests.
ALTERNATIVE MINIMUM TAX. Each common unitholder will be required to take
into account that unitholder's share of any items of Kinder Morgan Energy
Partners, L.P.'s income, gain or loss for purposes of the alternative minimum
tax. A portion of Kinder Morgan Energy Partners, L.P.'s depreciation deductions
may be treated as an item of tax preference for this purpose.
A common unitholder's alternative minimum taxable income derived from
Kinder Morgan Energy Partners, L.P. may be higher than that unitholder's share
of Kinder Morgan Energy Partners, L.P.'s net income because Kinder Morgan Energy
Partners, L.P. may use more accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The current minimum tax rate for
noncorporate taxpayers is 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. Prospective common unitholders should
consult with their tax advisors as to the impact of an investment in common
units on their liability for the alternative minimum tax.
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SECTION 754 ELECTION. Kinder Morgan Energy Partners, L.P. previously made
the election permitted by Section 754 of the Internal Revenue Code. That
election is irrevocable without the consent of the IRS. The election will
generally permit Kinder Morgan Energy Partners, L.P. to adjust a common unit
purchaser's tax basis in Kinder Morgan Energy Partners, L.P.'s assets ("inside
basis") under Section 743(b) of the Internal Revenue Code to reflect the
purchase price. This election does not apply to a person who purchases common
units directly from Kinder Morgan Energy Partners, L.P. The Section 743(b)
adjustment belongs to the purchaser and not to other unitholders. For purposes
of this discussion, a common unitholder's inside basis in Kinder Morgan Energy
Partners, L.P.'s assets will be considered to have two components: (1)
unitholder's share of Kinder Morgan Energy Partners, L.P.'s actual basis in such
assets (the "Common Basis"); and (2) unitholder's Section 743(b) adjustment to
that basis.
Treasury regulations under Section 743 of the Internal Revenue Code require
a portion of the Section 743(b) adjustment attributable to property subject to
cost recovery deductions under Section 168 to be recovered over the remaining
cost recovery period for the Section 704(c) built-in gain in such property.
Recently finalized treasury regulations under Section 197 similarly require a
portion of the Section 743(b) adjustment attributable to amortizable Section 197
intangibles to be amortized over the remaining amortization period for the
Section 704(c) built-in gain in such intangibles. These treasury regulations
apply only to partnerships that have adopted the remedial method, which Kinder
Morgan Energy Partners, L.P. may adopt with respect to certain recovery
property. If a different method is adopted, the Section 743(b) adjustment
attributable to property subject to cost recovery deductions under Section 168
or amortization under Section 197 must be taken into account as if it were a
newly-purchased property placed in service when the transfer giving rise to the
Section 743(b) adjustment occurs. Regardless of the method adopted, Treasury
Regulation Section 1.167(c)-1(a)(6) requires the portion of a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167 of
the Internal Revenue Code to be depreciated using either the straight-line or
the 150% declining balance method.
Pursuant to Kinder Morgan Energy Partners, L.P.'s partnership agreement,
the general partner is authorized to adopt a convention to preserve the
uniformity of units even if that convention is not consistent with specified
treasury regulations. See "Disposition of Common Units -- Uniformity of Common
Units." Although counsel is unable to opine as to the validity of such an
approach, Kinder Morgan Energy Partners, L.P.'s intends to adopt a method to
depreciate and amortize the 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 or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of the property, or treat that portion as
non-amortizable to the extent attributable to property the Common Basis of which
is not amortizable, despite its inconsistency with treasury regulations. If
Kinder Morgan Energy Partners, L.P. determines that this position cannot
reasonably be taken, it may adopt a depreciation or amortization convention
under which all purchasers acquiring common units in the same month would
receive depreciation or amortization, whether attributable to the Common Basis
or a Section 743(b) adjustment, based upon the same applicable rate as if they
had purchased a direct interest in Kinder Morgan Energy Partners, L.P.'s assets.
This kind of aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to certain of its
unitholders. See "Disposition of Common Units -- Uniformity of Common Units." If
the IRS successfully challenged Kinder Morgan Energy Partners, L.P.'s method for
depreciating or amortizing the Section 743(b) adjustment, the uniformity of
common units might be affected, and the gain realized by a unitholder from the
sale of units might be increased without the benefit of additional deductions.
See "Disposition of Common Units -- Uniformity of Common Units."
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A Section 754 election is advantageous if the transferee's basis in the
transferee's common units is higher than the units' share of the aggregate tax
basis of Kinder Morgan Energy Partners, L.P.'s assets immediately prior to the
transfer. In that case, as a result of the election, the transferee would have,
among other items, a greater amount of depreciation deductions and the
transferee's share of any gain or loss on a sale of Kinder Morgan Energy
Partners, L.P.'s assets would be less. Conversely, a Section 754 election is
disadvantageous if the transferee's basis in such common units is lower than
those units' share of the aggregate tax basis of Kinder Morgan Energy Partners,
L.P.'s assets immediately prior to the transfer. Thus, the fair market value of
the units may be affected either favorably or unfavorably by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of Kinder Morgan Energy
Partners, L.P.'s assets and other matters. For example, the allocation of the
Section 743(b) adjustment among Kinder Morgan Energy Partners, L.P.'s assets
must be made in accordance with the Internal Revenue Code. The IRS could seek to
reallocate some or all of any Section 743(b) adjustment allocated by Kinder
Morgan Energy Partners, L.P. to tangible assets to goodwill instead. Goodwill,
as an intangible asset, is generally amortizable over a longer period of time or
under a less accelerated method than Kinder Morgan Energy Partners, L.P.'s
tangible assets. Kinder Morgan Energy Partners, L.P. cannot assure you that the
determinations it makes will not be successfully challenged by the IRS and that
the deductions attributable to them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in the general partner's opinion, the expense of compliance exceed the
benefit of the election, the general partner may seek permission from the IRS to
revoke Kinder Morgan Energy Partners, L.P.'s Section 754 election. If permission
is granted, a subsequent purchaser of common units may be allocated more income
than the purchaser would have been allocated had the election not been revoked.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR. Kinder Morgan Energy Partners, L.P.
uses the year ending December 31 as its taxable year and the accrual method of
accounting for federal income tax purposes. Each common unitholder will be
required to include in income that unitholder's share of Kinder Morgan Energy
Partners, L.P.'s income, gain, loss and deduction for its taxable year ending
within or with that unitholder's taxable year. In addition, a common unitholder
who has a taxable year ending on a date other than December 31 and who disposes
of all of that unitholder's units following the close of Kinder Morgan Energy
Partners, L.P.'s taxable year but before the close of that unitholder's taxable
year must include that unitholder's share of Kinder Morgan Energy Partners,
L.P.'s income, gain, loss and deduction in income for that unitholder's taxable
year, with the result that the unitholder will be required to include in income
for that unitholder's taxable year that unitholder's share of more than one year
of Kinder Morgan Energy Partners, L.P.'s income, gain, loss and deduction.
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION. The tax basis of Kinder
Morgan Energy Partners, L.P.'s assets will be used for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of these assets.
The IRS may challenge either the fair market values or the useful lives
assigned to Kinder Morgan Energy Partners, L.P.'s assets or seek to characterize
intangible assets as nonamortizable goodwill. If any such challenge or
characterization were successful, the deductions allocated to a common
unitholder in respect of Kinder Morgan Energy Partners, L.P.'s assets would be
reduced, and a unitholder's share of taxable income received from it would be
increased accordingly. Any increase could be material.
To the extent allowable, the general partner may elect to use the
depreciation and cost recovery methods that will result in the largest
deductions being taken in the early years after
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assets are placed in service. Property Kinder Morgan Energy Partners, L.P.
subsequently acquires or constructs may be depreciated using accelerated methods
permitted by the Internal Revenue Code.
If Kinder Morgan Energy Partners, L.P. disposes of depreciable property by
sale, foreclosure, or otherwise, all or a portion of any gain, determined by
reference to the amount of depreciation previously deducted and the nature of
the property, may be subject to the recapture rules and taxed as ordinary income
rather than capital gain. Similarly, a common unitholder who has taken cost
recovery or depreciation deductions with respect to property Kinder Morgan
Energy Partners, L.P.'s owns will likely be required to recapture some or all of
those deductions as ordinary income upon a sale of any of the unitholder's
interest in Kinder Morgan Energy Partners, L.P. See "Tax Consequences of Common
Unit Ownership -- Allocation of Income, Gain, Loss and Deduction" and
"Disposition of Common Units -- Recognition of Gain or Loss."
The costs incurred in selling Kinder Morgan Energy Partners, L.P.'s units,
called "syndication expenses," must be capitalized and cannot be deducted
currently, ratably or upon its termination. There are uncertainties regarding
the classification of costs as organization expenses, which may be amortized by
Kinder Morgan Energy Partners, L.P., and as syndication expenses, which may not
be amortized by it. The underwriting discounts and commissions Kinder Morgan
Energy Partners, L.P. incurs will be treated as a syndication cost.
VALUATION AND TAX BASIS OF OUR PROPERTIES. The federal income tax
consequences of the ownership and disposition of common units will depend in
part on Kinder Morgan Energy Partners, L.P.'s estimates of the relative fair
market values, and the initial tax bases, of Kinder Morgan Energy Partners,
L.P.'s assets. Although Kinder Morgan Energy Partners, L.P. may from time to
time consult with professional appraisers regarding valuation matters, it will
make many of the relative fair market value estimates itself. These estimates
are subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss, deductions or credits
previously reported by Kinder Morgan Energy Partners, L.P.'s common unitholders
might change, and unitholders might be required to adjust their tax liability
for prior years and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS. Gain or loss will be recognized on a sale of
common units equal to the difference between the amount realized and the
unitholder's tax basis for the units sold. A common unitholder's amount realized
will be measured by the sum of the cash or the fair market value of other
property received by the unitholder plus the unitholder's share of Kinder Morgan
Energy Partners, L.P.'s nonrecourse liabilities. Because the amount realized
includes a common unitholder's share of Kinder Morgan Energy Partners, L.P.'s
nonrecourse liabilities, the gain recognized on the sale of units may result in
a tax liability in excess of any cash received from such sale.
Prior distributions from Kinder Morgan Energy Partners, L.P. in excess of
cumulative net taxable income for a unit that decreased a common unitholder's
tax basis in that unit will, in effect, become taxable income if the unit is
sold at a price greater than the unitholder's tax basis in that unit, even if
the price received is less than the unitholder's original cost.
Except as noted below, gain or loss recognized by a common unitholder,
other than a "dealer" in units, on the sale or exchange of a unit will generally
be taxable as capital gain or loss. Capital gain recognized by an individual on
the sale of common units held more than 12 months will generally be taxed at a
maximum rate of 20%. A portion of this gain or loss, which will likely be
substantial, however, will be separately computed and taxed as ordinary income
or loss under Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" Kinder
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Morgan Energy Partners, L.P. owns. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory items and deprecation
recapture may exceed net taxable gain realized upon the sale of a common unit
and may be recognized even if there is a net taxable loss realized on the sale
of a unit. Thus, a common unitholder may recognize both ordinary income and a
capital loss upon a sale of units. Net capital loss may offset capital gains and
no more than $3,000 of ordinary income, in the case of individuals, and may only
be used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or disposition of less
than all of those interests, a portion of that tax basis must be allocated to
the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, recently finalized treasury regulations allow a selling
unitholder who can identify units transferred with an ascertainable holding
period to elect to use the actual holding period of the units transferred. Thus,
according to the ruling, a unitholder will be unable to select high or low basis
units to sell as would be the case with corporate stock, but, according to the
regulations, may designate specific units sold for purposes of determining the
holding period of units transferred. A unitholder electing to use the actual
holding period of units transferred must consistently use that identification
method for all subsequent sales or exchanges of units. A unitholder considering
the purchase of additional units or a sale of units purchased in separate
transactions should consult the unitholder's tax advisor as to the possible
consequences of this ruling and application of the final treasury regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial positions, including partnership interests, by treating a
taxpayer as having sold an "appreciated" partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at its fair market
value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of the Treasury is
also authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the appreciated financial
position.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, Kinder Morgan
Energy Partners, L.P.'s taxable income and losses will be determined annually,
will be prorated on a monthly basis and will be subsequently apportioned among
the common unitholders in proportion to the number of units owned by each of
them as of the opening of the New York Stock Exchange on the first business day
of the month. However, gain or loss realized on a sale or other disposition of
Kinder Morgan Energy Partners, L.P.'s assets other than in the ordinary course
of business will be allocated among the common unitholders of record as of the
opening of the New York Stock Exchange on the first business day of the month in
which such gain or loss is recognized. As a result, a common unitholder
transferring units may be allocated income, gain, loss, deduction, and credit
realized after the date of transfer.
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The use of this method is uncertain under existing treasury regulations.
Accordingly, counsel is unable to opine on the validity of this method of
allocating income and deductions between common unitholders. If this method is
not allowed under the treasury regulations, or only applies to transfers of less
than all of the unitholder's interest, Kinder Morgan Energy Partners, L.P.'s
taxable income or losses might be reallocated among Kinder Morgan Energy
Partners, L.P.'s unitholders. Kinder Morgan Energy Partners, L.P. is authorized
to revise its method of allocation between common unitholders to conform to a
method permitted under future treasury regulations.
A common unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that quarter, but will not be entitled to receive that cash
distribution.
NOTIFICATION REQUIREMENTS. A common unitholder who sells or exchanges
units is required to notify Kinder Morgan Energy Partners, L.P. in writing of
that sale or exchange within 30 days after the sale or exchange. Kinder Morgan
Energy Partners, L.P. is required to notify the IRS of that transaction and to
furnish certain information to the transferor and transferee. However, these
reporting requirements do not apply to a sale by an individual who is a citizen
of the United States and who effects the sale or exchange through a broker.
Additionally, a transferor and a transferee of a common unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount of
the consideration received for the unit that is allocated to Kinder Morgan
Energy Partners, L.P.'s goodwill or going concern value. Failure to satisfy
these reporting obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION. Kinder Morgan Energy Partners, L.P. will be
considered to have been terminated for tax purposes if there is a sale or
exchange of 50% or more of the total interests in its capital and profits within
a 12-month period. A constructive termination results in the closing of Kinder
Morgan Energy Partners, L.P.'s taxable year for all unitholders. In the case of
a common unitholder reporting on a taxable year other than a fiscal year ending
December 31, the closing of Kinder Morgan Energy Partners, L.P.'s tax year may
result in more than 12 months of Kinder Morgan Energy Partners, L.P.'s taxable
income or loss being includable in that unitholder's taxable income for the year
of termination. Kinder Morgan Energy Partners, L.P. would be required to make
new tax elections after a termination, including a new election under Section
754 of the Internal Revenue Code, and a termination would result in a deferral
of Kinder Morgan Energy Partners, L.P.'s deductions for depreciation. A
termination could also result in penalties if Kinder Morgan Energy Partners,
L.P. was unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject Kinder Morgan
Energy Partners, L.P. to, any tax legislation enacted before the termination.
UNIFORMITY OF COMMON UNITS
Because Kinder Morgan Energy Partners, L.P. cannot match transferors and
transferees of units, Kinder Morgan Energy Partners, L.P. must maintain
uniformity of the economic and tax characteristics of the common units to a
purchaser of these units. In the absence of uniformity, Kinder Morgan Energy
Partners, L.P. may be unable to completely comply with a number of federal
income tax requirements, both statutory and regulatory. A lack of uniformity can
result from a literal application of Treasury Regulation Section
1.167(c)-1(a)(6) or Treasury Regulations under Sections 743 and 197 of the
Internal Revenue Code and from the application of the "ceiling limitation" on
Kinder Morgan Energy Partners, L.P.'s ability to make allocations to eliminate
Book-Tax Disparities attributable to Contributed Property. Any non-uniformity
could have a negative impact on the value of the common units.
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Kinder Morgan Energy Partners, L.P. intends to depreciate and amortize the
portion of a Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common Basis
of that property, or treat that portion as non-amortizable to the extent
attributable to property the Common Basis of which is not amortizable, despite
its inconsistency with treasury regulations. See "Tax Consequences of Common
Unit Ownership -- Section 754 Election." If Kinder Morgan Energy Partners, L.P.
determines that this position cannot reasonably be taken, it may adopt
depreciation and amortization conventions under which all purchasers acquiring
common units in the same month would receive depreciation and amortization
deductions, whether attributable to the Common Basis or the Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in Kinder Morgan Energy Partners, L.P.'s property. If this
position is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to some common unitholders and risk
the loss of depreciation and amortization deductions not taken in the year that
these deductions are otherwise allowable. If Kinder Morgan Energy Partners, L.P.
chooses not to utilize this aggregate method, it may use any other reasonable
depreciation and amortization convention to preserve the uniformity of the
intrinsic tax characteristics of any units that would not have a material
adverse effect on the common unitholders. The IRS may challenge any method of
depreciating or amortizing the Section 743(b) adjustment described in this
paragraph. If this challenge were sustained, the uniformity of common units
might be affected, and the gain from the sale of units might be increased
without the benefit of additional deductions.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of common units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of Kinder Morgan Energy Partners, L.P.'s income allocated to a
common unitholder which is a tax-exempt organization will be unrelated business
taxable income and will be taxable to them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of Kinder Morgan Energy Partners, L.P.'s
gross income will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
common units will be considered to be engaged in business in the United States
because of the ownership of units. As a consequence they will be required to
file federal tax returns to report their share of Kinder Morgan Energy Partners,
L.P.'s income, gain, loss, deduction or credit and pay federal income tax at
regular rates on their share of Kinder Morgan Energy Partners, L.P.'s net income
or gain. Under rules applicable to publicly traded partnerships, Kinder Morgan
Energy Partners, L.P. will withhold, currently at the rate of 39.6%, on cash
distributions made quarterly to foreign common unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to Kinder Morgan Energy Partners, L.P.'s transfer agent on a Form
W-8 or applicable substitute form in order to obtain credit for these
withholding taxes. Subsequent adoption of treasury regulations or the issuance
of other administrative pronouncements may require Kinder Morgan Energy
Partners, L.P. to change these procedures.
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In addition, because a foreign corporation that owns common units will be
treated as engaged in a United States trade or business, that corporation may be
subject to the United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its share of Kinder Morgan Energy Partners,
L.P.'s income and gain, as adjusted for changes in the foreign corporation's
"U.S. net equity," which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated by an income tax
treaty between the United States and the country in which the foreign corporate
unitholder is a "qualified resident." In addition, this type of unitholder is
subject to special information reporting requirements under Section 6038C of the
Internal Revenue Code.
Under an IRS ruling, a foreign common unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from this ruling, a foreign common unitholder will not be taxed or subject
to withholding upon the sale or disposition of a unit if the foreign unitholder
has owned less than 5% in value of the units during the five-year period ending
on the date of the disposition and if the units are regularly traded on an
established securities market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
KINDER MORGAN ENERGY PARTNERS, L.P.'S INFORMATION RETURNS AND AUDIT
PROCEDURES. Kinder Morgan Energy Partners, L.P. intends to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes that unitholder's share
of Kinder Morgan Energy Partners, L.P.'s income, gain, loss, deduction and
credit for Kinder Morgan Energy Partners, L.P.'s preceding taxable year. In
preparing this information, which will not be reviewed by counsel, Kinder Morgan
Energy Partners, L.P. will take various accounting and reporting positions, some
of which have been mentioned earlier, to determine that unitholder's share of
income, gain, loss, deduction and credits. Kinder Morgan Energy Partners, L.P.
cannot assure you that those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, regulations or administrative
interpretations of the IRS. No assurance can be given to prospective unitholders
that the IRS will not successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect the value of the
common units.
The IRS may audit Kinder Morgan Energy Partners, L.P.'s federal income tax
information returns. Adjustments resulting from an IRS audit may require each
common unitholder to adjust a prior year's tax liability, and possibly may
result in an audit of the unitholder's own return. Any audit of a unitholder's
return could result in adjustments not related to Kinder Morgan Energy Partners,
L.P.'s returns as well as those related to its returns.
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 in a partnership proceeding
rather than in separate proceedings with the partners. The Internal Revenue Code
requires that one partner be designated as the "Tax Matters Partner" for these
purposes. Kinder Morgan Energy Partners, L.P.'s partnership agreement appoints
the general partner as the Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on our behalf
and on behalf of the unitholders. In addition, the Tax Matters Partner can
extend the statute of limitations for assessment of tax deficiencies against
unitholders for items in Kinder Morgan Energy Partners, L.P.'s returns. The Tax
Matters Partner may bind a unitholder with less than a 1% profits interest in
Kinder Morgan Energy Partners, L.P. to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the Tax
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Matters Partner. The Tax Matters Partner may seek judicial review, by which all
the unitholders are bound, of a final partnership administrative adjustment and,
if the Tax Matters Partner fails to seek judicial review, judicial review may be
sought by any unitholder having at least a 1% interest in profits or by any
group of unitholders having in the aggregate at least a 5% interest in profits.
However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment
of any item on that unitholder's federal income tax return that is not
consistent with the treatment of the item on Kinder Morgan Energy Partners,
L.P.'s return. Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
NOMINEE REPORTING. Persons who hold an interest in Kinder Morgan Energy
Partners, L.P. as a nominee for another person are required to furnish to Kinder
Morgan Energy Partners, L.P.:
- the name, address and taxpayer identification number of the beneficial
owner and the nominee;
- whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity;
- the amount and description of units held, acquired or transferred for the
beneficial owner; and
- specific 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 United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
Kinder Morgan Energy Partners, L.P. The nominee is required to supply the
beneficial owner of the units with the information furnished to Kinder Morgan
Energy Partners, L.P.
REGISTRATION AS A TAX SHELTER. The Internal Revenue Code requires that
"tax shelters" be registered with the Secretary of the Treasury. The temporary
treasury regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that Kinder Morgan
Energy Partners, L.P. is not subject to the registration requirement on the
basis that (i) it does not constitute a tax shelter or (ii) it constitutes a
projected income investment exempt from registration. However, Kinder Morgan
Energy Partners, L.P. has registered as a tax shelter with the Secretary of the
Treasury because of the absence of assurance that it will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN KINDER MORGAN ENERGY
PARTNERS, L.P. OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS. Kinder Morgan Energy Partners, L.P.'s tax shelter
registration number is 9228900496. A unitholder who sells or otherwise transfers
a unit in a later transaction must furnish the registration number to the
transferee. The penalty for failure of the transferor of a unit to furnish the
registration number to the transferee is $100 for each failure. The unitholders
must disclose Kinder Morgan Energy Partners, L.P.'s tax shelter registration
number on Form 8271 to be attached to the tax return on which any deduction,
loss, credit or other benefit Kinder Morgan Energy Partners, L.P. generates is
claimed or on which any of Kinder Morgan Energy Partners, L.P.'s income is
included. A unitholder who fails to disclose the tax shelter registration number
on the unitholder's return, without reasonable cause for that failure, will be
subject to a $250 penalty for each failure. Any penalties discussed are not
deductible for federal income tax purposes.
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ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
for which there is, or was, "substantial authority," or (ii) as to which there
is a reasonable basis and the pertinent facts of that position are disclosed on
the return. More stringent rules apply to "tax shelters," a term that in this
context does not appear to include Kinder Morgan Energy Partners, L.P. If any
item of income, gain, loss, deduction or credit included in the distributive
shares of unitholders might result in that kind of an "understatement" of income
for which no "substantial authority" exists, Kinder Morgan Energy Partners, L.P.
must disclose the pertinent facts on its return. In addition, Kinder Morgan
Energy Partners, L.P. will make a reasonable effort to furnish sufficient
information for unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $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 TAX CONSIDERATIONS
In addition to federal income taxes, common unitholders will be subject to
other taxes, including state and local income taxes, foreign taxes,
unincorporated business taxes, and estate, inheritance or intangible taxes that
may be imposed by the various jurisdictions in which Kinder Morgan Energy
Partners, L.P. does business or owns property or in which a common unitholder is
a resident. Although an analysis of those various taxes is not presented here,
each prospective common unitholder should consider their potential impact on an
investment in Kinder Morgan Energy Partners, L.P. Kinder Morgan Energy Partners,
L.P. currently owns property or is doing business in Canada and in various
states including Arizona, California, Colorado, Delaware, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Missouri, Nebraska, Nevada, New
Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia
and Wyoming. A common unitholder will likely be required to file Canadian
federal income tax returns and to pay Canadian federal and provincial income
taxes and to file state income tax returns and to pay taxes in many of these
states and may be subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax benefit in the
year incurred and also may not be available to offset income in subsequent
taxable years. Some states may require Kinder Morgan Energy Partners, L.P., or
it may elect, to withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular unitholder's income tax liability
to the state, generally does not relieve a nonresident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by Kinder Morgan Energy Partners, L.P. Based on current law and Kinder Morgan
Energy Partners, L.P.'s estimate of its future operations, the general partner
anticipates that any amounts required to be withheld will not be material.
Kinder Morgan Energy Partners, L.P. may also own property or do business in
other states in the future.
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It is the responsibility of each common unitholder to investigate the legal
and tax consequences, under the laws of pertinent states, localities and foreign
jurisdictions, of an investment in Kinder Morgan Energy Partners, L.P.
Accordingly, each prospective common unitholder should consult, and must depend
upon, that unitholder's own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each common unitholder to file all
foreign, state and local, as well as United States federal tax returns, that may
be required of the unitholder. Counsel has not rendered an opinion on the
foreign, state or local tax consequences of an investment in Kinder Morgan
Energy Partners, L.P.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended, commonly known as
"ERISA", and the prohibited transaction provisions of section 4975 of the
Internal Revenue Code that may be relevant to a prospective purchaser of shares.
The discussion does not purport to deal with all aspects of ERISA or section
4975 of the Internal Revenue Code that may be relevant to particular
shareholders in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Internal
Revenue Code, existing and currently proposed regulations under ERISA and the
Internal Revenue Code, the legislative history of ERISA and the Internal Revenue
Code, existing administrative rulings of the Department of Labor ("DOL") and
reported judicial decisions. No assurance can be given that legislative,
judicial, or administrative changes will not affect the accuracy of any
statements herein with respect to transactions entered into or contemplated
prior to the effective date of such changes.
A FIDUCIARY MAKING A DECISION TO INVEST IN THE SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE INTERNAL
REVENUE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, SALE OR
EXCHANGE OF THE shareS BY SUCH PLAN OR IRA.
Each fiduciary of a pension, profit-sharing, or other employee benefit
plan, known as an "ERISA Plan", subject to Title I of ERISA should consider
carefully whether an investment in the shares is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require an ERISA Plan's investments to be (1) prudent and
in the best interests of the ERISA Plan, its participants, and its
beneficiaries, (2) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to do so, and (3) authorized under the terms of
the ERISA Plan's governing documents (provided the documents are consistent with
ERISA). In determining whether an investment in the shares is prudent for
purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider
all of the facts and circumstances, including whether the investment is
reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the ERISA Plan's portfolio.
The fiduciary of an individual retirement account, commonly called an
"IRA", or of a qualified retirement plan not subject to Title I of ERISA because
it is a governmental or church plan or because it does not cover common law
employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA
Plan may only make investments that are authorized by the appropriate governing
documents and under applicable state law.
Fiduciaries of ERISA Plans and persons making the investment decision for
an IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of
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ERISA and the Internal Revenue Code in making their investment decision. A
"party in interest" or "disqualified person" with respect to an ERISA Plan or
with respect to a Non-ERISA Plan or IRA subject to Internal Revenue Code section
4975 is subject to (1) an initial 15% excise tax on the amount involved in any
prohibited transaction involving the assets of the plan or IRA and (2) an excise
tax equal to 100% of the amount involved if any prohibited transaction is not
corrected. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA
will lose its tax-exempt status and its assets will be deemed to have been
distributed to such individual in a taxable distribution (and no excise tax will
be imposed) on account of the prohibited transaction. In addition, a fiduciary
who permits an ERISA Plan to engage in a transaction that the fiduciary knows or
should know is a prohibited transaction may be liable to the ERISA Plan for any
loss the ERISA Plan incurs as a result of the transaction or for any profits
earned by the fiduciary in the transaction.
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Internal Revenue Code apply to an entity
because one or more investors in the equity interests in the entity is an ERISA
Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Internal
Revenue Code. An ERISA Plan fiduciary also should consider the relevance of
those principles to ERISA's prohibition on improper delegation of control over
or responsibility for "plan assets" and ERISA's imposition of co-fiduciary
liability who participates in, permits (by action or inaction) the occurrence
of, or fails to remedy a known breach by another fiduciary.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when an ERISA Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the ERISA or
Non-ERISA Plan's or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act, provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred. The Plan Asset
Regulations provide that a security is "widely held" only if it is part of a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The Plan
Asset Regulations provide that whether a security is "freely transferable" is a
factual question to be determined on the basis of all relevant facts and
circumstances.
It is anticipated that the shares will meet the criteria of publicly
offered securities under the Plan Asset Regulations. The Underwriters expect
(although no assurance can be given) that the shares will be held beneficially
by more than 100 independent persons by the conclusion of the offering; there
are no restrictions imposed on the transfer of shares; and the shares will be
sold as part of an offering pursuant to an effective registration statement
under the Securities Act of 1933, and thus will be timely registered under the
Securities Exchange Act of 1934.
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UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co. is the
representative of the underwriters.
Number of
Underwriters shares
------------ ---------
Goldman, Sachs & Co. .......................................
---------
Total............................................. 8,500,000
=========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,275,000 shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
No Exercise Full Exercise
----------- -------------
Per Share................................................... $ $
Total....................................................... $ $
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., Kinder Morgan
Management, LLC and its directors, executive officers and sole member have
agreed with the underwriters not to, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of or hedge any securities of Kinder
Morgan Energy Partners, L.P. or Kinder Morgan Management, LLC that are
substantially similar to the shares, i-units or common units including but not
limited to any securities that are convertible into or exchangeable for, or that
represent the right to receive, shares, i-units or common units or any such
substantially similar securities (other than (A) the sale of i-units by Kinder
Morgan Energy Partners, L.P. to Kinder Morgan Management, LLC and subsequent
quarterly distributions of i-units and shares as contemplated by the prospectus,
(B) in connection with the acquisition of assets (other than cash), businesses
or the capital stock or other ownership interests of businesses by any of Kinder
Morgan, Inc., Kinder Morgan Energy Partners, L.P., or any subsidiary of Kinder
Morgan, Inc. owning common units or Class B units on the date of this
prospectus, or any operating subsidiary of Kinder Morgan Energy Partners, L.P.
owning common units or Class B units on the date of this prospectus, if the
recipient(s) of such securities agree(s) not to offer, sell, contract to sell,
or otherwise dispose of during such lock-up period any such securities received
in connection with such acquisition(s) and
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(C) pursuant to employee stock or unit option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding as
of, the date of this prospectus) without prior written consent of Goldman, Sachs
& Co., it being expressly agreed that the foregoing restriction shall preclude
Kinder Morgan, Inc., Kinder Morgan Energy Partners, L.P., Kinder Morgan
Management, LLC and its directors, executive officers and sole member from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a sale or disposition of shares, i-units or
common units, or even if such shares, i-units or common units would be disposed
of by someone other than Kinder Morgan, Inc., Kinder Morgan Energy Partners,
L.P., Kinder Morgan Management, LLC or its directors, officers or sole member,
including, without limitation, any short sale or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any of the shares, i-units or common units or with respect to any security
that includes, relates to, or derives any significant part of its value from
such shares, i-units or common units during the periods described in the next
two sentences. With respect to shares and i-units and securities of such issuers
that are substantially similar thereto as described above, but specifically
excluding common units, such period shall be from the date of this prospectus
and continuing through the date 180 days after the date of this prospectus. With
respect to common units and securities of such issuers that are substantially
similar thereto as described above, such period shall be from the date of this
prospectus and continuing through the date 60 days after the date of this
prospectus.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Kinder Morgan Management,
LLC and the representative. Among the factors to be considered in determining
the initial public offering price of the shares, in addition to prevailing
market conditions and the recent market price of the common units, will be
Kinder Morgan Energy Partners, L.P.s' historical performance, estimates of the
business potential and earnings prospects of Kinder Morgan Management, LLC and
Kinder Morgan Energy Partners, L.P., an assessment of Kinder Morgan Management,
LLC's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
The shares will be listed on the under the symbol
" ."
In connection with the offering, the underwriters may purchase and sell
shares and common units in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Shorts sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of shares or common units
made by the underwriters in the open market prior to the completion of the
offering.
The underwriters may also 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 representative has repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
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Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
shares or the common units, and together with the imposition of the penalty bid,
may stabilize, maintain or otherwise affect the market price of the shares or
the common units. As a result, the price of the shares or the common units may
be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued at any time. These
transactions may be effected on the in the over-the-counter
market or otherwise.
Because the National Association for Securities Dealers, Inc. views the
common units offered pursuant to the exchange feature as interests in a direct
participation program, the offering is being made in compliance with Rule 2810
of the NASD's Conduct Rules. Accordingly, the representative of the underwriters
has informed Kinder Morgan Management, LLC and its affiliates that the
underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority without the prior written approval of the transaction by
the customer. Investor suitability with respect to the common units should be
judged similarly to the suitability with respect to other securities that are
listed for trading on a national securities exchange. The underwriters do not
expect sales to discretionary accounts to exceed five percent of the total
number of shares offered.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
Each of Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P.
and Kinder Morgan, Inc. has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
Some of the underwriters have from time to time performed various
investment banking and financial advisory services, participated in the
underwriting of debt and equity securities offerings and served as lender or
agent under credit facilities for Kinder Morgan Energy Partners, L.P., Kinder
Morgan, Inc. and their affiliates for which they have received customary fees
and reimbursement of their out of pocket expenses. The underwriters may, from
time to time in the future, engage in transactions with and perform services for
Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P., Kinder
Morgan, Inc. and their affiliates in the ordinary course of business.
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LEGAL MATTERS
The validity of the shares offered by this prospectus will be passed upon
for us by Bracewell & Patterson, L.L.P., Houston, Texas. Various legal matters
relating to the offering will be passed upon for the underwriters by Vinson &
Elkins L.L.P.
EXPERTS
The financial statement as of February 16, 2001 of Kinder Morgan
Management, LLC included in this prospectus, has been so included 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 Kinder Morgan Energy Partners, L.P. as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000 incorporated in this prospectus by reference to its Current
Report on Form 8-K filed February 20, 2001 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 Kinder Morgan, Inc. as of December 31, 2000 and
1999 and for the years then ended incorporated in this prospectus by reference
to its Current Report on Form 8-K filed February 20, 2001 have been so
incorporated in reliance on the report (which contains an explanatory paragraph
relating to the adjustments described in Note 2 that were applied to restate the
1998 financial statements) of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
In addition, (1) the balance sheet of Kinder Morgan G.P., Inc. as of
December 31, 2000 which appears in Kinder Morgan Energy Partners, L.P.'s Current
Report on Form 8-K filed February 20, 2001; (2) the statements of income, cash
flows and changes in member's equity of Kinder Morgan Interstate Gas
Transmission LLC for the year ended December 31, 1999 which appear in the Form
8-K/A dated March 28, 2000; and (3) the statements of income, cash flows and
changes in partners' equity of Trailblazer Pipeline Company for the year ended
December 31, 1999 which appear in the Form 8-K/A dated March 28, 2000
incorporated in this prospectus and registration statement by reference 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 Kinder Morgan, Inc. for the year ended December
31, 1998 (prior to the restatement of the 1998 financial statements described in
Note 2) included in Kinder Morgan, Inc.'s Form 8-K filed on February 20, 2001,
incorporated by reference in this prospectus and registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of Red Cedar Gathering Company as of and for the
years ended December 31, 1999 and 1998 included in Kinder Morgan Energy
Partners, L.P.'s Form 8-K/A filed on March 28, 2000, incorporated by reference
in this prospectus and registration statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
March 24, 2000, with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
The combined financial statements of GATX Terminals Companies as of and for
the year ended December 31, 2000, included in the Kinder Morgan Energy Partners,
L.P. Current Report on Form 8-K filed on February 20, 2001, and incorporated by
reference in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their report
thereon also incorporated herein by reference. Such combined
107
110
financial statements have been incorporated herein by reference in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Kinder Morgan Management, LLC has filed on Form S-1, and Kinder Morgan
Energy Partners, L.P. and Kinder Morgan, Inc. have filed on Form S-3, a
registration statement with the Securities and Exchange Commission under the
Securities Act of 1933 with respect to the securities offered in this offering.
This prospectus, which is a part of the registration statement, does not contain
all of the information set forth in the registration statement, or the exhibits
which are part of the registration statement, parts of which are omitted as
permitted by the rules and regulations of the Securities and Exchange
Commission. For further information about Kinder Morgan Management, LLC, Kinder
Morgan Energy Partners, L.P. and Kinder Morgan, Inc. and about the securities to
be sold in this offering, please refer to the registration statement and the
exhibits which are part of the registration statement. Statements contained in
this prospectus as to the contents of any contract or any other document are not
necessarily complete. Each statement in this prospectus regarding the contents
of the referenced contract or other document is qualified in all respects by our
reference to the copy filed with the registration statement.
Upon completion of this offering, Kinder Morgan Management, LLC will become
subject to the information and periodic reporting requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, will file periodic reports,
proxy and information statements and other information with the Commission.
Kinder Morgan Management, LLC's periodic reports, proxy and information
statements and other information will be available for inspection and copying at
the regional offices, public references facilities and web site of the
Securities and Exchange Commission referred to below.
We intend to furnish our shareholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. file annual,
quarterly and other reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC"). Their current SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document they file at the
SEC's public reference rooms located at:
450 Fifth Street, N.W.
Washington, D.C. 20549
Seven World Trade Center
New York, New York 10048; and
Northwest Atrium Center
500 West Madison Street
Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges.
Because Kinder Morgan Energy Partners, L.P.'s common units and Kinder
Morgan, Inc.'s common stock are listed on the New York Stock Exchange, Kinder
Morgan Energy Partners, L.P.'s and Kinder Morgan, Inc.'s reports, proxy
statements and other information can be reviewed and copied at the office of
that exchange at 20 Broad Street, New York, New York 10005.
108
111
The SEC allows Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc.
to "incorporate by reference" the information they file with them, which means
that Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus,
and information that Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc.
file later with the SEC will automatically update and supersede this
information. Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc.
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 until the termination of the offering:
KINDER MORGAN ENERGY PARTNERS, L.P.
SEC FILINGS (FILE NO. 1-11234) PERIOD
----------------------------------- ------
Annual Report on Form 10-K Year ended December 31, 1999
Quarterly Report Quarter ended March 31, 2000
Quarterly Report Quarter ended June 30, 2000
Quarterly Report Quarter ended September 30, 2000
Current Report on Form 8-K/A Filed March 28, 2000
Current Report on Form 8-K Filed March 31, 2000
Current Report on Form 8-K/A Filed April 3, 2000
Current Report on Form 8-K Filed June 28, 2000
Current Report on Form 8-K/A Filed December 1, 2000
Current Report on Form 8-K Filed December 7, 2000
Current Report on Form 8-K Filed February 20, 2001
Registration Statement on Form 8-A, as Filed July 2, 1992
thereafter amended
KINDER MORGAN, INC. SEC FILINGS
(FILE NO. 1-06446) PERIOD
------------------------------- ------
Annual Report on Form 10-K/A Filed on May 23, 2000
Annual Report on Form 10-K Year Ended December 31, 1999
Quarterly Report Quarter ended March 31, 2000
Quarterly Report Quarter ended June 30, 2000
Quarterly Report Quarter ended September 30, 2000
Current Report on Form 8-K Filed on April 20, 2000
Current Report on Form 8-K Filed on February 23, 2000
Current Report on Form 8-K/A Filed on February 7, 2000
Current Report on Form 8-K Filed on February 4, 2000
Current Report on Form 8-K Filed on January 14, 2000
Current Report on Form 8-K Filed February 20, 2001
Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc., respectively,
will provide a copy of any document incorporated by reference in this prospectus
and any exhibit specifically incorporated by reference in those documents at no
cost by request directed to them at the following address and telephone number:
Kinder Morgan Energy Partners, L.P.
Kinder Morgan, Inc.
Investor Relations Department
One Allen Center, Suite 1000
500 Dallas Street
Houston, Texas 77002
(713) 369-9000
The information concerning Kinder Morgan Energy Partners, L.P. contained or
incorporated by reference in this document has been provided by Kinder Morgan
Energy Partners, L.P., and the information concerning Kinder Morgan, Inc.
contained or incorporated by reference in this document has been provided by
Kinder Morgan, Inc.
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112
You should rely only on the information contained or incorporated by
reference in this prospectus to purchase the securities offered by this
prospectus. Kinder Morgan Management, LLC, Kinder Morgan Energy Partners, L.P.
and Kinder Morgan, Inc. have not authorized anyone to provide you with
information that is different from what is contained in this prospectus. You
should not assume that the information contained in this prospectus is accurate
as of any date other than the date on the cover, and the mailing of the
prospectus to shareholders shall not create any implication to the contrary.
110
113
INDEX TO FINANCIAL STATEMENT
KINDER MORGAN MANAGEMENT, LLC
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Notes to Balance Sheet...................................... F-4
F-1
114
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Member of
Kinder Morgan Management, LLC:
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Kinder Morgan Management, LLC at February
16, 2001 in conformity with accounting principles generally accepted in the
United States of America. This financial statement is the responsibility of the
company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
February 16, 2001
F-2
115
KINDER MORGAN MANAGEMENT, LLC
BALANCE SHEET
FEBRUARY 16, 2001
ASSETS
Cash........................................................ $100,000
--------
Total Assets...................................... $100,000
========
EQUITY
Voting share; unlimited shares authorized; 1 share issued
and outstanding........................................... $100,000
Nonvoting shares; unlimited shares authorized; no shares
issued.................................................... --
--------
Total Equity...................................... $100,000
========
The accompanying Notes are an integral part of this statement.
F-3
116
KINDER MORGAN MANAGEMENT, LLC
NOTES TO BALANCE SHEET
1. FORMATION AND OWNERSHIP
Kinder Morgan Management, LLC is a Delaware limited liability company
formed on February 16, 2001 under the Delaware Limited Liability Company Act.
Kinder Morgan G.P., Inc., a wholly owned subsidiary of Kinder Morgan, Inc. (a
major energy company traded on the New York Stock Exchange under the ticker
symbol "KMI"), owns all of Kinder Morgan Management, LLC's voting securities and
is its sole managing member.
2. CAPITALIZATION
Kinder Morgan Management, LLC's authorized capital structure consists of
two classes of membership interests: (1) nonvoting equity interests and (2)
voting equity interests. Additional equity interests may be approved by the
board and the vote of the holders of a majority of the outstanding shares of
nonvoting equity interests. As of February 16, 2001, the issued capitalization
consists of $100,000 contributed by Kinder Morgan, G.P., Inc. for its voting
equity interest.
We expect to issue shares of nonvoting equity interests for cash to the
public as discussed in Note 3, using substantially all of the proceeds to
purchase a number of i-units from Kinder Morgan Energy Partners, L.P. (the
nation's largest publicly-traded pipeline limited partnership, traded on the New
York Stock Exchange under the ticker symbol "KMP") equal to the number of shares
we have outstanding. These i-units are similar to Kinder Morgan Energy Partners,
L.P. common limited partner units, except that quarterly distributions from
operations and from interim capital transactions will be received in additional
i-units rather than cash. Each time Kinder Morgan Energy Partners, L.P. issues
i-units to us, we will also distribute an equal number of shares to holders of
our shares. The number of i-units and shares will remain equal.
3. BUSINESS
Kinder Morgan Management, LLC proposes to file a registration statement
with respect to an initial public offering of shares.
After the public offering, we will be a partner in Kinder Morgan Energy
Partners, L.P. and we will manage and control its business and affairs. We will
own all of the i-units issued by Kinder Morgan Energy Partners, L.P.
4. INCOME TAX
We are a limited liability company that will elect to be treated as a
corporation for federal income tax purposes.
F-4
117
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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. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................ 3
Risk Factors.............................. 18
Information Regarding Forward Looking
Statements.............................. 29
Use of Proceeds........................... 30
Our Policy Regarding Share
Distributions........................... 30
Kinder Morgan Energy Partners, L.P.'s
Distribution Policy..................... 30
Capitalization of Kinder Morgan
Management, LLC......................... 35
Capitalization of Kinder Morgan Energy
Partners, L.P........................... 36
Capitalization of Kinder Morgan, Inc...... 37
Selected Financial Data of Kinder Morgan
Energy Partners, L.P.................... 38
Selected Pro Forma Financial Data of
Kinder Morgan Energy Partners, L.P...... 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 42
Description of the Shares................. 56
Description of the i-units................ 66
Business.................................. 68
Management of Kinder Morgan Management,
LLC..................................... 74
Relationships and Related Party
Transactions............................ 78
Limited Liability Company Agreement....... 80
Description of Common Units............... 81
Shares Eligible for Future Sale........... 83
Federal Income Tax Considerations Relating
to the Shares and the Common Units...... 83
ERISA Considerations...................... 102
Underwriting.............................. 104
Legal Matters............................. 107
Experts................................... 107
Where You Can Find Additional
Information............................. 108
Index to Financial Statement.............. F-1
----------------------
Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
8,500,000 SHARES
KINDER MORGAN
MANAGEMENT, LLC
Representing Limited Liability
Company Interests
GOLDMAN, SACHS & CO.
Representative of the Underwriters
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (FORM S-1; ITEM 14 OF FORM
S-3).
Shown below are the expenses (other than underwriting discounts) expected
to be incurred by Kinder Morgan Management, LLC (the "Company") in connection
with the issuance and distribution of the securities being registered. Except as
otherwise indicated, all such amounts will be advanced to the Company by Kinder
Morgan G.P., Inc. and then paid by the Company. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
securities exchange listing fee, the amounts shown below are estimates:
Securities and Exchange Commission registration fee......... $146,625
NASD filing fee............................................. 30,500
Securities exchange listing fee............................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
--------
TOTAL............................................. $ *
========
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (FORM S-1; ITEM 15 OF FORM
S-3).
Kinder Morgan Management, LLC
The Company's limited liability company agreement provides that the Company
will indemnify the members of the board and the officers of the Company from
liabilities arising in the course of such persons' service to the Company,
provided that the indemnitee acted in good faith and in a manner which such
indemnitee believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, had no reasonable cause to believe
such indemnitee's conduct was unlawful. Such liabilities include all losses,
claims, damages, expenses (including, without limitation, legal fees and
expenses), judgments, fines, penalties, interests, settlements and other
amounts, provided that with respect to any criminal proceeding, the indemnitee
had no reasonable cause to believe its conduct was unlawful. The Company expects
to be included within the same coverage available to Kinder Morgan G.P., Inc.
for directors' and officers' liability insurance for potential liability under
such indemnification. The holders of shares will not be personally liable for
such indemnification.
KINDER MORGAN ENERGY PARTNERS, L.P.
The Partnership Agreement for Kinder Morgan Energy Partners, L.P. ("Kinder
Morgan Energy Partners, L.P.") provides that Kinder Morgan Energy Partners, L.P.
will indemnify any person who is or was an officer or director of Kinder Morgan
G.P., Inc. (the "KM General Partner") or any departing partner, to the fullest
extent permitted by law. In addition, Kinder Morgan Energy Partners, L.P. may
indemnify, to the extent deemed advisable by the KM General Partner and to the
fullest extent permitted by law, any person who is or was serving at the request
of the KM General Partner or any affiliate of the KM General Partner or any
departing partner as an officer or director of the KM General Partner, a
departing partner or any of their Affiliates (as defined in Kinder Morgan Energy
Partners, L.P. Partnership Agreement) ("Indemni-
II-1
119
tees") from and against any and all losses, claims, damages, liabilities (joint
or several), expenses (including, without limitation, legal fees and expenses),
judgement, fines, settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal, administrative
or investigative, in which any Indemnitee may be involved, or is threatened to
be involved, as a party or otherwise, by reason of its status as an officer or
director or a person serving at the request of Kinder Morgan Energy Partners,
L.P. in another entity in a similar capacity, provided that in each case the
Indemnitee acted in good faith and in a manner which such Indemnitee believed to
be in or not opposed to the best interests of Kinder Morgan Energy Partners,
L.P. and, with respect to any criminal proceeding, had no reasonable cause to
believe its conduct was unlawful. Any indemnification under these provisions
will be only out of the assets of Kinder Morgan Energy Partners, L.P. and the KM
General Partner shall not be personally liable for, or have any obligation to
contribute or loan funds or assets to Kinder Morgan Energy Partners, L.P. to
enable it to effectuate such indemnification. Kinder Morgan Energy Partners,
L.P. is authorized to purchase (or to reimburse the KM General Partner or its
affiliates for the cost of) insurance against liabilities asserted against and
expenses incurred by such person to indemnify such person against such
liabilities under the provisions described above.
Article XII(c) of the Certificate of Incorporation of the KM General
Partner (the "corporation" therein), contains the following provisions relating
to indemnification of directors and officers:
"(c) Each director and each officer of the corporation (and such
holder's heirs, executors and administrators) shall be indemnified by the
corporation against expenses reasonably incurred by him in connection with
any claim made against him or any action, suit or proceeding to which he
may be made a party, by reason of such holder being or having been a
director or officer of the corporation (whether or not he continues to be a
director or officer of the corporation at the time of incurring such
expenses), except in cases where the claim made against him shall be
admitted by him to be just, and except in cases where such action, suit or
proceeding shall be settled prior to the adjudication by payment of all or
a substantial part of the amount claimed, and except in cases in which he
shall be adjudged in such action, suit or proceeding to be liable or to
have been derelict in the performance of such holder's duty as such
director or officer. Such right of indemnification shall not be exclusive
of other rights to which he may be entitled as a matter of law."
Officers and directors of the KM General Partner who are also officers and
directors of Kinder Morgan, Inc. are entitled to similar indemnification from
Kinder Morgan, Inc. pursuant to Kinder Morgan, Inc.'s certificate of
incorporation and bylaws.
KINDER MORGAN, INC.
Section 17-6305 of the Kansas General Corporation Law provides that a
Kansas corporation shall have power to indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action or suit (including an action by or in the right of the
corporation to procure a judgment in its favor) or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit by or
in the right of the corporation, including attorney fees, and against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, including
attorney fees, if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation; and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such
II-2
120
person's conduct was unlawful. Article Ninth of Kinder Morgan, Inc.'s articles
of incorporation requires it to provide substantially the same indemnification
of its directors and officers as that authorized by Kansas General Corporation
Law.
Kinder Morgan, Inc. has insurance policies which, among other things,
include liability insurance coverage for directors and officers, with a $200,000
corporation reimbursement deductible clause, under which directors and officers
are covered against "loss" arising from any claim or claims which may be made
against a director or officer by reason of any "wrongful act" in their
respective capacities as directors and officers. "Loss" is defined so as to
exclude, among other things, fines or penalties, as well as matters deemed
uninsurable under the law pursuant to which the policy is to be construed.
"Wrongful act" is defined to include any actual or alleged breach of duty,
neglect, error, misstatement, misleading statement or omission done or
wrongfully attempted. The policy also contains other specific definitions and
exclusions and provides an aggregate of more than $20,000,000 of insurance
coverage.
Kinder Morgan Management, LLC, KINDER MORGAN ENERGY PARTNERS, L.P., AND KINDER
MORGAN, INC.
The Form of Underwriting Agreement filed herewith as Exhibit 1.1, under
certain circumstances, provides for indemnification by the Underwriters of the
directors, officers and controlling persons of the Company, Kinder Morgan Energy
Partners, L.P. and Kinder Morgan, Inc.
Each of the Company, Kinder Morgan Energy Partners, L.P., and Kinder
Morgan, Inc. has purchased liability insurance policies covering the members or
directors, as the case may be, and officers of each of the respective entities,
including, to provide protection where the entity cannot legally indemnify a
director or officer and where a claim arises under the Employee Retirement
Income Security Act of 1974 against a director or officer based on an alleged
breach of fiduciary duty or other wrongful act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (FORM S-1 ONLY).
All of the Company's voting shares were sold to Kinder Morgan G.P., Inc.
All of such sales were completed without registration under the Securities
Act in reliance upon the exemption provided by Section 4(2) of the Securities
Act.
ITEM 16. EXHIBITS (BOTH FORMS S-1 AND S-3) AND FINANCIAL STATEMENT SCHEDULES
(FORM S-1 ONLY).
(a) Exhibits:
To be filed by amendment unless otherwise indicated.
1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation of the Company.
3.2 Limited Liability Company Agreement of the Company.
4.1 Form of certificate representing shares of the Company.
4.2 Form of certificate representing the common units of Kinder
Morgan Energy Partners, L.P. (filed as Exhibit 4 to Kinder
Morgan Energy Partners, L.P.'s Registration Statement on
Form S-1 (File No. 33-48142) and incorporated by reference).
4.3 Form of certificate representing the i-units of Kinder
Morgan Energy Partners, L.P.
4.4 Purchase Agreement between the Company and Kinder Morgan,
Inc.
4.5 Exchange Agreement between the Company and Kinder Morgan,
Inc.
4.6 Registration Rights Agreement between Kinder Morgan Energy
Partners, L.P. and Kinder Morgan, Inc.
5 Opinion of Bracewell & Patterson, L.L.P. as to the legality
of the securities being offered.
8 Opinion of Bracewell & Patterson, L.L.P. as to certain
federal income tax matters.
II-3
121
10.1 Tax Indemnity Agreement between the Company and Kinder
Morgan, Inc.
10.2 Management Services Agreement between Kinder Morgan
Management, LLC and Kinder Morgan G.P., Inc.
23.1 Consent of Bracewell & Patterson, L.L.P. (included in their
opinions filed as Exhibits 5 and 8).
23.2* Consent of PricewaterhouseCoopers LLP.
23.3* Consent of PricewaterhouseCoopers LLP.
23.4* Consent of PricewaterhouseCoopers LLP.
23.5* Consent of Arthur Andersen LLP.
23.6* Consent of Arthur Andersen LLP.
23.7* Consent of Ernst & Young LLP.
24.1* Powers of Attorney with respect to the Company.
24.2* Powers of Attorney with respect to Kinder Morgan Energy
Partners, L.P.
24.3* Powers of Attorney with respect to Kinder Morgan, Inc.
---------------
* Filed herewith.
(b) Financial Statement Schedules of Kinder Morgan Management, LLC.
All financial statement schedules are omitted because the information is
not required, is inapplicable, is not material or is otherwise included in the
financial statements or related notes thereto.
ITEM 17. UNDERTAKINGS (BOTH FORMS S-1 AND S-3).
Kinder Morgan Management, LLC
(a) Kinder Morgan Management, LLC hereby undertakes to provide at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Kinder
Morgan Management, LLC under the foregoing provisions, or otherwise, Kinder
Morgan Management, LLC has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Kinder Morgan Management, LLC in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, Kinder Morgan
Management, LLC will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) Kinder Morgan Management, LLC hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Kinder Morgan Management, LLC under Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
122
KINDER MORGAN ENERGY PARTNERS, L.P. AND KINDER MORGAN, INC.
(a) Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. each hereby
undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. each hereby
undertakes that, for purposes of determining any liability under the Securities
Act of 1933, each filing of their respective annual reports pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of each of
Kinder Morgan Energy Partners, L.P. and Kinder Morgan, Inc. pursuant to the
foregoing or otherwise, each company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the respective company of expenses incurred or paid by a director,
officer or controlling person of the respective company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
respective company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
as duly caused this Registration Statement on Form S-3 or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas on February 16, 2001.
KINDER MORGAN ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
By: Kinder Morgan G.P., Inc. as
General Partner
By: /s/ JOSEPH LISTENGART
----------------------------------
Joseph Listengart
Vice President, General Counsel
and Secretary
------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 or amendment thereto has been signed below by
the following persons in the indicated capacities on February 16, 2001:
SIGNATURE TITLE
--------- -----
/s/ RICHARD D. KINDER Director, Chairman of the Board and Chief
--------------------------------------------------- Executive Officer of Kinder Morgan G.P., Inc.
Richard D. Kinder (Principal Executive Officer)
/s/ WILLIAM V. MORGAN* Director, Vice Chairman of the Board and
--------------------------------------------------- President of Kinder Morgan G.P., Inc.
William V. Morgan
/s/ GARY L. HULTQUIST* Director of Kinder Morgan G.P., Inc.
---------------------------------------------------
Gary L. Hultquist
/s/ PERRY M. WAUGHTAL* Director of Kinder Morgan G.P., Inc.
---------------------------------------------------
Perry M. Waughtal
/s/ C. PARK SHAPER Vice President, Treasurer and Chief Financial
--------------------------------------------------- Officer of Kinder Morgan G.P., Inc. (Principal
C. Park Shaper Financial Officer and Principal Accounting
Officer)
(Constituting a majority of the
Board of Directors)
*By: /s/ JOSEPH LISTENGART
---------------------------------------------
Joseph Listengart
Attorney-in-fact for persons indicated
II-6
124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-3 or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas on February 16, 2001.
KINDER MORGAN, INC.
By: /s/ JOSEPH LISTENGART
------------------------------------
Joseph Listengart
Vice President, General Counsel
and Secretary
------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 or amendment thereto has been signed below by
the following persons in the indicated capacities on February 16, 2001:
SIGNATURE TITLE
--------- -----
/s/ EDWARD H. AUSTIN, JR.* Director
---------------------------------------------------
Edward H. Austin, Jr.
/s/ STEWART A. BLISS* Director
---------------------------------------------------
Stewart A. Bliss
/s/ RICHARD D. KINDER Director, Chairman and Chief Executive Officer
--------------------------------------------------- (Principal Executive Officer)
Richard D. Kinder
/s/ WILLIAM V. MORGAN Director, Vice Chairman and President
---------------------------------------------------
William V. Morgan
/s/ EDWARD RANDALL, III* Director
---------------------------------------------------
Edward Randall, III
/s/ C. PARK SHAPER Vice President and Chief Financial Officer
--------------------------------------------------- (Principal Financial and Accounting Officer)
C. Park Shaper
/s/ H. A. TRUE, III* Director
---------------------------------------------------
H. A. True, III
(Constituting a majority of the
Board of Directors)
* By: /s/ JOSEPH LISTENGART
--------------------------------------------
Joseph Listengart
Attorney-in-fact for persons indicated
II-7
125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas on February 16, 2001.
Kinder Morgan Management, LLC
By: /s/ JOSEPH LISTENGART
------------------------------------
Joseph Listengart
Vice President, General Counsel
and Secretary
------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 or amendment thereto has been signed below by
the following persons in the indicated capacities on February 16, 2001:
SIGNATURE TITLE
--------- -----
/s/ RICHARD D. KINDER Director, Chairman and Chief Executive Officer
--------------------------------------------------- (Principal Executive Officer)
Richard D. Kinder
/s/ WILLIAM V. MORGAN* Director, Vice Chairman of the Board and
--------------------------------------------------- President
William V. Morgan
/s/ GARY L. HULTQUIST* Director
---------------------------------------------------
Gary L. Hultquist*
/s/ PERRY M. WAUGHTAL* Director
---------------------------------------------------
Perry M. Waughtal*
/s/ C. PARK SHAPER Vice President, Treasurer and Chief Financial
--------------------------------------------------- Officer
C. Park Shaper
Kinder Morgan, Inc. Director
By: /s/ C. PARK SHAPER
---------------------------------------------
C. Park Shaper
Vice President and
Chief Financial Officer
(Constituting a majority of the
Board of Directors)
*By: /s/ JOSEPH LISTENGART
---------------------------------------------
Joseph Listengart
Attorney-in-fact for persons indicated
II-8
126
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation of the Company.
3.2 Limited Liability Company Agreement of the Company.
4.1 Form of certificate representing shares of the Company.
4.2 Form of certificate representing the common units of Kinder
Morgan Energy Partners, L.P. (filed as Exhibit 4 to Kinder
Morgan Energy Partners, L.P.'s Registration Statement on
Form S-1 (File No. 33-48142) and incorporated by reference).
4.3 Form of certificate representing the i-units of Kinder
Morgan Energy Partners, L.P.
4.4 Purchase Agreement between the Company and Kinder Morgan,
Inc.
4.5 Exchange Agreement between the Company and Kinder Morgan,
Inc.
4.6 Registration Rights Agreement between Kinder Morgan Energy
Partners, L.P. and Kinder Morgan, Inc.
5 Opinion of Bracewell & Patterson, L.L.P. as to the legality
of the securities being offered.
8 Opinion of Bracewell & Patterson, L.L.P. as to certain
federal income tax matters.
10.1 Tax Indemnity Agreement between the Company and Kinder
Morgan, Inc.
10.2 Management Services Agreement between Kinder Morgan
Management, LLC and Kinder Morgan G.P., Inc.
23.1 Consent of Bracewell & Patterson, L.L.P. (included in their
opinions filed as Exhibits 5 and 8).
23.2* Consent of PricewaterhouseCoopers LLP.
23.3* Consent of PricewaterhouseCoopers LLP.
23.4* Consent of PricewaterhouseCoopers LLP.
23.5* Consent of Arthur Andersen LLP.
23.6* Consent of Arthur Andersen LLP.
23.7* Consent of Ernst & Young LLP.
24.1* Powers of Attorney with respect to the Company.
24.2* Powers of Attorney with respect to Kinder Morgan Energy
Partners, L.P.
24.3* Powers of Attorney with respect to Kinder Morgan, Inc.
---------------
* Filed herewith.