-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Na0vvIIQr5utcUvVchzqOURh8g7cAOpSY9awfY49fR7ie7VwBhdNbykK4AS1Odtj p1rErB4ERvdxHgmYmkwfiw== 0001014108-98-000101.txt : 19981116 0001014108-98-000101.hdr.sgml : 19981116 ACCESSION NUMBER: 0001014108-98-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN ENERGY PARTNERS L P CENTRAL INDEX KEY: 0000888228 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 760380342 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11234 FILM NUMBER: 98746028 BUSINESS ADDRESS: STREET 1: 1301 MCKINNEY ST STREET 2: STE 3450 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7138449500 MAIL ADDRESS: STREET 1: C/O MORRISON & HECKER LLP STREET 2: 2600 GRAND AVENUE CITY: KANSAS CITY STATE: MO ZIP: 64108 FORMER COMPANY: FORMER CONFORMED NAME: ENRON LIQUIDS PIPELINE L P DATE OF NAME CHANGE: 19970304 10-Q 1 1998 THIRD QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 Commission File Number 1-11234 KINDER MORGAN ENERGY PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 76-0380342 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1301 McKinney St. Suite 3450 Houston, Texas 77010 ------------------------------- ------------------------------- (Address of principal executive (Zip Code) Offices) (713) 844-9500 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The Registrant had 48,851,690 Common Units outstanding at November 11, 1998. Page 1 of 26 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ITEM 1. - Financial Statements (Unaudited) Consolidated Statement of Income - Three Months and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheet - September 30, 1998 and December 31, 1997 4 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 ITEM 3. - Quantitative and Qualitative Disclosures about Market Risk 25 PART II. OTHER INFORMATION ITEM 1. - Legal Proceedings 26 ITEM 2. - Changes in Securities 26 ITEM 5. - Other Information 26 ITEM 6. - Exhibits and Reports on Form 8-K 26 Page 2 of 26 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands Except Per Unit Amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 -------------- ------------- -------------- ------------- Revenues $ 101,900 $ 17,385 $ 220,685 $ 52,553 Costs and Expenses Cost of products sold 2,756 1,589 5,482 5,307 Operations and maintenance 24,959 3,726 43,781 10,803 Fuel and power 6,537 1,030 15,778 3,756 Depreciation and amortization 11,050 2,657 25,440 7,797 General and administrative 11,788 2,310 25,946 6,564 Taxes, other than income taxes 3,187 758 8,173 2,284 ------------ ------------- -------------- ------------- 60,277 12,070 124,600 36,511 ------------ ------------- -------------- ------------- Operating Income 41,623 5,315 96,085 16,042 Other Income (Expense) Earnings from equity investments 5,810 1,729 16,417 4,184 Interest, net (9,613) (2,899) (27,386) (9,174) Other, net (2,089) (11) (4,631) 6 Minority Interest (447) (37) (924) (101) ------------ ------------- -------------- ------------- Income Bef. Income Taxes and Extraordinary charge 35,284 4,097 79,561 10,957 Income Tax Expense 168 343 168 909 ------------ ------------- -------------- ------------- Income Before Extraordinary charge 35,116 3,754 79,393 10,048 Extraord. charge on early extinguishment of debt - - (13,611) - ============ ============= ============== ============= Net Income $ 35,116 $ 3,754 $ 65,782 $ 10,048 ============ ============= ============== ============= Calculation of Limited Partners' Interest in Net Income: Income Before Extraordinary Charge $ 35,116 $ 3,754 $ 79,393 $ 10,048 Less: General Partner's interest in Net Income (10,031) (1,072) (22,458) (2,115) ------------ ------------- -------------- ------------- Limited Partners' Net Income bef. extraord. charge 25,085 2,682 56,935 7,933 Less: Extraord. charge on early exting. of debt - - (13,611) - ============ ============= ============== ============= Limited Partners' Net Income $ 25,085 $ 2,682 $ 43,324 $ 7,933 ============ ============= ============== ============= Net Income per Unit before extraordinary charge $ 0.52 $ 0.20 $ 1.53 $ 0.60 ============ ============= ============== ============= Net Income per Unit $ 0.52 $ 0.20 $ 1.17 $ 0.60 ============ ============= ============== ============= Number of Units used in Computation 47,837 13,482 37,180 13,176 ============ ============= ============== ============= The accompanying notes are an integral part of these consolidated financial statements.
Page 3 of 26 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands)
(Unaudited) September 30, December 31, 1998 1997 ----------------- ----------------- ASSETS Current Assets Cash and cash equivalents $ 48,256 $ 9,612 Accounts receivable (net of allowance for doubtful accounts) 33,129 8,569 Inventories Products 2,372 1,901 Materials and supplies 2,570 1,710 ----------------- ----------------- 86,327 21,792 ----------------- ----------------- Property, Plant and Equipment, at cost 1,853,706 290,620 Less accumulated depreciation 62,558 45,653 ----------------- ----------------- 1,791,148 244,967 ----------------- ----------------- Equity Investments 237,721 31,711 ----------------- ----------------- Deferred Charges and Other Assets 19,208 14,436 ================= ================= TOTAL ASSETS $ 2,134,404 $ 312,906 ================= ================= LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Accounts payable $ 18,333 $ 4,930 Accrued liabilities 24,030 3,585 Accrued benefits 17,638 - Accrued taxes 6,171 2,861 ----------------- ----------------- 66,172 11,376 ----------------- ----------------- Long-Term Liabilities and Deferred Credits Long-term debt 564,563 146,824 Other 105,929 2,997 ----------------- ----------------- 670,492 149,821 ----------------- ----------------- Minority Interest 19,221 1,485 ----------------- ----------------- Partners' Capital Common Units 1,367,345 146,840 General Partner 11,174 3,384 ----------------- ----------------- 1,378,519 150,224 ----------------- ----------------- ================= ================= TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 2,134,404 $ 312,906 ================= ================= The accompanying notes are an integral part of these consolidated financial statements.
Page 4 of 26 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Unaudited)
Nine Months Ended September 30, 1998 1997 ---------------- ------------- Cash Flows From Operating Activities Reconciliation of net income to net cash provided by operating activities Net income $ 65,782 $ 10,048 Extraordinary charge on early extinguishment of debt 13,611 - Depreciation and amortization 25,440 7,797 Earnings from equity investments (16,417) (4,184) Distributions from equity investments 12,248 6,425 Changes in components of working capital, and Other, net 12,539 5,357 El Paso Settlement (8,000) - ---------------- ------------- Net Cash Provided by Operating Activities 105,203 25,443 ---------------- ------------- Cash Flows From Investing Activities Acquisitions of assets (74,706) (22,184) Additions to property, plant and equipment for expansion and maintenance projects (23,529) (4,378) Sale of property, plant and equipment 46 33 Contributions to equity investments (136,192) (1,900) ---------------- ------------- Net Cash Used in Investing Activities (234,381) (28,429) ---------------- ------------- Cash Flows From Financing Activities Issuance of debt 415,089 38,100 Payment of debt (375,235) (58,014) Increase in restricted cash - (5,167) Unit registration costs (289) - Cost of refinancing long-term debt (16,471) - Proceeds from issuance of common units 212,303 33,919 Contributions from General Partner's Minority Interest 12,488 - Distributions to partners Common Units (61,624) (14,712) General Partner (17,362) (1,163) Minority Interest (1,077) (162) Other, net - (661) ---------------- ------------- Net Cash Provided by (Used In) Financing Activities 167,822 (7,860) ---------------- ------------- Increase (Decrease) in Cash and Cash Equivalents 38,644 (10,846) Cash and Cash Equivalents, Beginning of Period 9,612 14,299 ================ ============= Cash and Cash Equivalents, End of Period $ 48,256 $ 3,453 ================ ============= Noncash Investing and Financing Activities Contribution of net assets to partnership investments $ 59,341 $ - Assets acquired by the issuance of Common Units $ 1,003,202 $ - Assets acquired by the assumption of liabilities $ 554,182 $ - The accompanying notes are an integral part of these consolidated financial statements.
Page 5 of 26 KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The unaudited consolidated financial statements included herein have been prepared by Kinder Morgan Energy Partners, L.P. (the "Partnership") pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Partnership believes, however, that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 ("Form 10-K"). The Limited Partners' Net Income per Unit was computed by dividing the Limited Partners' interest in Net Income before and after the extraordinary charge on early extinguishment of debt by the weighted average number of Common Units outstanding during the period. Certain reclassifications have been made to the consolidated financial statements for the prior year to conform with the current presentation. 2. Acquisitions and Joint Ventures Santa Fe Kinder Morgan Operating L.P. "D" ("OLP-D"), a Delaware limited partnership, acquired on March 6, 1998, 99.5% of SFPP, L.P. ("SFPP"), the operating partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"). The transaction was accounted for under the purchase method of accounting and was valued at more than $1.4 billion inclusive of liabilities assumed. The Partnership acquired the interest of Santa Fe's common unit holders in SFPP in exchange for approximately 26.6 million Common Units (1.39 Common Units of the Partnership for each Santa Fe common unit). The Partnership paid $84.4 million to Santa Fe Pacific Pipelines, Inc. (the "former SF General Partner") in exchange for the general partner interest in Santa Fe. The $84.4 million was borrowed under the Loan Facility (see Note 5). Also on March 6, 1998, SFPP redeemed from the former SF General Partner a .5% interest in SFPP for $5.8 million. The redemption was paid from SFPP's cash reserves. After the redemption, the former SF General Partner continues to own a .5% special limited partner interest in SFPP. Assets acquired in this transaction comprise the Partnership's Pacific Operations, which include over 3,300 miles of pipeline and thirteen owned and operated terminals. Shell CO2 Company On March 5, 1998, the Partnership and affiliates of Shell Oil Company ("Shell") agreed to combine their CO2 activities and assets into a partnership, Shell CO2 Company, Ltd.("Shell CO2 Company"), to be operated by a Shell affiliate. The Partnership acquired, through a newly created limited liability company, a 20% interest in Shell CO2 Company in exchange for contributing the Central Basin Pipeline and approximately $25 million in cash. The $25 million was borrowed under the Loan Facility (see Note 5). The Partnership accounts for its partnership interest in Shell CO2 Company under the equity method as part of the Mid-Continent Operations. Page 6 of 26 Hall-Buck Marine, Inc. On August 13, 1998, the Partnership announced that it had completed its acquisition of Hall-Buck Marine, Inc. ("Hall-Buck") for approximately $100 million. Hall-Buck, headquartered in Sorrento, Louisiana, is one of the nation's largest independent operators of dry bulk terminals, operating twenty terminals on the Mississippi River, the Ohio River, and the Pacific Coast. In addition, Hall-Buck owns all of the common stock of River Consulting Incorporated, a nationally recognized leader in the design and construction of bulk material facilities and port related structures. The $100 million of consideration consisted of approximately 2.1 million Common Units and assumed indebtedness of $23 million. After the acquisition, the Partnership changed the name of Hall-Buck Marine, Inc. to Kinder Morgan Bulk Terminals, Inc. and, going forward, included its activity as part of the Bulk Terminals business segment. Cardlock Fuel System, Inc. On August 26, 1998, the Partnership announced that it had signed a series of definitive agreements to form a joint venture with Cardlock Fuels System, Inc ("CFS"), an affiliate of Southern Counties Oil Co., for the purpose of constructing unattended, automated fueling stations adjacent to the Partnership's terminal facilities within its Pacific Operations. The Partnership will provide the terminal sites, and CFS will contribute its unattended, automated fueling station expertise including marketing and electronic transaction processing services. The joint venture will select at least three sites to commence activity on immediately. The joint venture has a target of up to ten sites within the next three years. Plantation Pipe Line Company On September 15, 1998, the Partnership announced that it had completed the acquisition of a 24% interest in Plantation Pipe Line Company for $110 million. Plantation Pipe Line Company owns and operates a 3,100 mile pipeline system throughout the southeastern United States which serves as a common carrier of refined petroleum products to various metropolitan areas, including Atlanta, Georgia; Charlotte, North Carolina; and the Washington, D.C. area. The Partnership will account for its investment in Plantation Pipe Line Company under the equity method of accounting and include its activity as part of the Mid-Continent Operations. Pro Forma Information The following summarized unaudited Pro Forma Consolidated Income Statement information for the nine months ended September 30, 1998 and 1997, assumes the Partnership's acquisition of SFPP and its interest in Shell CO2 Company had occurred as of January 1, 1997. The unaudited Pro Forma financial results have been prepared for comparative purposes only and may not be indicative of the results that would have occurred if the Partnership had acquired the assets of SFPP and its interest in Shell CO2 Company on the dates indicted or which will be attained in the future. Net Income for each of the Pro Forma periods does not include the annualized effects of all the cost saving measures the company has achieved since its acquisition of SFPP. Amounts presented below are in thousands, except for per Common Unit amounts: Pro Forma Nine Months Ended September 30, Income Statement 1998 1997 ---------------------- Revenues $259,932 $235,174 Operating Income $111,226 $94,637 Net Income before extraordinary charge $88,473 $59,708 Net Income $74,862 $59,708 Net Income per Common Unit before extraord. charge $1.46 $1.34 Net Income per Common Unit $1.14 $1.34 Page 7 of 26 3. Litigation FERC Proceedings Prior to the Partnership's acquisition of SFPP, several complaints had been filed with the Federal Energy Regulatory Commission (FERC) challenging SFPP's rates for the East Line, West Line, Sepulveda Line, and the Watson station. An initial decision by the FERC Administrative Law Judge was issued on September 25, 1997 (the "Initial Decision"). The Initial Decision upheld SFPP's position that "changed circumstances" were not shown to exist on the West Line, thereby retaining the just and reasonable status of all West Line rates that were "grandfathered" under the Energy Policy Act of 1992. In addition, the Initial Decision determined that SFPP's East Line rates were not grandfathered under the Energy Policy Act and also included rulings that were generally adverse to SFPP regarding certain cost of service issues. If the Initial Decision is affirmed in current form by the FERC, the Partnership estimates that the total reparations and interest that would be payable approximate the reserves that have been recorded as of September 30, 1998. The Partnership also estimates that the Initial Decision, in its current form, and if also applied to the Sepulveda Line and the Watson station rates, would reduce prospective revenues by approximately $8 million annually, the same rate at which the Partnership is currently accruing its reserve. California Public Utilities Commission Proceeding A complaint was filed on April 7, 1997 with the California Public Utilities Commission ("CPUC") challenging rates charged by SFPP for intrastate transportation of refined petroleum products. SFPP filed responsive testimony defending the justness and reasonableness of its rates. On June 18, 1998, a CPUC Administrative Law Judge issued a proposed decision, finding that the evidence of record did not support complainants' claim that rates charged for service within the State of California by SFPP are unjust or unreasonable under the California Public Utilities Code. In light of his findings, the Judge dismissed the complaints filed against SFPP. On August 6, 1998, the CPUC affirmed the proposed decision of its Administrative Law Judge and dismissed the complaints. On October 6, 1998, the complainants filed an application for rehearing with the CPUC. SFPP responded to the rehearing application. The rulings are pending before the CPUC for disposition. Environmental SFPP, along with several other respondents, has been involved in one cleanup ordered by the United States Environmental Protection Agency ("EPA") related to ground water contamination in the vicinity of SFPP's storage facilities and truck loading terminals at Sparks, Nevada. The EPA approved the respondent's remediation plan, which began in 1995. In addition, SFPP is presently involved in 18 ground water hydrocarbon remediation efforts under administrative orders issued by the California Regional Water Quality Control Board and two other state agencies. SFPP is involved in environmental cleanup efforts at sights not governed by administrative orders. SFPP is also involved in environmental proceedings related to ground water and soil contamination in Elmira, California. The General Partner is a defendant in two proceedings (one by the State of Illinois and one by the Department of Transportation) relating to alleged environmental and safety violations for events relating to a fire that occurred at the Morris storage field in September 1994. The Partnership has recorded reserves for environmental costs which reflect the estimated cost of completing all remediation projects presently known to be required either by government mandate or in the ordinary course of business. Although no assurance can be given, based upon the information presently available, it is the opinion of management that the Partnership's environmental costs, to the extent they exceed recorded liabilities, will not have a material adverse effect on the Partnership's financial condition, Page 8 of 26 liquidity or ability to maintain its quarterly cash distributions at the current level. Other The Partnership and SFPP, in the ordinary course of business, are defendants in various lawsuits relating to the Partnership's assets. Although no assurance can be given, the Partnership believes, based on its experience to date, that the ultimate resolution of such items will not have a material impact on its financial position or results of operations. For more detailed information regarding litigation, refer to the Partnership's Form 10-K, Item 3, Legal Proceedings. 4. Distributions On August 14, 1998, the Partnership paid a cash distribution for the quarterly period ended June 30, 1998, of $0.63 per Common Unit. The distribution was declared on July 15, 1998, payable to unitholders of record as of July 31, 1998. On October 14, 1998, the Partnership declared a cash distribution for the quarterly period ended September 30, 1998, of $0.63 per Common Unit. The distribution will be paid on or before November 13, 1998, to unitholders of record as of October 31, 1998. 5. Long-Term Debt In February 1998, the Partnership entered into a $325 million revolving credit facility (Loan Facility) expiring in February 2005. The Loan Facility has an outstanding balance of $185 million at September 30, 1998. On June 12, 1998, the Partnership received $212.30 million from an equity offering of approximately 6.1 million Common Units, which was primarily used to pay down long-term debt related to the Loan Facility. The Loan Facility provides for principal payments equal to the amount by which the outstanding balance is in excess of the amount available, which reduces quarterly commencing in May 2000. The Loan Facility also provides, at the Partnership's option, a floating interest rate equal to either the administrative agent's base rate (but not less than the Federal Funds Rate plus .5% per year) or LIBOR plus a margin ranging from .75% to 1.5% per year based on the Partnership's ratio of funded indebtedness to cash flow, as defined in the Loan Facility. The Loan Facility contains certain restrictive covenants including, but not limited to, the incurrence of additional indebtedness, the making of investments, and making cash distributions other than quarterly distributions from available cash as provided by the Partnership Agreement. The Partnership has used the proceeds from the Loan Facility to refinance the existing first mortgage notes, including a prepayment premium, to fund the cash investments in Shell CO2 Company and Plantation Pipe Line Company, to refinance the debt associated with the Hall-Buck acquisition, and to fund the acquisition of the general partner interest in Santa Fe (Note 2). The prepayment premium and the write-off of the associated unamortized debt issue costs are reflected as an extraordinary charge in the accompanying condensed consolidated statement of income. SFPP's long-term debt primarily consists of its Series E and Series F first mortgage notes and a bank credit facility. At September 30, 1998, the outstanding balances under the Series E notes, Series F notes, and bank credit facility were $32.5 million, $244.0 million, and $78.5 million, respectively. The annual interest rate on the Series E and Series F notes is 10.25% and 10.70%, respectively, the maturity is December 1998 and December 2004, respectively, and interest is payable semiannually in June and December. The Partnership intends to refinance the Series E notes on a long-term basis upon their maturity and therefore, has included them in long-term debt. The Series F notes are payable in annual installments of $31.5 million in 1999, $32.5 million in 2000, $39.5 million in 2001, $42.5 million in 2002, and $37.0 million in 2003. The first mortgage notes may also be prepaid beginning in 1999 in full or in part at a price equal to par plus, in certain circumstances, a premium. The first mortgage notes are secured by mortgages on substantially Page 9 of 26 all of the properties of SFPP (the Mortgaged Property). The notes contain certain covenants limiting the amount of additional debt or equity that may be issued and limiting the amount of cash distributions, investments, and property dispositions. The bank credit facility provides for borrowings of up to $175 million due in August 2000 and interest, at a short-term Eurodollar rate, payable quarterly. Borrowings ($78.5 million at September 30, 1998) under this facility are also secured by the Mortgaged Property and are generally subject to the same terms and conditions as the first mortgage notes. On November 6, 1998, the Partnership filed with the SEC a shelf registration statement with respect to the sale from time to time of up to $600 million in debt and/or equity securities. The Partnership is contemplating the issuance of up to $300 million in medium-term senior notes. These public debt securities will be guaranteed on a full, unconditional, and joint and several basis by all of the Partnership's consolidating subsidiaries, excluding SFPP, so long as any other debt obligations of the Partnership are guaranteed by such subsidiaries. SFPP, which was acquired March 6, 1998, will not be guaranteeing the public debt securities. Kinder Morgan Energy Partners, L.P., the parent company, has operations from only investments in its subsidiaries. The following discloses the consolidating financial information for the Partnership: CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (In Thousands Except Per Unit Amounts) (Unaudited)
Kinder Morgan Combined Combined Energy Guarantor Nonguarantor Partners, LP Subs. Subs. Elims Consolidated --------------- -------------- -------------- --------------- --------------- Revenues $ - $ 33,295 $ 68,605 $ - $ 101,900 Costs and Expenses Cost of products sold - 2,756 - - 2,756 Operations and maintenance - 15,932 9,027 - 24,959 Fuel and power - 1,386 5,151 - 6,537 Depreciation and amortization - 3,427 7,623 - 11,050 General and administrative - 3,110 8,678 - 11,788 Taxes, other than income taxes - 952 2,235 - 3,187 --------------- -------------- -------------- --------------- --------------- - 27,563 32,714 - 60,277 --------------- -------------- -------------- --------------- --------------- Operating Income - 5,732 35,891 - 41,623 Other Income (Expense) Earnings from equity investments 35,114 31,823 322 (61,449) 5,810 Interest, net 2 (1,802) (7,813) - (9,613) Other, net - (157) (1,932) - (2,089) Minority Interest - 44 - (491) (447) --------------- -------------- -------------- --------------- --------------- Inc Bef. Taxes and Extraord charge 35,116 35,640 26,468 (61,940) 35,284 Income Tax Expense - 168 - - 168 --------------- -------------- -------------- --------------- --------------- Income Before Extraordinary charge 35,116 35,472 26,468 (61,940) 35,116 Extraordinary charge on early extinguishment of debt - - - - - =============== ============== ============== =============== =============== Net Income $ 35,116 $ 35,472 $ 26,468 $ (61,940) $ 35,116 =============== ============== ============== =============== ===============
Page 10 of 26 CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (In Thousands Except Per Unit Amounts) (Unaudited)
Kinder Morgan Combined Combined Energy Guarantor Nonguarantor Partners, LP Subs. Subs. Elims Consolidated --------------- -------------- -------------- --------------- --------------- Revenues $ - $ 65,821 $ 154,864 $ - $ 220,685 Costs and Expenses Cost of products sold - 5,482 - - 5,482 Operations and maintenance - 23,502 20,279 - 43,781 Fuel and power - 4,319 11,459 - 15,778 Depreciation and amortization - 8,042 17,398 - 25,440 General and administrative - 7,507 18,439 - 25,946 Taxes, other than income taxes - 2,200 5,973 - 8,173 --------------- -------------- -------------- --------------- --------------- - 51,052 73,548 - 124,600 --------------- -------------- -------------- --------------- --------------- Operating Income - 14,769 81,316 - 96,085 Other Income (Expense) Earnings from equity investments 65,745 74,915 498 (124,741) 16,417 Interest, net 41 (9,312) (18,115) - (27,386) Other, net - (225) (4,406) - (4,631) Minority Interest - 43 - (967) (924) --------------- -------------- -------------- --------------- --------------- Inc Bef. Taxes and Extraord charge 65,786 80,190 59,293 (125,708) 79,561 Income Tax Expense - 168 - - 168 --------------- -------------- -------------- --------------- --------------- Income Before Extraordinary charge 65,786 80,022 59,293 (125,708) 79,393 Extraordinary charge on early extinguishment of debt (4) (13,607) - - (13,611) =============== ============== ============== =============== =============== Net Income $ 65,782 $ 66,415 $ 59,293 $ (125,708) $ 65,782 =============== ============== ============== =============== ===============
Page 11 of 26 CONSOLIDATING BALANCE SHEET AT SEPTEMBER 30, 1998 (In Thousands) (Unaudited)
Kinder Morgan Combined Combined Energy Guarantor Nonguarantor Partners, LP Subs. Subs. Elims Consolidated ---------------- ---------------- ---------------- ------------------ ---------------- ASSETS Current Assets Cash and cash equivalents $ 48 $ 21,449 $ 26,759 $ - $ 48,256 Accounts receivable (net of allow. for doubtful accts) 11,718 17,682 34,484 (30,755) 33,129 Inventories Products - 1,583 789 - 2,372 Materials and supplies - 1,780 790 - 2,570 ---------------- ---------------- ---------------- ------------------ ---------------- 11,766 42,494 62,822 (30,755) 86,327 ---------------- ---------------- ---------------- ------------------ ---------------- Prop., Plant and Equip, at cost - 332,393 1,521,313 - 1,853,706 Less accumulated deprec. - 43,148 19,410 - 62,558 ---------------- ---------------- ---------------- ------------------ ---------------- - 289,245 1,501,903 - 1,791,148 ---------------- ---------------- ---------------- ------------------ ---------------- Equity Investments 1,370,377 1,278,523 10,164 (2,421,343) 237,721 ---------------- ---------------- ---------------- ------------------ ---------------- Long-Term note receivables 185,231 - - (185,231) - ---------------- ---------------- ---------------- ------------------ ---------------- Def. Charges and Other Assets 2,621 13,320 3,267 - 19,208 ================ ================ ================ ================== ================ TOTAL ASSETS $ 1,569,995 $ 1,623,582 $ 1,578,156 $ (2,637,329) $ 2,134,404 ================ ================ ================ ================== ================ LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Accounts payable $ 5,478 $ 22,242 $ 21,368 $ (30,755) $ 18,333 Accrued liabilities 998 1,694 21,338 - 24,030 Accrued benefits - - 17,638 - 17,638 Accrued taxes - 867 5,304 - 6,171 ---------------- ---------------- ---------------- ------------------ ---------------- 6,476 24,803 65,648 (30,755) 66,172 ---------------- ---------------- ---------------- ------------------ ---------------- Long-Term Liabilities and Def. Credits Long-term debt 185,000 209,245 355,549 (185,231) 564,563 Other - 5,218 100,711 - 105,929 ---------------- ---------------- ---------------- ------------------ ---------------- 185,000 214,463 456,260 (185,231) 670,492 ---------------- ---------------- ---------------- ------------------ ---------------- Minority Interest - - - 19,221 19,221 ---------------- ---------------- ---------------- ------------------ ---------------- Partners' Capital Limited Partner Interests - 1,370,376 - (1,370,376) - General Partner Interests - - 1,050,967 (1,050,967) - Special LP Interests - - 5,281 (5,281) - Common Units 1,367,345 - - - 1,367,345 Kinder Morgan General Partner 11,174 13,940 - (13,940) 11,174 ---------------- ---------------- ---------------- ------------------ ---------------- 1,378,519 1,384,316 1,056,248 (2,440,564) 1,378,519 ---------------- ---------------- ---------------- ------------------ ---------------- ================ ================ ================ ================== ================ TOTAL LIAB. AND CAPITAL $ 1,569,995 $ 1,623,582 $ 1,578,156 $ (2,637,329) $ 2,134,404 ================ ================ ================ ================== ================
Page 12 of 26 CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (In Thousands) (Unaudited)
Kinder Morgan Combined Combined Energy Guarantor Nonguarantor Partners, LP Subs. Subs. Elims Consolidated --------------- --------------- -------------- --------------- --------------- Cash Flows From Operating Activities Reconciliation of net income to net cash provided by operating activities Net income $ 65,782 $ 66,415 $ 59,293 $ (125,708) $ 65,782 Extraordinary charge on early extinguishment of debt 4 13,607 - - 13,611 Depreciation and amortization - 8,042 17,398 - 25,440 Earnings from equity investments (65,745) (74,915) (498) 124,741 (16,417) Distributions from equity investments 77,636 69,005 - (134,393) 12,248 Changes in components of working capital, and Other, net (187,356) 194,442 4,486 967 12,539 El Paso Settlement - - (8,000) - (8,000) Net Cash Provided by (Used in) --------------- --------------- -------------- --------------- --------------- Operating Activities (109,679) 276,596 72,679 (134,393) 105,203 --------------- --------------- -------------- --------------- --------------- Cash Flows From Investing Activities Acquisitions of assets (225) (95,980) 21,499 - (74,706) Adds to prop, plant and equip. for expansion and maintenance projects - (13,683) (9,846) - (23,529) Sale of property, plant and equipment - 26 20 - 46 Contributions to equity investments - (135,701) (491) - (136,192) Net Cash Provided by (Used in) --------------- --------------- -------------- --------------- --------------- Investing Activities (225) (245,338) 11,182 - (234,381) --------------- --------------- -------------- --------------- --------------- Cash Flows From Financing Activities (Incr)/Decr in notes receivables (205,262) - - 205,262 - Issuance of debt 407,000 218,038 89 (210,038) 415,089 Payment of debt (222,000) (157,863) (148) 4,776 (375,235) Unit registration costs (289) - - - (289) Cost of refinancing long-term debt (2,864) (13,607) - - (16,471) Proceeds from issuance of common units 212,303 - - - 212,303 Contributions from GP's Interest - 12,488 - - 12,488 Distributions to partners - Limited Partner Interests - (77,635) - 77,635 - General Partner Interests - - (56,758) 56,758 - Special LP Interests - - (285) 285 - Common Units (61,624) - - - (61,624) Kinder Morgan General Partner (17,362) (792) - 792 (17,362) Minority Interest - - - (1,077) (1,077) Net Cash Provided by (Used in) --------------- --------------- -------------- --------------- --------------- Financing Activities 109,902 (19,371) (57,102) 134,393 167,822 --------------- --------------- -------------- --------------- --------------- Incr/(Decr) in Cash and Cash Equivs. (2) 11,887 26,759 - 38,644 Cash and Cash Equivs., Beg. of Per. 50 9,562 - - 9,612 =============== =============== ============== =============== =============== Cash and Cash Equivs., End of Per. $ 48 $ 21,449 $ 26,759 $ - $ 48,256 =============== =============== ============== =============== ===============
Page 13 of 26 6. Partners' Capital At December 31, 1997 and September 30, 1998, Partners' capital consisted of 13,249,200 and 47,989,690 Common Units, respectively, held by third parties and 862,000 Common Units held by the General Partner. Together, these 14,111,200 Common Units at December 31, 1997 and 48,851,690 Common Units at September 30, 1998 represent the limited partners' interest and an effective 98% economic interest in the Partnership, exclusive of the incentive distribution. On June 12, 1998, the Partnership issued 6,070,578 Common Units in a public offering and on August 13, 1998, the Partnership issued 2,121,033 Common Units to acquire Hall-Buck Marine, Inc. In connection with the Hall-Buck acquisition, the General Partner contributed $750,748 to OLP-C. For the purposes of maintaining partner capital accounts, the Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective interests. Normal allocations according to percentage interests are done only, however, after giving effect to any priority income allocations in an amount equal to incentive distributions allocated 100% to the General Partner. Incentive distributions paid to the General Partner are determined by the amount quarterly distributions to unitholders exceed certain specified target levels. The Partnership's cash distribution of $0.63 per Common Unit paid on August 14, 1998 for the second quarter of 1998 required an incentive distribution to the General Partner of $9,352,984. The Partnership's cash distribution of $0.50 per Common Unit for the same period of the prior year required an incentive distribution to the General Partner of $964,600. The increased incentive distribution reflects the increased distribution of $0.13 per Common Unit and the issuance of additional Common Units since June 30, 1997. The Partnership's declared distribution for the third quarter of 1998 of $0.63 per Common Unit will result in an incentive distribution to the General Partner of $9,777,501. This compares to the Partnership's cash distribution of $0.50 per Common Unit and incentive distribution to the General Partner of $1,045,442 for the third quarter of 1997. The increase in the 1998 third quarter incentive distribution over the distribution paid for the third quarter of 1997 is a result of the $0.13 increase in the distribution per Common Unit as well as the higher number of Common Units outstanding on September 30, 1998. 7. Subsequent Events On October 1, 1998, the Partnership announced that it had acquired ST Services' ("ST") Imperial, California refined petroleum products terminal for $1.1 million in cash, effective July 1, 1998. As part of the transaction, ST will acquire the Partnership's idled Stockton, California terminal. The Partnership, prior to the acquisition, owned and operated twenty refined petroleum product tanks at the Imperial Site with a combined capacity of 339,000 barrels together with two truck loading racks. The Imperial Terminal acquisition will add six refined petroleum product tanks with a combined capacity of 120,000 barrels and two additional loading racks. Page 14 of 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Third Quarter 1998 Compared With Third Quarter 1997 The Partnership's net income increased to $35.12 million in the third quarter of 1998 compared to $3.75 million in the third quarter of 1997. The increase resulted primarily from the inclusion of earnings attributable to the Pacific Operations (formerly Santa Fe Pacific Pipeline Partners, "SFPP"), which were acquired March 6, 1998. In addition, the Partnership reported higher earnings from each of the other two reportable business segments: Mid-Continent Operations and Bulk Terminals. Higher overall quarterly earnings were partially offset by higher debt expense and higher general and administrative expenses. Increases in both categories of expense were likewise related to new acquisitions and investments made by the Partnership. The Pacific Operations reported quarterly net income of $42.96 million from total revenues of $68.61 million. The amounts reflect strong demand for gasoline, jet fuel, and diesel fuel in the Partnership's West Coast markets. The Mid-Continent Operations' earnings increased 27% to $7.68 million in 1998 compared to $6.04 million in 1997. Mid-Continent Operations consist of the North System, the Cypress Pipeline, the Partnership's equity investments in Shell CO2 Company, Plantation Pipe Line Company, and Mont Belvieu Associates, and the operating lease agreement at the Painter Plant. Earnings attributable to CO2 activity increased 63% to $3.76 million in the third quarter of 1998 compared to the same period last year. This was due to higher returns from the Partnership's equity investment in Shell CO2 Company. Third quarter earnings attributable to the Partnership's other Mid-Continent equity investments increased 70% over the amounts reported from the third quarter last year. Third quarter 1998 pipeline earnings and revenues were down compared to the third quarter of 1997 due to a 4% decrease in average tariff rates and a slight decrease (1%) in barrels transferred. Total quarterly revenues for the segment were $8.49 million in 1998 compared to $12.44 million last year. The decrease was chiefly due to Central Basin Pipeline being accounted for under the equity method in 1998. Earnings from the Bulk Terminals segment for the third quarter of 1998 were $6.24 million compared to $2.83 million in the comparable period in 1997. The Bulk Terminals segment includes dry bulk terminal activity, the Cora and Grand Rivers coal terminal facilities, and the energy services provided by the Red Lightning business unit. The 1998 results include the earnings of the coal and dry bulk terminal activity acquired from Hall-Buck Marine, Inc. on August 13, 1998. Excluding this acquisition, third quarter income from the Partnership's coal terminals increased 19% over the same period last year. Higher overall segment earnings were partially offset by lower operating margins from coal marketing activity. The segment reported revenues of $24.81 million in 1998 compared to revenues of $4.97 million in the third quarter of 1997. Excluding the results of the acquired business, segment revenues increased $3.66 million (74%) in the third quarter of 1998 over the same quarter of 1997. This was primarily due to a 69% increase in coal tons transferred, the inclusion of a full quarter of operations from the Grand Rivers coal terminal, and higher coal marketing revenues. Page 15 of 26 Operating statistics for the third quarter are as follows: Third Quarter 1998 1997 ---------------- Pacific Operations Delivery Volumes(MMBbls) 99.4 - Average Tariff ($/Bbl) $0.63 - Mid-Continent Operations * Delivery Volumes (MMBbls) 10.4 10.5 Average Tariff ($/Bbl) $0.67 $0.70 Bulk Terminals Transport Volumes (MM Tons) 8.8 2.3 Earnings contribution by business segment for the third quarter is as follows: Earnings Contribution by Business Segment** (Unaudited) (In Thousands) Third Quarter 1998 1997 ---------------- Pacific Operations $42,959 - Mid-Continent Operations $7,681 $6,041 Bulk Terminals $6,242 $2,826 ------------------------------------------------------------------------ * North System and Cypress only. ** Excludes general and administrative expenses, debt costs, and minority interest. Includes the results of acquired operations from the date of acquisition. Cost of products sold increased to $2.76 million in the quarter ended September 30, 1998 compared to $1.59 million in the same period of 1997. The 74% increase was the result of increased purchase/sale contracts from coal marketing activities. Overall higher cost of products sold was partially offset by excluding costs related to the Central Basin Pipeline, which was transferred to Shell CO2 Company in March 1998 and subsequently accounted for under the equity method. Fuel and power expenses increased to $6.54 million in 1998 compared to $1.03 million in 1997. Excluding the $5.24 million in expense reported by the assets acquired in 1998 (Pacific Operations and dry bulk terminals), fuel and power expense increased 26% in 1998, primarily due to higher average electricity rates and higher coal volumes transferred by the Bulk Terminals segment. Operating and maintenance expenses, combined with general and administrative expenses, were $36.75 million in the third quarter of 1998. This amount compares to $6.04 million in the third quarter of 1997. The increase was attributable to higher operating expenses resulting from increased coal activity and to general and administrative costs associated with new acquisitions made by the Partnership. Depreciation and amortization expense increased to $11.05 million in 1998 compared to $2.66 million in 1997. The increase was attributable to the Page 16 of 26 expenses associated with acquired assets, which reported depreciation and amortization expense of $8.58 million in the quarter. Taxes, other than income taxes, increased $2.43 million in the third quarter of 1998 compared to the same quarter last year. The increase was attributable to the inclusion of the Pacific Operations and the dry bulk terminals, which reported taxes, other than income of $2.24 million and $0.27 million, respectively, in the quarter ended September 30, 1998. Equity in earnings of partnerships for the quarter ended September 30, 1998 increased $4.08 million over the amount reported in the third quarter of 1997. This resulted primarily from the recognition of $3.63 million of earnings from the Partnership's equity investment in Shell CO2 Company and $0.62 million of earnings from the Partnership's equity investment in Plantation Pipe Line Company. Net interest expense increased $6.71 million in the third quarter of 1998 compared to last year primarily due to debt assumed by the Partnership as part the acquisition of the Pacific Operations. Other net income and expense decreased $2.08 million in 1998 compared to 1997. The decrease was primarily due to expense accruals made for the FERC Rate Case reserve established for the Pacific Operations. Minority interest expense increased $0.41 million for the quarter ended September 30, 1998 when compared to the same quarter of 1997. The increase was the result of earnings attributable to SFPP (Pacific Operations) as well as to higher overall Partnership net income. Income tax expense decreased $0.18 million in the third quarter of 1998 when compared to the third quarter of 1997. This was due to a $0.36 million tax benefit resulting from the change in ownership of the Mont Belvieu Fractionator interest to a non-corporate entity, partially offset by $0.23 million in taxes realized from the equity investment in Plantation Pipe Line Company. Page 17 of 26 Nine Months Ended Sept. 30, 1998 Compared With Nine Months Ended Sept. 30, 1997 For the nine months ended September 30, 1998, the Partnership reported $79.39 million as net income before extraordinary charge. This amount compares to $10.05 million reported as net income for the same period of 1997. The Pacific Operations business segment reported earnings of $95.85 million since March 6, 1998. Business segment earnings do not include Partnership expenses related to general and administrative costs or debt costs. Excluding the Pacific Operations' segment income (from revenue of $154.86 million), the Partnership reported a 48% increase in earnings from its remaining business segments: Mid-Continent Operations and Bulk Terminals. Higher overall earnings in the first nine months of 1998 were partially offset by higher debt expense and higher general and administrative expenses. The Mid-Continent Operations reported earnings of $24.97 million for the first nine months of 1998 compared to $17.32 million for the same period last year. The increase was mainly due to higher earnings from CO2 activities. Due to the Partnership's investment in Shell CO2 Company, earnings from CO2 operations were $11.83 million in 1998 compared to $5.51 million in 1997. In addition, nine month earnings from the Partnership's investment in the Mont Belvieu Fractionator increased 70% ($1.51 million) over last year primarily due to favorable income tax adjustments. The overall increase in segment earnings was partially offset by a decrease in pipeline income from last year. Warmer weather resulted in lower transport volumes and lower average tariff rates. Excluding the results of the Central Basin Pipeline, which were reported under the equity method in 1998, pipeline revenue and income were $25.09 million and $9.20 million, respectively, for the first nine months of 1998. This compared to revenues and income of $28.44 million and $10.22 million, respectively, for the same period last year. Earnings from the Bulk Terminals segment equaled $12.60 million in the first nine months of 1998 compared to $8.06 million in the same period of 1997. Amounts for 1998 include the dry bulk terminal businesses acquired from Hall-Buck Marine Inc. on August 13, 1998. Excluding these acquired assets, the segment's 1998 earnings increase was primarily due to the inclusion of the Grand Rivers coal terminal, which was acquired in September, 1997, as well as increased earnings from coal marketing activity. Segment revenues, excluding the acquired assets, were $22.80 million for the first nine months of 1998 versus $12.95 million for the same period in 1997. This 76% increase reflects the addition of the Grand Rivers terminal as well as higher operating revenues realized from marketing activity. Page 18 of 26 Operating statistics for the first nine months of 1998 and 1997 are as follows: Nine Months Ended September 30, 1998 1997 ---------------- Pacific Operations Delivery Volumes(MMBbls) 228.7 - Average Tariff ($/Bbl) $0.63 - Mid-Continent Operations * Delivery Volumes (MMBbls) 32.7 32.1 Average Tariff ($/Bbl) $0.69 $0.75 Bulk Terminals Transport Volumes (MM Tons) 14.9 6.2 Earnings contribution by business segment for the first nine months of 1998 and 1997 is as follows: Earnings Contribution by Business Segment** (Unaudited) (In Thousands) Nine Months Ended September 30, 1998 1997 ---------------- Pacific Operations ** $95,847 - Mid-Continent Operations $24,971 $17,315 Bulk Terminals $12,601 $8,063 ------------------------------------------------------------------------ * North System and Cypress only. ** Excludes general and administrative expenses, debt costs, and minority interest. Includes the results of acquired operations from the date of acquisition. Cost of products sold increased 3% to $5.48 million in 1998 compared to $5.31 million in 1997. Lower purchase/sale contracts reported by the Mid-Continent segment were offset by higher cost of goods sold incurred by the Bulk Terminals segment. 1998 amounts exclude the product costs incurred by the Central Basin Pipeline, which was accounted for under the equity method. Higher product costs incurred by the Bulk Terminals segment reflect an increase in purchase contracts relating to coal marketing transactions. Page 19 of 26 Excluding the $11.55 million in expense incurred by the Pacific Operations and dry bulk terminals (the 1998 acquired assets), year-to-date fuel and power expense increased 13% in 1998 as compared to 1997. The increase was primarily due to higher average electricity rates and higher coal volumes. Operating and maintenance expenses, combined with general and administrative expenses, totaled $69.73 million for the first nine months of 1998. This compares to $17.37 million for the first nine months of 1997. The 1998 increase reflects the addition of the Grand Rivers coal terminal and overall higher expense from the Coal Operations segment because of higher coal transfer volumes. The net increase was partially offset by lower operations and maintenance expenses from the Mid-Continent segment due to lower transportation volumes on the North System and accounting for the Central Basin Pipeline under the equity method. Higher general and administrative expenses relate to the acquisition of the Pacific Operations. Depreciation and amortization expense increased to $25.44 million for the first nine months of 1998 compared to $7.80 million for the same period of 1997. The increase was attributable to the inclusion of the Pacific Operations and the dry bulk terminals, which reported combined depreciation expense of $18.36 million for the first nine months of 1998. Excluding the $6.32 million in expense incurred by the acquired assets, taxes, other than income taxes, decreased 19% in the first nine months of 1998 versus the same period a year ago. Lower tax expenses were reported by the Mid-Continent Operations as a result of the CO2 joint venture with Shell and lower property tax valuations on the North System. Equity in earnings of partnerships increased $12.23 million in the first nine months of 1998 compared to the first nine months of 1997. This resulted from the recognition of $10.88 million of earnings from the Partnership's equity investment in Shell CO2 Company and higher earnings from the Partnership's equity investments in Plantation Pipe Line Company, the Colton Transmix Processing Facility, and the Heartland Partnership. Net interest expense increased $18.21 million in the nine month period ended September 30, 1998 over the same period of 1997. This was principally due to debt assumed by the Partnership as part of the acquisition of the Pacific Operations as well as expenses related to the financing of the Partnership's investment in Plantation Pipe Line Company and the bulk terminals acquisition. Other net income and expense decreased $4.64 million in the first nine months of 1998 compared to last year. The decrease was primarily due to expense relating to the FERC Rate Case reserve for the Pacific Operations. Minority interest expense increased $0.82 million in the nine month period ended September 30, 1998 when compared to the same period of 1997. The increase was the result of earnings attributable to SFPP (Pacific Operations) as well as to higher overall Partnership net income. Income tax expense decreased $.74 million in the first nine months of 1998 when compared to the first nine months of 1997. This resulted primarily from tax benefits resulting from the change in ownership of the Mont Belvieu Fractionator interest to a non-corporate entity. Financial Condition General The Partnership's primary cash requirements, in addition to normal operating expenses, are debt service, sustaining capital expenditures, discretionary capital expenditures, and quarterly distributions to partners. In addition to utilizing cash generated from operations, the Partnership could meet its cash requirements through the utilization of credit facilities or by Page 20 of 26 issuing additional limited partner interests in the Partnership. The Partnership expects to fund future cash distributions and sustaining capital expenditures with existing cash and cash flows from operating activities. Expansion capital expenditures are expected to be funded through additional Partnership borrowings or issuance of additional limited partner interests. Interest payments are expected to be paid from cash flows from operating activities and debt principal payments will be met by additional borrowings as they become due or by issuance of additional limited partner interests. Cash Provided by Operating Activities Net cash provided by operating activities was $105.20 million for the nine months ended September 30, 1998, versus $25.44 million in the comparable period of 1997. The period-to-period increase in cash flow from operations was primarily a result of higher net earnings and non-cash depreciation and amortization charges. Higher earnings, chiefly due to the acquisition of the Pacific Operations, accounted for $55.73 million of the increase. Higher depreciation, directly attributable to the Pacific Operations and the acquisition of dry bulk terminal activity, accounted for $17.64 million of the increase. Cash Used in Investing Activities Net cash used in investing activities was $234.38 million for the nine month period ended September 30, 1998, compared to $28.43 million in the comparable 1997 period. The $205.95 million increase includes the result of $74.71 million used for the March 6, 1998 acquisition of the Pacific Operations. Additionally, contributions to partnership investments of $25 million and $110 million, respectively, were made for the Partnership's investments in Shell CO2 Company and Plantation Pipe Line Company, respectively. Excluding the effect of assets purchased in the acquisition of the Pacific Operations, additions to property, plant, and equipment, were $23.53 million in the first nine months of 1998 compared to $4.38 million for the first nine months of 1997. These additions of property, plant and equipment include both expansion and maintenance projects. The 1998 increase was mainly due to property additions for the Pacific Operations since the date of acquisition and property additions related to the Bulk Terminals operating segment. Cash Provided by Financing Activities Net Cash provided by financing activities amounted to $167.82 million for the nine month period ended September 30, 1998. The 1998 net cash provided by financing activities represents a $175.68 million increase over the $7.86 million net cash used in financing activities for the nine month period ended September 30, 1997. The increase was chiefly the result of $212.30 million in proceeds received from the June 1998 issuance of approximately 6.1 million Common Units and a $59.77 million increase in overall debt financing activities. In addition, $12.49 million was received as a result of General Partner contributions made to maintain its minority interest in the operating partnerships. The overall net increase in cash provided by financing activities was partially offset by an increase of $64.02 million in distributions to partners and $16.47 million used for refinancing long-term debt. The Partnership's debt instruments generally require the Partnership to maintain a reserve for current debt service obligations. The purpose of the reserve is to lessen differences in the amount of Available Cash from quarter to quarter due to timing of required principal and interest payments (which may only be required on a semi-annual or annual basis) and to provide a source of funds to make such payments. Distributions to partners increased to $80.06 million in the nine month period ended September 30, 1998, compared to $16.04 million in the comparable 1997 period. This increase was attributable to increased distributions paid to Page 21 of 26 Common Unitholders of $1.755 per Common Unit in the first nine months of 1998 compared to $1.13 per Common Unit for the comparable period in 1997, the issuance of additional Common Units since September 30, 1997, and increased incentive distributions paid to the General Partner. The Partnership believes that the increase in paid distributions per Unit resulted from favorable operating results in 1998. On October 14, 1998, the Partnership declared a distribution of $0.63 per Common Unit for the third quarter of 1998. The Partnership believes that future operating results will continue to support similar levels of quarterly cash distributions, however, no assurance can be given that future distributions will continue at such levels. The Partnership Agreement requires the Partnership to distribute 100% of "Available Cash" (as defined in the Partnership Agreement) to the Partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available Cash consists generally of all cash receipts of the Partnership and its operating partnerships, less cash disbursements and net changes to reserves, and amounts payable to the former Santa Fe general partner in respect of its .5% interest in SFPP. Available Cash of the Partnership generally is distributed 98% to the Limited Partners (including the approximately 2% limited partner interest of the General Partner) and 2% to the General Partner. This general requirement is modified to provide for incentive distributions to be paid to the General Partner in the event that quarterly distributions to unitholders exceed certain specified targets. In general, Available Cash for each quarter is distributed, first, 98% to the Limited Partners and 2% to the General Partner until the Limited Partners have received a total of $0.3025 per Unit for such quarter, second, 85% to the limited Partners and 15% to the General Partner until the Limited Partners have received a total of $0.3575 per Unit for such quarter, third, 75% to the Limited Partners and 25% to the General Partner until the Limited Partners have received a total of $0.4675 per Unit for such quarter, and fourth, thereafter 50% to the Limited Partners and 50% to the General Partner. Incentive distributions are generally defined as all cash distributions to the General Partner that are in excess of 2% of the aggregate amount of cash being distributed. The General Partner's incentive distribution declared by the Partnership for the third quarter of 1998 was $9,777,501. Year 2000 The Partnership is currently implementing a five phase program to achieve Year 2000 compliance. The Partnership is evaluating both information technology systems ("IT") and non-IT systems such as those that include embedded technology. The System Inventory Phase is substantially complete. In the System Inventory Phase, all hardware and software is inventoried and a database of systems that need further assessment is created. The Partnership anticipates completing the System Inventory Phase by the end of the fourth quarter of 1998. The Partnership has begun the Assessment phase. In the Assessment Phase, specific Year 2000 issues and solutions are identified. The Partnership anticipates completing the Assessment Phase by the end of the first quarter of 1999. The Partnership has begun the System Testing Phase. In the System Testing Phase, real world tests on critical systems are run to insure that they will operate properly after the Year 2000. The Partnership anticipates completing the System Testing Phase by the end of the second quarter of 1999. The Partnership has begun the Remediation Phase. In the Remediation Phase, problems that arise in our Assessment and System Testing Phases are fixed. The Partnership anticipates completing the Remediation Phase by the end of the third quarter of 1999. The Partnership has not yet begun the Contingency Planning Phase. The Partnership currently has plans in place for non-Year 2000 related contingencies and will modify these plans to address any specific contingencies related to the Year 2000 problem. The Partnership anticipates completing the Contingency Planning Phase by the end of the fourth quarter of 1999. Page 22 of 26 The Partnership does not believe it has material exposure to third parties' failures to remediate the Year 2000 problem. The Partnership has not sought and does not intend to seek information from material suppliers, customers, or service providers to determine the exact extent to which the Partnership would be effected by third parties' failures to remediate the Year 2000 problem. While the Partnership has budgeted funds to address the Year 2000 problem, the Partnership does not believe that any material expenditures to address the Year 2000 problem as it relates to existing systems will be required. However, uncertainty exists concerning the potential costs and effects associated with any Year 2000 compliance. Therefore, the Partnership cannot give any assurances that unexpected Year 2000 compliance problems of either the Partnership or its vendors, customers, and service providers would not materially and adversely affect the Partnership's business, financial condition or operating results. Information Regarding Forward Looking Statements This filing includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as plans, expects, anticipates, estimates, will and other words and phrases of similar meaning. Although the Partnership believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Such forward looking statements involve known and unknown risks and uncertainties. The Partnership's actual actions or results may differ materially from those discussed in the forward looking statements. Specific factors which could cause actual results to differ from those in the forward looking statements, include, among others: o price trends and overall demand for NGLs, refined petroleum products, CO2, coal, and other bulk materials in the United States (which may be affected by general levels of economic activity, weather, alternative energy sources, conservation and technological advances); o changes in the Partnership's tariff rates set by FERC and the California Public Utilities Commission; o the Partnership's ability to integrate recent acquisitions and other future acquisitions into its existing operations; o with respect to the bulk terminals, the ability of railroads to deliver bulk products to the terminals on a timely basis; o the Partnership's ability to successfully identify and close strategic acquisitions and realize cost savings; o the discontinuation of operations at major end-users of the products transported by its liquids pipelines (such as refineries, petrochemical plants, or military bases) or handled by its bulk terminals; and o the condition of the capital markets in the United States. See Items 1 and 2 "Business and Properties - Risk Factors" of the Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 31, 1998 for a more detailed description of these and other factors that may affect the forward looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. Page 23 of 26 PART II. OTHER INFORMATION KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES ITEM 1. Legal Proceedings See Part I, Item 1, Note 3 to Consolidated Financial Statements entitled "Litigation" which is incorporated herein by reference. ITEM 2. Changes in Securities The Partnership issued 2,121,033 Common Units in connection with the acquisition of Hall-Buck Marine, Inc., a Louisiana corporation, on August 13, 1998. The form of the transaction was an exchange of all of the outstanding common stock of Hall-Buck for a combination of accrued indebtedness of $23 million and the 2,121,033 Common Units. The Common Units were issued and sold without registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. *3.1 Second Amended and Restated Agreement of Limited Partnership dated as of February 14, 1997 (Exhibit 3.1 to Amendment No. 1 to the Partnership's Registration Statement on Form S-4 (File No. 333-44519)) Filed February 4, 1998 ("1998 S-4") *4.1 Credit Agreement dated February 17, 1998 among Kinder Morgan Energy Partners, L.P., Kinder Morgan Operating L.P. "B", the Subsidiary Guarantors, the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank (Exhibit 4.9 to the Partnership's 1997 Form 10-K) *4.2 Pledge Agreement dated February 17, 1998 among Kinder Morgan Energy Partners, L.P., the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank (Exhibit 4.10 to 1997 Form 10-K) *4.3 Pledge Agreement dated February 17, 1998 among Kinder Morgan Operating L.P. "A", the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank (Exhibit 4.11 to 1997 Form 10-K) *4.4 Pledge Agreement dated February 17, 1998 among Kinder Morgan Operating L.P. "D" the Lenders, Goldman Sachs Credit Partners, L.P. and First Union National Bank (Exhibit 4.12 to 1997 Form 10-K) *4.5 Pledge Agreement dated February 17,1998 among Kinder Morgan Natural Gas Liquids Corporation, the Lenders, Goldman Sachs Credit Page 24 of 26 Partners, L.P. and First Union National Bank (Exhibit 4.13 to 1997 Form 10-K) *4.6 First Mortgage Note Agreement dated December 8, 1988 among Southern Pacific Pipe Lines Partnership, L.P. (now known as SFPP,L.P.) and the Purchasers listed on Schedule A (a conformed composite of 54 separate agreements, identical except for signatures) (Exhibit 4.2 to Form 10-K for Santa Fe Pacific Pipelines, L.P. for 1988 ("Santa Fe 1988 Form 10-K") *4.6.1 Consent and Amendment dated as of December 19, 1997 between the noteholders and SFPP,L.P. (a conformed composite of the separate agreements with each noteholder, identical except for signatures)(Exhibit 4.14.1 to 1997 Form 10-K) *4.7 Deed of Trust, Security Agreement and Fixture Filing, dated December 8, 1988, between SFPP, L.P., its general partner, Chicago Title Insurance Company and Security Pacific National Bank (Exhibit 4.3 to Santa Fe 1988 Form 10-K) *4.8 Trust Agreement dated December 19, 1988, between SFPP., its general partner and Security Pacific National Bank (Exhibit 4.4 to Santa Fe 1988 Form 10-K) *4.9 Amended and Restated Credit Agreement dated as of August 11, 1997 among SFPP, L.P., Bank of America National Trust and Savings Association, as agent, Texas Commerce Bank National Association, as syndication agent, Bank of Montreal, as documentation agent, BancAmerica Securities, Inc., as arranger, and the lenders that are signatories thereto. As the maximum allowable borrowings under this facility do not exceed 10% of the Registrant's total assets, this instrument is not filed as an exhibit to this Report, however, the Registrant hereby agrees to furnish a copy of such instrument to the Securities and Exchange Commission upon request. 27 Financial Data Schedule as of and for the nine months ended September 30, 1998 *Incorporated by reference. (b) Reports on Form 8-K. None. Page 25 of 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KINDER MORGAN ENERGY PARTNERS, L.P. (A Delaware Limited Partnership) By: Kinder Morgan G.P., Inc. as General Partner Date: November 11, 1998 By: /s/ David G. Dehaemers, Jr. ------------------------------ David G. Dehaemers, Jr. Vice President, Treasurer and Chief Financial Officer Page 26 of 26 EX-27 2 ARTICLE 5 FDS FOR THIRD QUARTER 1998
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 48,256 0 37,949 4,820 4,942 86,327 1,853,706 62,558 2,134,404 66,172 564,563 0 0 0 1,378,519 2,134,404 220,685 220,685 5,482 124,600 (12,462) 0 28,986 79,561 168 79,393 0 (13,611) 0 65,782 1.17 1.17
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