1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2001
REGISTRATION NO. 333-55868
REGISTRATION NO. 333-55866
REGISTRATION NO. 333-55866
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMENDMENT NO. 1
TO
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)
ONE ALLEN CENTER, SUITE 1000
500 DALLAS STREET
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
ONE ALLEN CENTER, SUITE 1000
500 DALLAS STREET
HOUSTON, TEXAS 77002
(713) 369-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
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 10103
(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 the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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. [ ]
------------------------
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 by Kinder Morgan Energy Partners, L.P. of
i-units to be acquired by Kinder Morgan Management, LLC with most of the
net proceeds of the offering of its shares, pursuant to Rule 140 of the
Securities Act of 1933, as amended;
- the obligation of Kinder Morgan, Inc. to deliver common units of Kinder
Morgan Energy Partners, L.P. to owners of shares of Kinder Morgan
Management, LLC in exchange for their shares 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 owners of its shares;
- 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 shares of Kinder Morgan
Management, LLC 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 owners of its 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 , 2001.
8,500,000 SHARES
REPRESENTING LIMITED LIABILITY COMPANY INTERESTS
KINDER MORGAN MANAGEMENT, LLC
----------------------
This is an initial public offering of our shares representing limited
liability company interests, a class of our equity with limited voting rights.
We are offering 8,500,000 of our shares through the underwriters named below
including 850,000 shares to be offered to our affiliate, Kinder Morgan, Inc.
We are a recently formed limited liability company that has elected to be
treated as a corporation for United States income tax purposes. We will manage
and control the business and affairs of Kinder Morgan Energy Partners, L.P. and
will use the proceeds of this offering to acquire limited partner interests,
referred to as i-units, in Kinder Morgan Energy Partners, L.P.
When Kinder Morgan Energy Partners, L.P. makes distributions on its common
units, we will make distributions on our 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 had you owned Kinder Morgan Energy
Partners, L.P. common units divided by the average market price of our shares.
On March 15, 2001, Kinder Morgan Energy Partners, L.P. announced its intention
to increase the quarterly distribution for the first quarter of 2001 to $1.00
per common unit, or $4.00 per common unit on an annualized basis.
Kinder Morgan, Inc. has agreed that at any time after the 45th day
following the closing of this offering, owners of our shares may exchange each
of their shares for a common unit of Kinder Morgan Energy Partners, L.P. owned
by Kinder Morgan, Inc. and its affiliates. This exchange feature is subject to
Kinder Morgan, Inc.'s right to settle the exchange in cash rather than in common
units.
Prior to this offering, there has been no public market for our shares. We
expect our shares to be offered at a price within 10% of the last reported sales
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 last reported sales price of the
common units on the NYSE on , 2001 was $ per common unit. We
have applied to have our shares included for trading on the under the
symbol .
INVESTING IN THE SHARES OR IN THE COMMON UNITS FOR WHICH THEY MAY BE
EXCHANGED INVOLVES RISK. A DISCUSSION OF RISK FACTORS BEGINS ON PAGE 20. These
risks include the following:
- Our success will be dependent upon our operation and management of Kinder
Morgan Energy Partners, L.P. and its resulting performance.
- As an owner of shares, you will have limited voting rights and therefor
will have little opportunity to influence or change management.
- Our management may have different interests than you and may not always
conduct our business as you would wish.
- Your shares are subject to mandatory and optional purchase provisions
which could result in your having to sell your shares at a time or price
which you do not like.
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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 THIS 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(1).................................... $ $
Proceeds, before expenses, to Kinder Morgan Management, $ $
LLC ......................................................
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(1)The underwriters will receive no discount or commission on the sale of
850,000 shares to Kinder Morgan, Inc.
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.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2001.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
DAIN RAUSCHER WESSELS FIRST UNION SECURITIES, INC.
----------------------
Prospectus dated , 2001.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY.......................................... 3
Risk Factors.............................................. 5
Organizational Structures................................. 7
The Offering.............................................. 9
The Shares................................................
Summary Financial Data.................................... 15
RISK FACTORS................................................ 20
Risks Related to the Shares; i-units and Kinder Morgan
Management, LLC......................................... 20
Risks Related to the Common Units of Kinder Morgan Energy,
Partners, L.P. ......................................... 24
Risks Related to Kinder Morgan Energy Partners, L.P.'s
Business................................................ 25
Risks Related to Conflicts of Interest and Limitations on
Liability............................................... 28
INFORMATION REGARDING FORWARD LOOKING STATEMENTS............ 30
USE OF PROCEEDS............................................. 31
OUR POLICY REGARDING SHARE DISTRIBUTIONS.................... 31
KINDER MORGAN ENERGY PARTNERS, L.P.'S DISTRIBUTION POLICY... 32
Requirement to Distribute Available Cash Less Reserves.... 32
Definition of Available Cash.............................. 32
Establishment of Reserves................................. 32
Cash, i-Unit and Share Distributions...................... 32
Two Different Types of Distributions...................... 32
General Procedure for Quarterly Distributions............. 33
Adjustment of Target Distribution Levels.................. 36
Distributions in Liquidation.............................. 37
CAPITALIZATION OF KINDER MORGAN MANAGEMENT, LLC............. 38
CAPITALIZATION OF KINDER MORGAN ENERGY PARTNERS, L.P........ 39
CAPITALIZATION OF KINDER MORGAN, INC........................ 40
SELECTED FINANCIAL DATA OF KINDER MORGAN ENERGY PARTNERS,
L.P....................................................... 41
SELECTED PRO FORMA FINANCIAL DATA OF KINDER MORGAN ENERGY
PARTNERS, L.P............................................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 45
Kinder Morgan Management, LLC............................. 45
Kinder Morgan Energy Partners, L.P. ...................... 46
DESCRIPTION OF OUR SHARES................................... 61
Distributions............................................. 61
Limited Voting Rights..................................... 63
Anti-dilution Adjustments................................. 64
Covenants................................................. 64
Optional Purchase......................................... 66
Mandatory Purchase........................................ 67
Exchange Feature.......................................... 68
Registration Rights....................................... 69
Tax Indemnity of Kinder Morgan, Inc. ..................... 70
Transfer Agent and Registrar.............................. 70
Book Entry System......................................... 70
Replacement of Share Certificates......................... 71
Fractional Shares......................................... 71
DESCRIPTION OF THE i-UNITS.................................. 72
Voting Rights............................................. 72
Distributions and Payments................................ 72
Merger, Consolidation or Sale of Assets................... 73
Federal Income Tax Characteristics........................ 73
BUSINESS.................................................... 74
Kinder Morgan Management, LLC............................. 74
Kinder Morgan Energy Partners, L.P. ...................... 76
Kinder Morgan, Inc. ...................................... 81
MANAGEMENT OF KINDER MORGAN MANAGEMENT, LLC................. 81
Directors and Executive Officers.......................... 81
Board of Directors and Committees......................... 84
Director Compensation..................................... 84
Executive Compensation.................................... 84
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Page
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RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................ 85
Our Relationship with Kinder Morgan, Inc. and Kinder
Morgan Energy Partners, L.P. ........................... 85
Tax Indemnification and Other Agreement................... 88
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 90
Conflicts of Interest..................................... 90
Situations in Which a Conflict of Interest Could Arise.... 90
Fiduciary Duties Owed to Our Shareholders and the Owners
of Units................................................ 91
LIMITED LIABILITY COMPANY AGREEMENT......................... 94
Formation................................................. 94
Purpose and Powers........................................ 94
Federal Income Tax Status as a Corporation................ 94
Power of Attorney......................................... 94
Members................................................... 94
Limited Liability......................................... 95
The Board................................................. 95
Officers and Employees.................................... 95
Capital Structure......................................... 95
Dissolution and Liquidation............................... 95
Exculpation and Indemnification........................... 96
Amendments................................................ 96
Meetings; Voting.......................................... 96
Books and Records; List of Shareholders................... 96
No Removal................................................ 97
Distributions............................................. 97
Exchange.................................................. 97
Optional Mandatory Purchase............................... 97
Purchase Events........................................... 97
DESCRIPTION OF COMMON UNITS AND CLASS B UNITS............... 98
Number of Units........................................... 98
Where Units are Traded.................................... 98
Quarterly Distributions................................... 98
Transfer Agent and Registrar.............................. 98
Summary of Partnership Agreement.......................... 98
SHARES ELIGIBLE FOR FUTURE SALE............................. 99
INCOME TAX CONSIDERATIONS RELATING TO THE SHARES AND THE
COMMON UNITS.............................................. 99
Legal Opinions............................................ 100
Federal Income Tax Considerations Associated with the
Ownership and Disposition of Shares..................... 100
Tax Consequences of Share Ownership....................... 101
Federal Income Tax Considerations Associated with the
Ownership and Disposition of Common Units............... 103
Limited Partner Status.................................... 105
Tax Consequences of Common Unit Ownership................. 106
Tax Treatment of Operations............................... 112
Disposition of Common Units............................... 113
Uniformity of Common Units................................ 115
Tax-Exempt Organizations, Mutual Funds and Non U.S.
Investors............................................... 115
Administrative Matters.................................... 116
Foreign, State, Local and Other Tax Considerations........ 119
ERISA CONSIDERATIONS........................................ 119
UNDERWRITING................................................ 122
LEGAL MATTERS............................................... 125
EXPERTS..................................................... 125
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 126
INDEX TO FINANCIAL STATEMENTS............................... 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., the general partner of Kinder Morgan
Energy Partners, L.P. You should also read carefully the information, including
the financial statements and the footnotes to those statements, which is
incorporated by reference in this prospectus.
KINDER MORGAN Management, LLC
We are a recently formed limited liability company that has elected to be
treated as a corporation for United States income tax purposes. We will be a
limited partner in Kinder Morgan Energy Partners, L.P. and will manage and
control its business and affairs. All of our voting shares are owned indirectly
by Kinder Morgan, Inc. 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. We were formed in Delaware on February 14, 2001. For
more information regarding our management and control of the business and
affairs of Kinder Morgan Energy Partners, L.P., please read "Business -- Kinder
Morgan Management, LLC."
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 in terms of
market capitalization. It owns and operates one of the largest refined petroleum
products pipeline systems in the United States. 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 an announced $1.00 per common unit for the first
quarter of 2001. Its operations are grouped into the following business
segments:
- PRODUCTS PIPELINES: Over 10,000 miles of pipelines and associated
terminals delivering gasoline, diesel fuel, jet fuel and natural gas
liquids to various markets;
- NATURAL GAS PIPELINES: Transports, treats, processes and stores natural
gas on approximately 12,000 miles of pipeline;
- CO(2) PIPELINES: Markets and transports carbon dioxide, commonly called
CO(2), to oil fields which use CO(2) to increase production of oil;
- BULK TERMINALS: 29 bulk terminal facilities which handle more than 40
million tons of coal, petroleum coke and other products annually; and
- LIQUIDS TERMINALS: Handles refined petroleum products, chemicals, and
other liquid products.
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GATX TRANSACTION
In March 2001, Kinder Morgan Energy Partners, L.P. completed the
acquisition of GATX Corporation's domestic pipeline and terminal business for
approximately $1.17 billion. The primary assets acquired include CALNEV Pipe
Line Company, a 550-mile petroleum products pipeline system extending from
Colton, California to Las Vegas, Nevada; Central Florida Pipeline Company, a
195-mile petroleum products pipeline system extending from Tampa, Florida to
Orlando, Florida; and 12 liquids terminals with a storage capacity of 35.6
million barrels. CALNEV Pipe Line Company, Central Florida Pipeline Company, and
those terminals located on the West Coast will be included in Kinder Morgan
Energy Partners, L.P.'s Product Pipeline segment. The remaining terminals will
comprise a new business segment of Kinder Morgan Energy Partners, L.P. called
Liquids Terminals.
BUSINESS STRATEGY
Kinder Morgan Energy Partners, L.P.'s objective is to grow by:
- providing, for a fee, transportation, storage and handling services 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 its financial structure.
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.
Generally, as utilization of its pipelines and terminals increases, Kinder
Morgan Energy Partners, L.P.'s fee-based revenues increase. Increases in
utilization are principally driven by increases in demand for gasoline, jet
fuel, natural gas and other energy products transported and handled by Kinder
Morgan Energy Partners, L.P. Increases in demand for these products are
generally driven by demographic growth in markets served by Kinder Morgan Energy
Partners, L.P., including the rapidly growing western and southeastern United
States.
Since February 1997, Kinder Morgan Energy Partners, L.P. has closed 21
acquisitions valued at approximately $4.8 billion. These acquisitions have
assisted Kinder Morgan Energy Partners, L.P. in growing from net income of $17.7
million in 1997 to net income of $278.3 million in 2000. Kinder Morgan Energy
Partners, L.P. intends to make additional acquisitions of pipelines, terminals
and other energy-related transportation assets.
KINDER MORGAN, INC.
Kinder Morgan, Inc., a Kansas corporation, with its stock traded on the
NYSE under the symbol "KMI", is one of the largest energy transportation and
storage companies in America, operating more than 30,000 miles of natural gas
and products pipelines. Kinder Morgan, Inc. also provides retail natural gas
distribution service to approximately 225,000 customers, and develops, owns and
operates power plants fueled by natural gas. Kinder Morgan, Inc.'s ownership of
both general and limited partnership interests in Kinder Morgan Energy Partners,
L.P. is expected to contribute over $200 million of earnings in 2001.
OFFICES
The principal executive offices of Kinder Morgan Management, LLC, Kinder
Morgan, Inc. and Kinder Morgan Energy Partners, L.P. are located at One Allen
Center, Suite 1000, 500 Dallas Street, Houston, Texas 77002, and the phone
number at this address is (713) 369-9000.
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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 KINDER MORGAN MANAGEMENT, LLC SHARES, I-UNITS AND KINDER MORGAN
MANAGEMENT, LLC
- The market price of our shares may be volatile and may be less than the
market price of the common units of Kinder Morgan Energy Partners, L.P.
- The value of the quarterly per-share distribution of an additional
fractional share may be less than the cash distribution on a common unit.
- Kinder Morgan Energy Partners, L.P. could be treated as a corporation for
federal income tax purposes. This would substantially reduce the cash
distributions on the common units and the value of i-units which Kinder
Morgan Energy Partners, L.P. will distribute quarterly to us and the
value of our fractional shares we will distribute quarterly to you.
- If owners of Kinder Morgan Management, LLC shares exchange their shares
for common units of Kinder Morgan Energy Partners, L.P., the market for
our 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
ownership interest.
- Our success will be dependent upon our operation and management of Kinder
Morgan Energy Partners, L.P. and its resulting performance.
- Your shares are subject to optional and mandatory purchase provisions
which could result in your having to sell your shares at a time or price
you do not like.
- Kinder Morgan, Inc. may be unable to satisfy its obligation to exchange
common units or cash for shares or to purchase shares upon the occurrence
of the mandatory purchase events, resulting in a loss in value of your
shares.
- As an owner 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 Kinder Morgan Energy Partners, L.P. is liquidated. As a result, you
may receive less per share in a liquidation than is received by an owner
of a common unit.
- A person or group owning 20% or more of the aggregate number of issued
and outstanding common units and Kinder Morgan Management, LLC shares,
other than Kinder Morgan, Inc. and its affiliates, may not vote common
units or shares; as a result, you are less likely to receive a premium
for your shares in a hostile takeover.
- The exercise of the exchange feature or the mandatory or optional
purchase right associated with our shares is a taxable event to the
owners of Kinder Morgan Management, LLC shares that dispose of their
shares pursuant to that exercise.
- Owners of Kinder Morgan Management, LLC shares have limited voting rights
and therefore will have little or no opportunity to influence or change
management.
RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P.
- Common unitholders have limited voting rights and therefore have little
or no opportunity to influence or change management.
- There are tax risks to common unitholders of Kinder Morgan Energy
Partners, L.P. that do not exist for owners of Kinder Morgan Management,
LLC shares. For example, the
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9
ownership of common units will result in unrelated business taxable
income to tax exempt persons, nonqualifying income to mutual funds and
withholding of taxes on distributions made to non U.S. persons. If you
are one of these persons, this may reduce the value to you of the right
to exchange your shares for common units.
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. If these proceedings are determined adversely, they could have
a material adverse impact on us.
- Kinder Morgan Energy Partners, L.P.'s acquisition strategy requires
access to new capital. Tightened credit markets or more expensive capital
will impair Kinder Morgan Energy Partners, L.P.'s ability to grow.
- Environmental regulation could result in increased operating and capital
costs for Kinder Morgan Energy Partners, L.P.
- 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. does not own approximately 97.5% of
the land on which its pipelines are constructed and Kinder Morgan Energy
Partners, L.P. is subject to the possibility of increased costs to retain
necessary 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 and increase its financing costs.
- Restrictions on Kinder Morgan Energy Partners, L.P.'s ability to prepay
the debt of SFPP, L.P. may limit its financial flexibility and increase
its financing costs.
RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS ON LIABILITY
- The interests of Kinder Morgan, Inc. may differ from our interests, the
interests of our shareholders and the interests of unitholders of Kinder
Morgan Energy Partners, L.P.
- Our limited liability company agreement modifies the fiduciary duties
owed by our board of directors to our shareholders and the partnership
agreement of Kinder Morgan Energy Partners, L.P. modifies the fiduciary
duties owed by the general partner to the unitholders.
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ORGANIZATIONAL STRUCTURE
The following charts depict the current organizational structure of Kinder
Morgan, Inc. and Kinder Morgan Energy Partners, L.P. and the organizational
structure following the offering.
[CHART]
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11
[CHART]
OWNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS
SUBSIDIARY OPERATING PARTNERSHIPS, ON A COMBINED BASIS AFTER THE
OFFERING:
i-units (entire class owned by Kinder Morgan
Management, LLC)...................................... 11.0%
Common units owned by the public....................... 69.0%
Common units and Class B units owned by Kinder Morgan,
Inc. and affiliates................................... 18.0%
General partner interest............................... 2.0%
------
Total........................................ 100.0%
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THE OFFERING
Shares offered................ 8,500,000 shares representing limited liability
company interests
Shares offered to the
public........................ 7,650,000 shares representing limited liability
company interests
Shares offered to Kinder
Morgan, Inc................... 850,000 shares representing limited liability
interests
Shares outstanding after this
offering.................... 8,500,000 shares representing limited liability
company interests
Use of proceeds............... We will use all of the net proceeds of the
offering of our shares, expected to be
approximately $501 million, as follows:
- approximately $500 million for the purchase
of a number of i-units from Kinder Morgan
Energy Partners, L.P. that will equal the
number of our shares outstanding after this
offering; and
- approximately $1 million to compensate Kinder
Morgan, Inc. for its purchase, exchange and
tax indemnity obligations, commonly called the
"related rights".
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 it receives from the sale of
i-units to us to reduce short-term debt it
incurred in its acquisition of the domestic
pipeline and terminal businesses of GATX
Corporation. Kinder Morgan Energy Partners,
L.P.'s total debt prior to this offering is
approximately $3.0 billion. This total debt
will be reduced to approximately $2.5 billion
following the close of this offering. Kinder
Morgan, Inc. will use the proceeds it receives
from Kinder Morgan Management, LLC for general
corporate purposes.
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 United States
income tax purposes. Kinder Morgan Management,
LLC will be a limited partner in Kinder Morgan
Energy Partners, L.P. and will manage and
control that partnership's business and
affairs.
Federal Income Tax Matters
Associated with our
Shares...................... Because we will be treated as a corporation for
United States income tax purposes, an owner of
our shares will
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not report on its United States income tax
return any of our items of income, gain, loss
and deduction. As a result of owning 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's ownership or sale of
our shares will not generate income derived
from an unrelated trade or business regularly
carried on by the tax-exempt investor, which is
generally referred to as unrelated business
taxable income, 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, which
generally means income other than interest,
dividends and gains from the sale of stock or
securities. Furthermore, the ownership of our
shares by a mutual fund will be treated as a
qualifying asset, which generally includes
cash, certain receivables, government
securities and other securities. There will not
be any withholding taxes imposed on quarterly
or other distributions of additional shares to
non U.S. persons or gain from the sale of our
shares by a non U.S. person provided it owns
fewer than 5% of our shares and our shares are
traded on a nationally recognized securities
exchange.
Income Tax Matters Associated
with i-units................ We will be subject to income taxes 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 for the related tax liability to
the extent that liability exceeds the cash we
receive related to that income.
Distributions................. We will make distributions on our shares only
in additional shares except upon our
liquidation. The fraction of an additional
share distributed each quarter per share
outstanding will be equal to the amount of 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 as determined for a
ten-trading day period ending on the trading
day immediately prior to the ex-dividend date
for the shares.
Exchange Feature.............. At any time after the 45th day following the
closing of this offering, owners of our shares
may exchange their shares for common units of
Kinder Morgan Energy Partners, L.P. owned by
Kinder Morgan, Inc. and its subsidiaries. Upon
exercise of this right to exchange Kinder
Morgan, Inc. may elect to deliver cash rather
than common units. As of the date of this
prospectus, Kinder Morgan, Inc. and its
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subsidiaries own 11,312,000 common units and
2,656,700 Class B units.
Mandatory Purchase............ If any of the events listed below occurs,
Kinder Morgan, Inc. will be required to
purchase all of our then outstanding shares
owned by others at a purchase price equal to
the higher of the average market price of the
shares and the common units as determined for a
ten-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 by
Kinder Morgan Energy Partners, L.P.,
including pursuant to an issuer tender offer,
during a 360-day period of an amount
exceeding 50% of the average market price of
a common unit for the ten trading days ending
on the trading day immediately prior to the
beginning of that 360-day period;
- an event resulting in Kinder Morgan, Inc. and
its affiliates ceasing to be 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., unless:
-- a new person or entity that becomes the
beneficial owner of more than 50% of that
total voting power is organized under the
laws of a state in the United States and
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 owners 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, unless in the transaction:
-- the owners of common units receive a
security that has in all material respects
the same rights and privileges as the
common units;
-- we receive a security which has in all
material respects the same rights and
privileges as the i-units;
-- an owner of common units receives no
consideration 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 the average
market price of a common unit for the
ten-day trading period ending on the
trading day immediately prior to the date
of the transaction; and
-- no consideration is received by us or the
owners of i-units other than the securities
referred to above.
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Optional Purchase............. Kinder Morgan, Inc. has the right to purchase
all of our shares owned by others in two
circumstances:
- when Kinder Morgan, Inc. and its affiliates
own 80% or more of our outstanding shares, and
- when Kinder Morgan, Inc. and its affiliates
own a number of our shares and common units
which equals 80% or more of the sum of the
aggregate number of our outstanding shares and
the aggregate number of outstanding common
units. In this second case, however, Kinder
Morgan, Inc. has the right to purchase both
the shares and the common units owned by
others, and cannot purchase either the shares
or the common units alone.
In these two circumstances, the purchase price
per share is calculated differently. If the
first circumstance exists and Kinder Morgan,
Inc. elects to purchase the shares, the
purchase price per share will equal 110% of the
higher of:
- the average closing price for the shares for
the ten consecutive trading days ending five
days prior to the date the notice of the
purchase is mailed to the owners of our
shares; and
- the highest price Kinder Morgan, Inc. or its
affiliates paid for such shares during the 90
days prior to the giving of the notice,
excluding exchanges or cash settlements
pursuant to the exchange feature of the
shares.
If the second circumstance exists and Kinder
Morgan, Inc. elects to purchase both the shares
and the common units, the purchase price per
share and the purchase price per common unit
will both equal the higher of:
- the average closing price for the shares or
common units for the 20 consecutive trading
days ending five days prior to the date the
notice of the purchase is mailed to the
owners; and
- the highest price Kinder Morgan, Inc. or its
affiliates paid for such shares or common
units, during the 90 days prior to the giving
of the notice, excluding exchanges or cash
settlements pursuant to the exchange feature
of the shares.
Voting Rights................. Kinder Morgan G.P., Inc. owns all of our voting
shares; however, owners of the class of shares
issued in this offering 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
proportionately to the number of affirmative
and negative votes and abstentions cast by
the owners of our shares. The i-units vote
with the Kinder Morgan Energy Partners, L.P.
common units and Class B units on all matters
the common units and Class B units vote
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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 adverse effect on
owners of the i-units in relation to the
owners of other then existing classes of
limited partnership interests; 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, tax
indemnification, purchase and delegation of
control agreements, each as described below,
but only if any of these amendments would
have a material adverse effect on us or the
owners of our shares.
A person or group owning common units or shares
or both common units and shares which
constitute 20% or more of the aggregate number
of issued and outstanding common units and
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 always be equal.
Our Covenants................. Our limited liability company agreement
provides:
- that our activities will be limited to being
a limited partner in Kinder Morgan Energy
Partners, L.P. and managing and controlling
its business and affairs;
- that all classes of shares we issue, other
than the class of shares offered in this
prospectus, must be owned by 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 our outstanding
shares.
Covenants of Kinder Morgan
Energy Partners, L.P........ Upon the closing of this offering, the Kinder
Morgan Energy Partners, L.P. partnership
agreement will be amended to provide that
Kinder Morgan Energy Partners, L.P. will not:
- except in liquidation, pay a distribution on
i-units other than in additional i-units or a
security that has in all material respects the
same rights and privileges as the i-units;
- pay a distribution on a common unit other
than in cash, additional common units or a
security that has in all
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material respects the same rights and
privileges as the common units;
- allow an owner of common units to receive any
consideration other than cash, common units
or a security that has in all material
respects the same rights and privileges as
the common units, or allow us as the owner of
the i-units to receive any consideration
other than i-units or a security which has in
all material respects the same rights and
privileges as the 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;
- 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. or its affiliates
after the transaction; and
-- the transaction would be a mandatory
purchase event;
- 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 360 days
and the aggregate amount of any cash
distributions to all owners of common
units made within the preceding 360-day
period, is less than 12% of the aggregate
average market value of the units of
Kinder Morgan Energy Partners, L.P.
determined on the trading day immediately
preceding the commencement of the tender
offer;
or
- issue any of its i-units to any person other
than us.
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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
PRO FORMA
AS ADJUSTED
FEBRUARY 16, 2001 FOR THE OFFERING
HISTORICAL (UNAUDITED)
----------------- ----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
ASSETS
Cash..................................................... $100 $ 100
i-units and related rights............................... -- 501,350
---- --------
Total assets............................................... $100 $501,450
==== ========
LIABILITIES AND EQUITY
Liabilities:............................................... -- --
Equity:
Voting shares............................................ $100 $ 100
Outstanding shares....................................... -- 501,350
---- --------
Total liabilities and equity............................... $100 $501,450
==== ========
The as adjusted balance sheet reflects the sale of 8,500,000 shares offered
at an assumed initial public offering price of $63.10 per share, after deducting
underwriting discounts and estimated offering expenses, and the application of
all those funds to purchase i-units from Kinder Morgan Energy Partners, L.P. and
to acquire the related rights from Kinder Morgan, Inc.
(continued on next page)
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KINDER MORGAN ENERGY PARTNERS, L.P. SELECTED FINANCIAL DATA
You should read the following selected financial data of Kinder Morgan
Energy Partners, L.P. in connection 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 35,612 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
======== ======== ========== ========== ==========
General partner's interest in net income..... $ 218 $ 4,074 $ 33,447 $ 56,273 $ 109,470
Limited partners' interest in net income..... $ 11,682 $ 13,663 $ 70,159 $ 126,029 $ 168,878
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 the Pacific operations, Kinder Morgan
Bulk Terminals, Inc. and the 24% interest in Plantation Pipe Line Company
since the respective dates of acquisition. The Pacific
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operations were acquired on March 6, 1998, Kinder Morgan Bulk Terminals,
Inc. was acquired effective July 1, 1998 and our 24% interest in Plantation
Pipe Line Company was acquired on September 15, 1998.
(5) Includes results of operations for the 51% interest in Plantation Pipe Line
Company, Product Pipelines' transmix operations and the 33 1/3% interest in
Trailblazer Pipeline Company since the respective dates of acquisition. Our
second investment in Plantation Pipe Line Company, representing a 27%
interest was made on June 16, 1999. The Product Pipelines' transmix
operations were acquired on September 10, 1999, and our initial 33 1/3%
investment in Trailblazer was made on November 30, 1999.
(6) Includes results of operations for Kinder Morgan Interstate Gas Transmission
LLC, the 66 2/3% interest in Trailblazer Pipeline Company, the 49% interest
in Red Cedar Gathering Company, Kinder Morgan CO(2) Company acquisitions,
Milwaukee and Dakota bulk terminals, Kinder Morgan Transmix Company, LLC,
the 32.5% interest in Cochin Pipeline System and Delta Terminal Services
since dates of acquisition. Kinder Morgan Interstate Gas Transmission, LLC,
Trailblazer Pipeline Company assets, and our 49% interest in Red Cedar
Gathering Company were acquired effective December 31, 1999. Milwaukee Bulk
Terminals, Inc. and Dakota Bulk Terminal, Inc. were acquired effective
January 1, 2000. Our remaining 80% interest in Kinder Morgan CO(2) Company,
was acquired on April 1, 2000. The Devon Energy carbon dioxide properties
were acquired on June 1, 2000. Kinder Morgan Transmix Company, LLC (formerly
Buckeye Transmix) was acquired on October 25, 2000. Our 32.5% interest in
Cochin Pipeline System was acquired effective November 3, 2000, and Delta
Terminal Services, Inc. was acquired effective December 1, 2000.
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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
-- the issuance of $700 million of 6.75% notes due 2011 and $300 million
of 7.40% notes due 2031, and the application of the proceeds to
retire short-term debt; and
- as adjusted to reflect the payment by Kinder Morgan Management, LLC of
the net proceeds of our public offering of the shares (less $1 million
paid to Kinder Morgan, Inc. for the related rights), expected to be
$500,350,000, to purchase a number of i-units from Kinder Morgan Energy
Partners, L.P. equal to the number of outstanding shares of Kinder Morgan
Management, LLC and the use by Kinder Morgan Energy Partners, L.P. of its
share of those net proceeds to retire short-term debt.
The unaudited pro forma data for GATX 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 using the purchase method of
accounting to give effect to the acquisition of the domestic terminals and
pipeline operations of GATX Terminals Companies for $1.170 billion, consisting
of $988.5 million in cash and assumed debt and other liabilities of $181.5
million, exclusive of working capital. On March 1, 2001, Kinder Morgan Energy
Partners, L.P. closed the acquisition of all of the assets purchased from GATX
other than the CALNEV Pipe Line Company. Kinder Morgan Energy Partners, L.P.
completed the acquisition of the CALNEV Pipe Line Company on March 30, 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 estimate of the fair market
values of assets acquired and liabilities assumed.
The unaudited pro forma data include assumptions and adjustments as
described in the notes to the unaudited pro forma combined financial statements
incorporated 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 by reference into this prospectus.
The unaudited pro forma data may not be indicative of the results that
would have occurred if the GATX acquisition had been consummated on the date
indicated or which will be obtained in the future.
(continued on next page)
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PRO FORMA PRO FORMA
YEAR ENDED FOR GATX AS ADJUSTED
DECEMBER 31, AND DEBT FOR SALE OF
2000 OFFERING 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) (174,393) (137,364)
Other, net.............................................. 14,584 14,584 14,584
Minority interest....................................... (7,987) (8,167) (8,541)
---------- ---------- ----------
Income before income taxes.............................. 292,282 312,821 349,477
Income tax benefit (expense)............................ (13,934) (13,934) (13,934)
---------- ---------- ----------
Net income.............................................. $ 278,348 $ 298,887 $ 335,543
========== ========== ==========
General partner's interest in net income................ $ 109,470 $ 122,094 $ 136,082
Limited partner's interest in net income................ $ 168,878 $ 176,793 $ 199,461
Basic limited partners' net income per unit............. $ 2.68 $ 2.80 $ 2.79
========== ========== ==========
Number of units used in computation..................... 63,106 63,106 71,607
Diluted limited partners' net income per unit........... $ 2.67 $ 2.80 $ 2.78
========== ========== ==========
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 $5,829,015 $5,829,015
Short-term debt......................................... $ 648,949 $ 654,678 $ 149,222
Long-term debt.......................................... $1,255,453 $2,375,203 $2,375,203
Partners' capital....................................... $2,117,067 $2,117,067 $2,617,417
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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,
or incorporated by reference into, 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 KINDER MORGAN MANAGEMENT, LLC SHARES, I-UNITS AND KINDER MORGAN
MANAGEMENT, LLC
THE MARKET PRICE OF OUR SHARES MAY BE VOLATILE AND MAY BE LESS THAN THE
MARKET PRICE OF THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P. Prior
to this offering, you could not buy or sell Kinder Morgan Management, LLC
shares. An active public trading market for our shares may not 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.
THE VALUE OF THE QUARTERLY PER SHARE DISTRIBUTION OF AN ADDITIONAL
FRACTIONAL SHARE MAY BE LESS THAN THE CASH DISTRIBUTION ON A COMMON UNIT. The
fraction of a Kinder Morgan Management, LLC share to be issued in 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. Since the
market price of our shares may vary substantially over time, the market value on
the date you receive a distribution of additional shares may vary substantially
from the cash you would have received had you owned common units instead of
shares.
KINDER MORGAN ENERGY PARTNERS, L.P. COULD BE TREATED AS A CORPORATION FOR
FEDERAL INCOME TAX PURPOSES. THIS WOULD SUBSTANTIALLY REDUCE THE CASH
DISTRIBUTIONS ON THE COMMON UNITS AND THE VALUE OF I-UNITS WHICH KINDER MORGAN
ENERGY PARTNERS, L.P. WILL DISTRIBUTE QUARTERLY TO US AND OUR SHARES WE WILL
DISTRIBUTE QUARTERLY TO YOU. The anticipated benefit of an investment in shares
depends largely on the treatment of Kinder Morgan Energy Partners, L.P. as a
partnership for 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 requires
Kinder Morgan Energy Partners, L.P. to derive at least 90% of its annual gross
income from specific activities to continue to be treated as a partnership for
income tax purpose. Kinder Morgan Energy Partners, L.P. may not find it
possible, regardless of its efforts, to meet this income requirement or may
inadvertently fail to meet this income requirement. Current law may change so as
to cause Kinder Morgan Energy Partners, L.P. to be taxed as a corporation for
income tax purposes without regard to its income or otherwise subject Kinder
Morgan Energy Partners, L.P. to entity-level taxation.
If Kinder Morgan Energy Partners, L.P. were to be treated 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% and would pay
state taxes at varying rates. 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 value of i-units distributed quarterly to us and our shares
distributed quarterly to you. Treatment of Kinder Morgan Energy Partners, L.P.
as a corporation would cause a substantial reduction in the value of our shares.
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IF OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES EXCHANGE THEIR SHARES FOR
COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P., THE MARKET FOR OUR SHARES
MAY BECOME LESS LIQUID. Subject to Kinder Morgan, Inc.'s election to deliver
cash in lieu of common units, our shares may be exchanged at any time after the
45th day following the closing of this offering for common units of Kinder
Morgan Energy Partners, L.P. If owners of our shares exercise their exchange
features, the number of shares owned 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 reduced.
KINDER MORGAN ENERGY PARTNERS, L.P. MAY ISSUE ADDITIONAL COMMON OR OTHER
UNITS AND WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD DILUTE YOUR OWNERSHIP
INTEREST. The issuance of additional common units or shares other than in our
quarterly distributions to you may have the following effects:
- the amount available for distributions on each share may decrease;
- the relative voting power of each previously outstanding share will be
decreased; and
- the market price of shares may decline.
OUR SUCCESS WILL BE DEPENDENT UPON OUR OPERATION AND MANAGEMENT OF KINDER
MORGAN ENERGY PARTNERS, L.P. AND ITS RESULTING PERFORMANCE. After this offering
we will be a limited 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, distributions on our i-units will decrease correspondingly,
and distributions to holders of our shares will decrease as well.
YOUR SHARES ARE SUBJECT TO OPTIONAL AND MANDATORY PURCHASE PROVISIONS WHICH
COULD RESULT IN YOUR HAVING TO SELL YOUR SHARES AT A TIME OR PRICE YOU DO NOT
LIKE. If any of the events listed below occurs, Kinder Morgan, Inc. will be
required to purchase all of our then outstanding shares at a purchase price
equal to the higher of the average market price of the shares and the common
units as determined for a ten-trading day period ending on the trading day
immediately prior to the date of the applicable event.
The mandatory purchase events include:
- aggregate distributions or other payments by Kinder Morgan Energy
Partners, L.P., other than in common units or in securities which have in
all material respects the same rights and privileges as common units but
including pursuant to an issuer tender offer, during a 360-day period of
an amount exceeding 50% of the average market price of a common unit for
the ten trading days ending on the trading day immediately prior to the
beginning of that 360-day period;
- an event resulting in Kinder Morgan, Inc. and its affiliates ceasing to
be the beneficial owners 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:
-- a new person or entity that becomes the beneficial owner of more than
50% of that total voting power 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 owners of our shares; and
- 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, unless in the transaction:
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-- the owners of common units receive a security that has in all material
respects the same rights and privileges as the common units;
-- we receive a security which has in all material respects the same
rights and privileges as the i-units;
-- an owner of common units receives no consideration 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 the average
market price of a common unit for the ten trading day period ending on
the trading day immediately prior to the date of the transaction; and
-- no consideration is received by us or the owners of i-units other than
the securities referred to above.
In addition, Kinder Morgan, Inc. has the right to purchase all of our
shares owned by other holders in two circumstances:
- when Kinder Morgan, Inc. and its affiliates own 80% or more of our
outstanding shares; and
- when Kinder Morgan, Inc. and its affiliates own a number of shares and
common units which equals 80% or more of the sum of the aggregate number
of our outstanding shares and the aggregate number of outstanding common
units. In this second case, however, Kinder Morgan, Inc. and its
affiliates have the right to purchase both the shares and the common units
owned by other holders, and cannot purchase either the shares or the units
alone.
In these two circumstances, the purchase price per share is calculated
differently. If the first circumstance exists and Kinder Morgan, Inc. elects to
purchase the shares, the purchase price per share will equal 110% of the higher
of:
- the average closing price for the shares for the ten consecutive trading
days ending five days prior to the date the notice of the purchase is
mailed to the owners of our shares; and
- the highest price Kinder Morgan, Inc. or its affiliates paid for such
shares during the 90 days prior to the giving of the notice, excluding
exchanges or cash settlements pursuant to the exchange feature of the
shares.
If the second circumstance exists and Kinder Morgan, Inc. elects to purchase
both the shares and the common units, the purchase price per share and the
purchase price per common unit will both equal the higher of:
- the average closing price for the shares or common units for the 20
consecutive trading days ending five days prior to the date the notice of
the purchase is mailed to the owners; and
- the highest price Kinder Morgan, Inc. or its affiliates paid for such
shares or common units, during the 90 days prior to the giving of the
notice, excluding exchanges or cash settlements pursuant to the exchange
feature of the shares.
If either of the optional purchase rights are exercised by Kinder Morgan,
Inc., or if there is a mandatory purchase event, you will be required to sell
your shares at a time or price that may be undesirable, and could receive less
than you paid for your shares. You may also incur a tax liability upon the sale
of your shares. For further information regarding the optional and mandatory
purchase rights, please read "Description of Our Shares -- Optional Purchase"
and "Description of Our Shares -- Mandatory Purchase."
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KINDER MORGAN, INC. MAY BE UNABLE TO SATISFY ITS OBLIGATION TO EXCHANGE
COMMON UNITS OR CASH FOR SHARES OR TO PURCHASE SHARES UPON THE OCCURRENCE OF THE
MANDATORY PURCHASE EVENTS, RESULTING IN A LOSS IN VALUE OF YOUR SHARES. The
obligations of Kinder Morgan, Inc. to exchange common units or cash for shares
or 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
Kinder Morgan, Inc. to secure its obligations or comply with financial
covenants. In either of these circumstances you may not receive cash or common
units in exchange for your shares.
AS AN OWNER 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
KINDER MORGAN ENERGY PARTNERS, L.P. IS LIQUIDATED. AS A RESULT, YOU MAY RECEIVE
LESS PER SHARE IN A LIQUIDATION THAN IS RECEIVED BY AN OWNER OF A COMMON UNIT.
If Kinder Morgan Energy Partners, L.P. is liquidated and Kinder Morgan, Inc.
does not satisfy its obligation to purchase your shares which is triggered by a
liquidation, then the value of your shares may depend on the liquidating
distribution received by us as the owner of i-units. 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 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 will likely realize
taxable income upon the liquidation of Kinder Morgan Energy Partners, L.P.
However, there may not be sufficient amounts of income and gain 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 and therefore you may receive less value than
would be received by an owner of common units.
Further, the tax indemnity provided to us by Kinder Morgan, Inc. only
indemnifies us for our tax liabilities to the extent we have not received cash
in the transaction generating the tax liability adequate to pay the tax. Prior
to liquidation of Kinder Morgan Energy Partners, L.P. we do not expect to
receive cash in a taxable transaction. If a liquidation of Kinder Morgan Energy
Partners, L.P. occurs, however, we would likely receive cash which would need to
be used at least in part to pay taxes. As a result our residual value would be
substantially reduced.
A PERSON OR GROUP OWNING 20% OR MORE OF THE AGGREGATE NUMBER OF ISSUED AND
OUTSTANDING COMMON UNITS AND KINDER MORGAN MANAGEMENT, LLC SHARES, OTHER THAN
KINDER MORGAN, INC. AND ITS AFFILIATES, MAY NOT VOTE COMMON UNITS OR SHARES; AS
A RESULT, YOU ARE LESS LIKELY TO RECEIVE A PREMIUM FOR YOUR SHARES IN A HOSTILE
TAKEOVER. Any common units and shares owned by a person or group that owns 20%
or more of the aggregate number of issued and outstanding common units and
shares cannot be voted. This limitation does not apply to Kinder Morgan, Inc.
and its affiliates. This provision may:
- discourage a person or group from attempting to take over control of us
or 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.
THE EXERCISE OF THE EXCHANGE FEATURE OR THE MANDATORY OR OPTIONAL PURCHASE
RIGHT ASSOCIATED WITH OUR SHARES IS A TAXABLE EVENT TO THE OWNERS OF KINDER
MORGAN MANAGEMENT, LLC SHARES THAT DISPOSE OF THEIR SHARES PURSUANT TO THAT
EXERCISE. Any sale or exchange of our shares, with Kinder Morgan, Inc. or
otherwise, for common units or cash will be a taxable transaction to the owner
of the shares sold or exchanged. Accordingly, a gain or loss will be recognized
on the sale or exchange equal to the difference between the fair market value
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of the common units or cash received and the owner's tax basis in the shares
sold or exchanged.
OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES HAVE LIMITED VOTING RIGHTS
AND THEREFORE WILL HAVE LITTLE OR NO OPPORTUNITY TO INFLUENCE OR CHANGE
MANAGEMENT. Kinder Morgan G.P., Inc., owns 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 owners of i-units, for which the i-units
will be voted in proportion to the vote of the owners of our shares;
- amendments to our limited liability company agreement, including the
purchase and exchange provisions, the Kinder Morgan, Inc. tax indemnity
agreement, the Kinder Morgan Energy Partners, L.P. registration rights
agreement, and the delegation of control agreement; but only if any of
these amendments would have an adverse effect on us or the owners of the
common units; and
- amendments to the Kinder Morgan Energy Partners, L.P. partnership
agreement that would have an adverse effect on the owners of the i-units
in relation to the common units.
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.
For a more detailed description of these approval rights please see
"Business -- Kinder Morgan Management LLC."
RISKS RELATED TO THE COMMON UNITS OF KINDER MORGAN ENERGY PARTNERS, L.P.
COMMON UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND THEREFORE HAVE LITTLE OR
NO OPPORTUNITY TO INFLUENCE OR CHANGE MANAGEMENT. Owners of common units have
only limited voting rights on matters affecting Kinder Morgan Energy Partners,
L.P. Kinder Morgan Management, LLC, will manage partnership activities as the
delegatee of Kinder Morgan, G.P., Inc., the general partner of Kinder Morgan
Energy Partners, L.P. to the extent permitted by Delaware law and the Kinder
Morgan Energy Partners, L.P. partnership agreement. Owners 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
owners of a majority of the outstanding 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.
The limited partners may remove the general partner only if:
- the owners 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
- Kinder Morgan Energy Partners, L.P. receives an opinion of counsel
opining that the removal would not result in the loss of limited
liability to any limited partner or the limited
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partner of the operating partnership or cause the partnership or its
operating partnerships to be taxed other than as a partnership for
federal income tax purposes.
THERE ARE TAX RISKS TO COMMON UNITHOLDERS OF KINDER MORGAN ENERGY PARTNERS,
L.P. THAT DO NOT EXIST FOR OWNERS OF KINDER MORGAN MANAGEMENT, LLC SHARES. FOR
EXAMPLE, THE OWNERSHIP OF COMMON UNITS WILL RESULT IN UNRELATED BUSINESS TAXABLE
INCOME TO TAX EXEMPT PERSONS, NONQUALIFYING INCOME TO MUTUAL FUNDS AND
WITHHOLDING OF TAXES ON DISTRIBUTIONS MADE TO NON U.S. PERSONS. IF YOU ARE ONE
OF THOSE PERSONS, THIS MAY REDUCE THE VALUE TO YOU OF THE RIGHT TO EXCHANGE YOUR
SHARES FOR COMMON UNITS. The federal income tax consequences of owning common
units in an entity like Kinder Morgan Energy Partners, L.P. which is treated as
a partnership for income tax purposes are different than those associated with
owning shares in an entity like ours which is treated as a corporation for
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 and consequences
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 non U.S. persons may have adverse tax consequences from owning and
selling 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. Distributions to non U.S. persons
will be reduced by withholding taxes, currently at the rate of 39.6%, and non
U.S. persons will be required to file United States federal income returns and
pay tax on their share of Kinder Morgan Energy Partners, L.P.'s taxable income.
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. IF THE
PROCEEDINGS ARE DETERMINED ADVERSELY, THEY COULD HAVE A MATERIAL ADVERSE IMPACT
ON US. In 1992, 1995 and 1999, some shippers on Kinder Morgan Energy Partners,
L.P.'s pipelines filed complaints with the Federal Energy Regulatory Commission
and California Public Utilities Commission that seek substantial refunds for
alleged overcharges during the years in question and prospective reductions in
the tariff rates on our Pacific operations.
The complaints predominantly attacked the interstate pipeline tariff rates
of the Kinder Morgan Energy Partners, L.P.'s 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.
Complaining shippers seek substantial reparations for alleged overcharges during
the years in question and request prospective rate reductions 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.
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. After the
California Public Utilities Commission dismissed these complaints and
subsequently granted a limited rehearing on April 10, 2000, the complainants
filed a new
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complaint with the California Public Utilities Commission asserting SFPP, L.P.'s
intrastate rates were not just and reasonable.
The Federal Energy Regulatory Commission complaint seeks approximately $105
million in tariff refunds and approximately $35 million in prospective annual
tariff reductions. The California Public Utilities Commission complaint seeks
approximately $17 million in tariff refunds and approximately $10 million in
prospective annual tariff reductions. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Kinder Morgan Energy Partners, L.P."
KINDER MORGAN ENERGY PARTNERS, L.P.'S ACQUISITION STRATEGY REQUIRES ACCESS
TO NEW CAPITAL. TIGHTENED CREDIT MARKETS OR MORE EXPENSIVE CAPITAL WILL IMPAIR
KINDER MORGAN ENERGY PARTNERS, L.P.'S ABILITY TO GROW. 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. These
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 this strategy. Expensive capital
will limit Kinder Morgan Energy Partners, L.P.'s ability to make acquisitions
that increase net income and distributable cash on a per unit basis. Kinder
Morgan Energy Partners, L.P.'s ability to maintain its capital structure may
impact the market value of its common units.
ENVIRONMENTAL REGULATION COULD RESULT IN INCREASED OPERATING AND CAPITAL
COSTS FOR KINDER MORGAN ENERGY PARTNERS, L.P. 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. The impact of Environmental
Protection Agency standards or future environmental measures on Kinder Morgan
Energy Partners, L.P. could increase its costs 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.
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;
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- 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 are 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. DOES NOT OWN APPROXIMATELY 97.5% OF THE
LAND ON WHICH ITS PIPELINES ARE CONSTRUCTED AND KINDER MORGAN ENERGY PARTNERS,
L.P. IS SUBJECT TO THE POSSIBILITY OF INCREASED COSTS TO RETAIN NECESSARY LAND
USE. 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 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.
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Approximately 10% of Kinder Morgan Energy Partners, L.P.'s pipeline assets are
located in the ground underneath railroad rights-of-way.
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 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. 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 AND INCREASE ITS FINANCING COSTS. 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 AND INCREASE ITS
FINANCING COSTS. 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
- 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.
RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS ON LIABILITY
THE INTERESTS OF KINDER MORGAN, INC. MAY DIFFER FROM OUR INTERESTS, THE
INTERESTS OF OUR SHAREHOLDERS AND THE INTERESTS OF UNITHOLDERS OF KINDER MORGAN
ENERGY PARTNERS, L.P. Kinder Morgan, Inc. owns all of the stock of the general
partner of Kinder Morgan Energy Partners, L.P. and elects all of its directors.
The general partner of Kinder Morgan Energy Partners, L.P. owns all of our
voting shares and elects all of our directors. Furthermore, some of our
directors and officers are also directors and officers of Kinder Morgan, Inc.
and the general partner of Kinder
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Morgan Energy Partners, L.P. and have fiduciary duties to manage the businesses
of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. in a manner that
may not be in the best interest of our shareholders. Kinder Morgan, Inc. has a
number of interests that differ from the interests of our shareholders and the
interests of the common unitholders. As a result, there is a risk that important
business decisions will not be made in your best interest as one of our
shareholders.
Situations in which a conflict of interest could arise include:
- We and Kinder Morgan Energy Partners, L.P. may compete for the time and
effort of the directors, officers and employees who provide services both
to us and to Kinder Morgan, Inc. and its affiliates.
- The acquisition strategy of Kinder Morgan, Inc. may create conflicts of
interest with the acquisition strategy of Kinder Morgan Energy Partners,
L.P.
- Kinder Morgan Inc. and its affiliates may compete with Kinder Morgan
Energy Partners, L.P.
- Kinder Morgan, Inc. may sell assets or provide services to Kinder Morgan
Energy Partners, L.P. giving rise to conflicts of interest.
- The fiduciary duties of our board of directors to us and of the general
partner of Kinder Morgan Energy Partners, L.P. to its unitholders have
been limited under our limited liability company agreement and the
partnership agreement of Kinder Morgan Energy Partners, L.P.
- Owners of the shares will have no right to enforce obligations of Kinder
Morgan, Inc. and its affiliates under agreements with us.
- Contracts between us and Kinder Morgan Energy Partners, L.P., on the one
hand, and Kinder Morgan, Inc. and its affiliates, on the other, will not
be the result of arm's-length negotiations.
- Because of the dilution of its interest, Kinder Morgan, Inc. may not want
Kinder Morgan Energy Partners, L.P. to issue additional equity when such
issuance would be in the best interest of Kinder Morgan Energy Partners,
L.P.
- Kinder Morgan, Inc. may exercise its rights to purchase the shares at a
time or price that you may not like.
OUR LIMITED LIABILITY COMPANY AGREEMENT MODIFIES THE FIDUCIARY DUTIES OWED
BY OUR BOARD OF DIRECTORS TO OUR SHAREHOLDERS AND THE PARTNERSHIP AGREEMENT OF
KINDER MORGAN ENERGY PARTNERS, L.P. MODIFIES THE FIDUCIARY DUTIES OWED BY THE
GENERAL PARTNER TO THE UNITHOLDERS. Modifications of state law standards of
fiduciary duties may significantly limit the ability of our shareholders and the
unitholders to successfully challenge the actions of our board of directors and
the general partner, respectively, in the event of a breach of their fiduciary
duties. These state law standards include the highest duties of good faith,
fairness and loyalty to the shareholders and to the unitholders, as applicable.
The duty of loyalty would generally prohibit our board of directors or the
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. Our limited liability company agreement
provides that none of our 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. For further
information on the limitation of liability of our board of directors, our voting
shareholder and the general partner of Kinder Morgan Energy Partners, L.P.,
please read "Conflicts of Interest and Fiduciary Responsibilities."
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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. 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.
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USE OF PROCEEDS
KINDER MORGAN MANAGEMENT, LLC
We expect that we will receive net proceeds of approximately $501.4 million
from the sale of the 8,500,000 shares we are offering, based on the assumed
initial public offering price of $63.10 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 $577.6 million. We will use approximately $500 million
of the net proceeds of this offering to purchase a number of i-units from Kinder
Morgan Energy Partners, L.P. equal to the number of shares we sell in this
offering and approximately $1 million to purchase the exchange and purchase
rights and tax indemnity from Kinder Morgan, Inc.
KINDER MORGAN ENERGY PARTNERS, L.P.
Kinder Morgan Energy Partners, L.P. will use all of the proceeds it
receives to reduce by approximately $500 million the short-term debt it incurred
in its acquisition of the domestic terminal and pipeline businesses of GATX
Corporation. Kinder Morgan Energy Partners, L.P.'s total debt prior to this
offering is approximately $3.0 billion. This total debt will be reduced to
approximately $2.5 billion following the close of this offering. As of April 3,
2001, the weighted average interest rate of the short-term debt to be retired
was 5.8%.
KINDER MORGAN, INC.
Kinder Morgan, Inc. will use the approximately $1 million of proceeds it
receives for general corporate purposes.
OUR POLICY REGARDING SHARE DISTRIBUTIONS
Prior to our liquidation:
- we will only make distributions to owners of shares in additional shares
or fractions of shares;
- we will calculate each quarter 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 are listed;
- we will 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 owners of common units; and
- we will simultaneously make a distribution of an equivalent fraction of a
voting share on each voting share or fraction owned by the general partner
of Kinder Morgan Energy Partners, L.P.
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 and voting shares we distribute.
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KINDER MORGAN ENERGY PARTNERS, L.P.'S DISTRIBUTION POLICY
REQUIREMENT TO DISTRIBUTE AVAILABLE CASH LESS RESERVES
The partnership agreement of Kinder Morgan Energy Partners, L.P. provides
that it will distribute its available cash to its partners on a quarterly basis.
Distributions for a quarter are generally made within 45 days after the end of
the quarter.
DEFINITION OF AVAILABLE CASH
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 or reductions in 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.
ESTABLISHMENT OF RESERVES
Decisions regarding amounts to be placed in or released from reserves have
a direct impact on the amount of available cash for distribution. This is
because increases and decreases in reserves are taken into account in computing
available cash. Each quarter we may, in our reasonable discretion, determine the
amounts to be placed in or released from reserves, subject to restrictions on
the purposes of the reserves and to the approval of Kinder Morgan G.P., Inc.
CASH, I-UNIT AND SHARE DISTRIBUTIONS
The general partner and owners of common units and Class B units will
receive distributions in cash, while we will receive our distributions in
additional i-units. When we receive additional i-units from Kinder Morgan Energy
Partners, L.P., we will issue and distribute an equal number of additional
shares to all of our shareholders.
For each outstanding i-unit and share, an additional fraction of an i-unit
and share will be issued. The fraction will be calculated by dividing the amount
of cash being distributed per 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
the shares are listed. The cash equivalent associated with distributions of
additional i-units will be treated as if it had actually been distributed for
purposes of determining the distributions to Kinder Morgan Energy Partners,
L.P.'s general partner. Kinder Morgan Energy Partners, L.P. will not distribute
the related cash but will retain the cash and use the cash in its business.
TWO DIFFERENT TYPES OF DISTRIBUTIONS
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 distributions to
owners of common units, Class B units and i-units relative to the distributions
to the general partner.
Cash from Operations. 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, net additions to or reductions in reserves,
debt service and various other items.
Cash from Interim Capital Transactions. Cash from interim capital
transactions will generally result only from distributions that are funded from
borrowings, sales of debt and equity securities
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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.
Rule for Characterizing Distributions. 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 purposes of calculating the sum of all distributions
of available cash, the total equivalent cash amount of all distributions to us
as the holder of all i-units will be treated as distributions of available cash,
even though the distributions to us are made in additional i-units rather than
cash. Kinder Morgan Energy Partners, L.P. will retain this cash and use the cash
in its business.
GENERAL PROCEDURES FOR QUARTERLY DISTRIBUTIONS
The following illustrates the implementation of the provisions described
above. For each quarter, we will use the following procedures to determine
distributions to the limited partners and general partner of Kinder Morgan
Energy Partners, L.P. and to our shareholders:
- first, we will determine the amount of cash receipts less cash
disbursements during the quarter;
- second, we will establish the net change in the reserves that will be
retained from or added to this cash. The unreserved and remaining balance
of cash will be the amount of available cash to be distributed;
- third, we will determine whether the distribution will be characterized
as cash from operations or cash from interim capital transactions;
- fourth, we will calculate how this available cash will be divided and
distributed among the partners of Kinder Morgan Energy Partners, L.P. If
the available cash is characterized as cash from operations, we will apply
the amount of available cash to the various percentage distribution levels
described below in "Allocation of Distributions from Operations." If the
available cash is characterized as cash from interim capital transactions,
then distributions will be made according to the percentages described
under "Allocation of Distributions from Interim Capital Transactions"
below. As a result of this process, we will determine the amounts of cash
to be distributed to the general partner and holders of the common units
and Class B units. We will also determine the total cash equivalent amount
that will be used to calculate the number of additional i-units to be
distributed to us;
- fifth, we will divide our total cash equivalent amount by the average
market price of one of our shares to determine the number of additional
i-units that will be distributed to us;
- sixth, we will cause Kinder Morgan Energy Partners, L.P. to make the cash
distributions to the general partner and holders of common units and Class
B units and to distribute to us the additional i-units; and
- seventh, we will issue pro rata to owners of our shares and voting shares
an aggregate number of additional shares equal to the number of i-units we
receive from Kinder Morgan Energy Partners, L.P.
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37
Allocation of Distributions. The discussion below indicates the
percentages of distributions required to be made to the limited partners and
general partner of Kinder Morgan Energy Partners, L.P. All distributions to the
general partner and owners of common units and Class B units will be made in
cash.
Distributions to us as the owner of all i-units will be made in additional
i-units or fractions of i-units. These distributions of additional i-units will
be treated as if their cash equivalent amount had actually been distributed for
purposes of determining the distributions to be made to the general partner.
Kinder Morgan Energy Partners, L.P. will not distribute the cash related to the
i-units but will retain the cash and use the cash in its business.
Allocation of Distributions from Operations. Kinder Morgan Energy Partners,
L.P. will make the following distributions of cash from operations for each
quarter:
- first, 98% to the owners of all classes of units pro rata and 2% to the
general partner until the owners of all classes of units have received a
total of $0.3025 per unit in cash or equivalent i-units for that quarter;
- second, 85% of any available cash then remaining to the owners of all
classes of units pro rata and 15% to the general partner until the owners
of all classes of units have received a total of $0.3575 per unit in cash
or equivalent i-units for that quarter;
- third, 75% of any available cash then remaining to the owners of all
classes of units pro rata and 25% to the general partner until the owners
of all classes of units have received a total of $0.4675 per unit in cash
or equivalent i-units for that quarter; and
- fourth, 50% of any available cash then remaining to the owners of all
classes of units pro rata, paid to owners of common units and Class B
units in cash and to us in the equivalent number of i-units, and 50% to
the general partner.
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Illustration of a Distribution of Cash from Operations. The following
tables depict a hypothetical example of a quarterly distribution of cash from
operations to the partners of Kinder Morgan Energy Partners, L.P. and to our
shareholders. The example assumes that Kinder Morgan Energy Partners, L.P. has a
total of 76.0 million units outstanding; composed of 64.8 million common units,
2.7 million Class B units and 8.5 million i-units, and assumes that 8.5 million
of our shares are outstanding. The amounts shown for "cash receipts less cash
disbursements for the quarter " and "reserves" are hypothetical and were
selected to produce a quarterly distribution of exactly $1.00 of cash per common
unit of Kinder Morgan Energy Partners, L.P.
DETERMINATION OF AVAILABLE CASH FOR DISTRIBUTION
Cash receipts less cash disbursements for the quarter....... $125,000,000
Less reserves............................................... (4,536,502)
------------
Available cash for distribution to all partners............. $120,463,498
============
ALLOCATION BETWEEN GENERAL PARTNER AND LIMITED PARTNERS
LIMITED PARTNERS GENERAL PARTNER TOTAL CASH FOR TOTAL CASH TO
PER UNIT AMOUNT PERCENTAGE PERCENTAGE LIMITED PARTNERS GENERAL PARTNER TOTAL
--------------- ---------------- --------------- ---------------- --------------- -----
First................ $0.0000-$0.3025 98% 2% $22,990,000 $ 469,184 $ 23,459,184
Second............... $0.3025-$0.3575 85% 15% 4,180,000 737,647 4,917,647
Third................ $0.3575-$0.4675 75% 25% 8,360,000 2,786,667 11,146,667
Fourth............... $0.4675-$1.0000 50% 50% 40,470,000 40,470,000 80,940,000
--------------- -- -- ----------- ----------- ------------
Total................ $ 1.00 $76,000,000 $44,463,498 $120,463,498
============
PRO RATA ALLOCATION AMONG CLASSES OF LIMITED PARTNERS
TOTAL PER UNIT
----------- --------
Cash distributions to all owners of common units............ $64,800,000 $1.00
Cash distributions to all owners of Class B units........... 2,700,000 $1.00
Cash retained for use in Kinder Morgan Energy Partners,
L.P.'s business (represents equivalent value of
distributions to us as owner of all i-units).............. 8,500,000 $1.00
----------- -----
Total....................................................... $76,000,000
===========
DETERMINATION OF I-UNIT AND SHARE DISTRIBUTIONS
(ASSUMING $63.10 AVERAGE SHARE PRICE)
CASH
EQUIVALENT
TOTAL CASH VALUE
PER UNIT OR EQUIVALENT PER UNIT OR
TOTAL PER SHARE VALUE PER SHARE
------- ----------- ---------- -----------
i-units distributed to us as owner of all i-units........... 134,707 .015848 $8,500,000 $1.00
Additional shares distributed to owners of our outstanding
shares.................................................... 134,707 .015848 $8,500,000 $1.00
Allocation of Distributions from Interim Capital Transactions. Any
distribution by Kinder Morgan Energy Partners, L.P. of available cash that
constitutes cash from interim capital transactions will be distributed:
- 98% to all owners of common units and Class B units pro rata with a
distribution to i-units being made instead in the form of i-units; and
- 2% to the general partner
until Kinder Morgan Energy Partners, L.P. has distributed cash from this source
in respect of each common unit outstanding since the original public offering of
Kinder Morgan Energy Partners, L.P. in an aggregate amount per unit equal to the
initial common unit price of $11.00. Distribution from interim capital
transactions to us, as the owner of all i-units, will not be made in cash but
will be made in additional i-units.
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As cash from interim capital transactions is distributed, it is treated as
if it were a repayment of the initial public offering price of the common units.
To reflect that repayment, the first three distribution levels will be adjusted
downward proportionately by multiplying each distribution amount by a fraction,
the numerator of which is the unrecovered initial common unit price immediately
after giving effect to that distribution and the denominator of which is the
unrecovered initial common unit price immediately prior to giving effect to that
distribution. 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 the initial common unit price is fully recovered, then each of the
first three distribution levels 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 owners of
common units and Class B units pro rata with a distribution to i-units being
made instead in the form of i-units and 50% to the general partner. As the owner
of all i-units, we will receive our distribution in additional i-units rather
than cash.
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 i-units in lieu of
distributions of available cash from operations or interim capital transactions
or the issuance of additional common units, Class B 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 was 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 distribution level, 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 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 the first interim capital transaction of $5.50 per unit is
distributed to owners of common units, then the amount of the first three
distribution levels would each be reduced to 50% of its initial level. If 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 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 a number which is equal to one minus the sum of
-- the highest effective 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, after taking into account the
benefit of any deduction allowable for federal income tax purposes for
the payment of state and local income taxes.
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40
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 highest
effective 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.
DISTRIBUTIONS IN LIQUIDATION
In the event of a liquidation of Kinder Morgan Energy Partners, L.P.,
Kinder Morgan, Inc. will be required to purchase all of our 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.
Upon dissolution of Kinder Morgan Energy Partners, L.P., unless Kinder
Morgan Energy Partners, L.P. is reconstituted and continued, the authorized
liquidator will 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 if the liquidator determines that an
immediate sale would be impractical or would cause undue loss to the partners.
If there is a liquidation of Kinder Morgan Energy Partners, L.P., it is
intended that, to the extent available, 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 and a Class B
unit.
Thus, generally, any gain will be allocated
- first, to owners of the i-units until the capital account of each i-unit
equals the capital account of a common unit and a Class B unit; and
- thereafter, between the owners of common units, Class B units and
i-units, as limited partners, and Kinder Morgan G.P., Inc., as the general
partner, in a manner that approximates their sharing ratios in the various
distribution levels and equally on a per unit basis between the i-units
and the common and Class B units.
Any loss or unrealized loss will be allocated to the general partner and
the owners of common units, Class B and i-units:
- first, to the common units and Class B units until the per unit balance
in a common unit and Class B unit capital account equals the per unit
balance in an i-unit capital account;
- second, 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.
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CAPITALIZATION OF KINDER MORGAN MANAGEMENT, LLC
The following table describes our capitalization as of February 16, 2001:
- on an 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 $63.10 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.
PRO FORMA
AS ADJUSTED
FEBRUARY 16, FOR THIS
2001 OFFERING
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
Equity:
Voting shares............................................. $100 $ 100
Outstanding shares........................................ -- 501,350
---- --------
Total equity........................................... $100 $501,450
==== ========
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;
- the issuance of $700 million of 6.75% notes due 2011 and $300 million of
7.40% notes due 2031, and the application of the proceeds to retire
short-term debt; and
- the payment by Kinder Morgan Management, LLC of the net proceeds from our
offering of shares (less $1 million paid to Kinder Morgan, Inc. for the
related rights), expected to be $500,350,000, to purchase a number of
i-units from Kinder Morgan Energy Partners, L.P. equal to the number of
shares sold by Kinder Morgan Management, LLC in this offering and the use
by Kinder Morgan Energy Partners, L.P. of those net proceeds to retire
short-term debt.
See "Use of Proceeds."
DECEMBER 31, PRO FORMA
2000 AS ADJUSTED
------------ (UNAUDITED)
(IN THOUSANDS)
Short-term debt............................................. $ 648,949 $ 149,222
Long-term debt.............................................. 1,255,453 2,375,203
Minority interest(1)........................................ 58,169 63,275
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............................................... -- 500,350
General partner interest.................................. 33,749 33,749
---------- ----------
Total partners' capital..................................... 2,117,067 2,617,417
---------- ----------
Total capitalization........................................ $4,079,638 $5,205,117
========== ==========
---------------
(1) The change in minority interest results from the capital contribution by our
general partner required pursuant to the 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 historical
capitalization as of December 31, 2000, and its capitalization as adjusted to
give effect to:
- the formation of Kinder Morgan Management, LLC, which will be
consolidated on Kinder Morgan, Inc.'s financial statements, and the
offering, which will result in additional Minority Interest in Equity of
Subsidiaries amounting to the net proceeds of the offering less the net
proceeds from the 10% of the offered shares that will be purchased by
Kinder Morgan, Inc., and
- the $1,000,000 received by Kinder Morgan, Inc. from us for the exchange
and purchase rights associated with our shares and the tax indemnity.
PRO FORMA
DECEMBER 31, AS ADJUSTED
2000 (UNAUDITED)
------------ -----------
(IN THOUSANDS)
Short-term debt............................................. $ 100,000 $ 153,635
========== ==========
Current portion of long-term debt........................... $ 808,167 $ 808,167
Long-term debt.............................................. 2,478,983 2,478,983
Kinder Morgan-obligated mandatorily redeemable preferred
capital trust securities of subsidiary trust holding
solely debentures of Kinder Morgan........................ 275,000 275,000
Minority interest in equity of subsidiaries................. 4,910 456,125
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......................... 572,894 572,894
Additional paid-in capital................................ 1,189,270 1,190,270
Retained earnings......................................... 37,584 37,584
Other, including shares held in treasury.................. (2,327) (2,327)
---------- ----------
Total stockholders' equity........................ 1,797,421 1,798,421
---------- ----------
Total capitalization........................................ $5,364,481 $5,816,696
========== ==========
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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 AMOUNTS)
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 35,612 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
======== ======== ========== ========== ==========
General partner's interest in net
income........................... $ 218 $ 4,074 $ 33,447 $ 56,273 $ 109,470
Limited partners' interest in net
income........................... $ 11,682 $ 13,663 $ 70,159 $ 126,029 $ 168,878
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
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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 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 Inc. and 24% interest in Plantation Pipe Line Company since dates
of acquisition. Pacific operations were acquired on March 6, 1998. Kinder
Morgan Bulk Terminals was acquired effective July 1, 1998 and our 24%
interest in Plantation Pipe Line Company Inc. was acquired on September 15,
1998.
(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. Our second
investment in Plantation, representing a 27% interest was made on June 16,
1999. The Product Pipelines' transmix operations were acquired on September
10, 1999, and our initial 33 1/3% investment in Trailblazer was made
effective November 30, 1999.
(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, Kinder
Morgan Transmix Company, Milwaukee and Dakota bulk terminals, 32.5% interest
in Cochin Pipeline System and Delta Terminal Services since dates of
acquisition. Kinder Morgan Interstate Gas Transmission, LLC, Trailblazer
assets, and our 49% interest in Red Cedar were acquired effective December
31, 1999. Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc. were
acquired effective January 1, 2000. Our remaining 80% interest in Kinder
Morgan CO(2) Company was acquired on April 1, 2000. The Devon Energy carbon
dioxide properties were acquired on June 1, 2000. Kinder Morgan Transmix
Company, LLC was acquired on October 25, 2000. Our 32.5% interest in Cochin
was acquired effective November 3, 2000, and Delta Terminal Services, Inc.
was acquired effective December 1, 2000.
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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
-- the issuance of $700 million of 6.75% notes due 2011 and $300 million
of 7.40% notes due 2031, and the application of the proceeds to
retire short-term debt; and
- as adjusted to reflect the payment by Kinder Morgan Management, LLC of
net proceeds from our public offering of the shares (less $1 million paid
to Kinder Morgan, Inc. for the related rights), expected to be
$500,350,000, 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.
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
acquisition of the U.S. terminals and pipeline operations of GATX Terminals
Companies for $1.170 billion, consisting of $988.5 million in cash and assumed
debt and other liabilities of $181.5 million, exclusive of working capital,
using the purchase method of accounting. The acquisition was consummated on
March 1, 2001, except for CALNEV Pipeline Company which was consummated March
30, 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 estimate of the fair market
values of assets to be acquired and liabilities to be assumed.
The unaudited pro forma data include assumptions and adjustments as
described in the notes to the unaudited pro forma combined financial statements
incorporated in this prospectus 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 in this
prospectus by reference.
The unaudited pro forma data may not be indicative of the results that
would have occurred if the GATX acquisition had been consummated on the date
indicated or which will be obtained in the future.
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PRO FORMA PRO FORMA
YEAR ENDED FOR GATX AS ADJUSTED
DECEMBER 31, 2000 AND DEBT OFFERING 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) (174,393) (137,364)
Other, net............................... 14,584 14,584 14,584
Minority interest........................ (7,987) (8,167) (8,541)
---------- ---------- ----------
Income before income taxes............... 292,282 312,821 349,477
Income tax benefit (expense)............. (13,934) (13,934) (13,934)
---------- ---------- ----------
Net income............................... $ 278,348 $ 298,887 $ 335,543
========== ========== ==========
General partner's interest in net
income................................ $ 109,470 $ 122,094 $ 136,082
Limited partners' interest in net
income................................ $ 168,878 $ 176,793 $ 199,461
Basic limited partners' net income per
unit.................................. $ 2.68 $ 2.80 $ 2.79
========== ========== ==========
Number of units used in computation...... 63,106 63,106 71,607
Diluted limited partners' net income per
unit.................................. $ 2.67 $ 2.80 $ 2.78
========== ========== ==========
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 $5,829,015 $5,829,015
Short-term debt.......................... $ 648,949 $ 654,678 $ 149,222
Long-term debt........................... $1,255,453 $2,375,203 $2,375,203
Partners' capital........................ $2,117,067 $2,117,067 $2,617,417
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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 in this
prospectus 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
GENERAL
Kinder Morgan Management, LLC is a limited liability company, formed on
February 14, 2001, that has elected to be treated as a corporation for United
States income tax purposes. All of our voting shares are owned indirectly by
Kinder Morgan, Inc.
BUSINESS
On the closing of the initial offering of our shares to the public and our
acquisition of an equal number of i-units from Kinder Morgan Energy Partners,
L.P., 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 power and authority 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.
LIQUIDITY AND CAPITAL RESOURCES
Our authorized capital structure consists of two classes of membership
interests: (1) nonvoting equity interests and (2) voting equity interests.
Additional classes of equity interests may be approved by our board, provided
that such additional class shall be owned only by Kinder Morgan G.P., Inc. At
February 16, 2001, the issued capitalization consisted of $100,000 contributed
by Kinder Morgan, G.P., Inc. for its voting equity interest.
We expect to issue shares of non-voting equity interests for cash to the
public, using all of the net proceeds to purchase i-units from Kinder Morgan
Energy Partners, L.P. and the exchange and purchase rights and tax indemnity
from Kinder Morgan, Inc. The number of our shares outstanding, including the
voting equity interest owned by Kinder Morgan G.P., Inc., will at all times
equal the number of i-units we own. All quarterly distributions from operations
and from interim capital transactions will be made to us as the holder of
i-units 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 owners of our shares. The number of i-units and shares will remain
equal.
We expect that our expenditures associated with managing and controlling
the business and affairs of Kinder Morgan Energy Partners, L.P. and the
reimbursement received from Kinder Morgan Energy Partners, L.P. will be equal.
Kinder Morgan Energy Partners, L.P. will also reimburse us for our general and
administrative expenses associated with securities filings and related costs. As
stated above, the distributions we expect to receive on the i-units we will own
will be in the form of additional i-units. Therefore, we expect neither to
generate nor to require significant amounts of cash in ongoing operations. Any
cash received from the sale of additional shares will be immediately used to
purchase additional i-units. Accordingly, we do not anticipate any other sources
or needs for additional liquidity.
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RESULTS OF OPERATIONS
Upon completion of our initial offering of shares to the public and the
purchase of i-units from Kinder Morgan Energy Partners, L.P., our results of
operations will consist of (1) the offsetting expenses and revenues associated
with managing and controlling the business and affairs of Kinder Morgan Energy
Partners, L.P. and (2) our share of the earnings of Kinder Morgan Energy
Partners, L.P. attributable to the i-units we will hold. If this offering is
completed for 8,500,000 shares (assuming no exercise of the underwriters'
overallotment option), we will own approximately 10.9% of all of Kinder Morgan
Energy Partners, L.P.'s outstanding limited partner interests. We will use the
equity method of accounting for our investment and, therefore, will record
earnings equal to approximately 10.9% of Kinder Morgan Energy Partners L.P.'s
limited partners' net income. Our percentage ownership could change over time if
our number of units held becomes a different percent of the total units
outstanding due to, among other things, issuances of additional common units by
Kinder Morgan Energy Partners, L.P. As shown in the historical financial
statements of Kinder Morgan Energy Partners, L.P. incorporated by reference into
this prospectus, the limited partners' interest in net income was $168.9
million, $126.0 million and $70.2 million for the years ended December 31, 2000,
1999 and 1998, respectively. These historical amounts are not necessarily
indicative of the level of earnings to be expected in the future.
KINDER MORGAN ENERGY PARTNERS, L.P.
RESULTS OF OPERATIONS
Kinder Morgan Energy Partners, L.P.'s financial results over the past three
years reflect significant growth in revenues, operating income and net income.
During this timeframe, Kinder Morgan Energy Partners, L.P. made numerous
strategic business acquisitions and experienced strong growth in 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 Fractionator, which separates natural gas liquids from natural
gas, 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
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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.
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
$107.3 million increase in year-to-year segment revenues includes a $90.7
million increase in revenues earned from transmix operations. The increase in
transmix revenues resulted primarily from the inclusion of a full year of
operations from our initial acquisition of transmix assets, acquired in
September 1999, and the inclusion of two months of operations from additional
transmix assets acquired in late October 2000. The segment also reported
revenues of $3.8 million from the inclusion of two months of operations from our
investment in the Cochin pipeline system, which was acquired in November 2000.
Furthermore, higher throughput volumes on both Kinder Morgan Energy Partners,
L.P.'s Pacific operations and North System pipelines contributed to a $12.7
million 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 demand from
refineries in the Midwest, as well as a 5% increase in average tariff rates.
In 1998, the Product Pipelines segment earned $156.9 million on revenues of
$258.7 million. The $55.4 million 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. The acquired transmix assets produced revenues of $18.3 million
in 1999. Kinder Morgan Energy Partners, L.P.'s Pacific operations reported a
revenue increase of $35.3 million in 1999 versus 1998. 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
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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 Plantation
Pipe Line Company 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 Federal Energy Regulatory Commission rate case reserve (as a result of
the Federal Energy Regulatory Commission's opinion relating to an outstanding
rate case dispute), 1999 insurance recoveries and favorable adjustments to
employee post-retirement benefit liabilities.
We are parties to proceedings at the Federal Energy Regulatory Commission
and the California Public Utilities Commission that challenge our tariffs on our
Pacific operations. The FERC complaint seeks approximately $105 million in
tariff refunds and approximately $35 million in prospective annual tariff
reductions. The CPUC complaint seeks approximately $17 million in tariff refunds
and approximately $10 million in prospective annual tariff reductions. 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. Kinder Morgan Energy Partners, L.P. believes it has
meritorious defenses in the proceedings challenging its pipeline tariffs, and it
is defending these proceedings vigorously. Kinder Morgan Energy Partners, L.P.
believes the ultimate resolutions of these proceedings will be materially more
favorable than the outcomes sought by the protesting shippers.
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 capacity to receive natural gas 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 25% interest in the Mont
Belvieu Fractionator 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
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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 Kinder Morgan Energy Partners, L.P.'s 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 Kinder Morgan Energy Partners, L.P.'s
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 this
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 of Milwaukee Bulk Terminals, Inc. and Dakota Bulk Terminal, Inc.,
effective January 1, 2000, and Delta Terminal Services, Inc., acquired on
December 1, 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 made in 2000, which
generated revenues of $11.4 million, its Bulk Terminals segment's overall
increases in year-to-year revenues were due to a 10% increase in coal transfer
revenues earned by the segment's Cora and Grand Rivers coal terminals in 1999
and 2000. Combined, these two coal terminals reported a $2.0 million increase in
transfer revenues in 2000 over 1999 due to a 6% increase in coal volumes
accompanied by a 4% increase in average coal transfer rates. A $1.7 million
increase in 1999 transfer revenues over 1998 transfer revenues resulted from an
18% increase in coal volumes handled at the terminals, 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, and higher property balances as a result of increased capital
spending.
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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.
- Cost Reductions. Kinder Morgan Energy Partners, L.P. has reduced by
approximately 15 percent the total operating, maintenance, general and
administrative 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 similar percentage reductions in the
operating, maintenance, general and administrative expenses of many of
the businesses and assets that it acquired since February 1997, including
its Pacific operations and Plantation Pipe Line Company. Generally, these
reductions in expense have been achieved by eliminating functions which
Kinder Morgan Energy Partners, L.P. and the acquired businesses each
maintained prior to their combination. Kinder Morgan Energy Partners,
L.P. expects to make similar percentage reductions in expenses of the
recently acquired GATX pipelines and terminals and intends to continue to
seek further reductions throughout its businesses 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:
- completed 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%;
- entered 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 the first quarter 2001;
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- constructed 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;
- announced 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; and
- continued 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.
- 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
- GATX Domestic Pipelines and Terminals March 1, 2001 and
March 30, 2001
- Pinney Dock and Transportation Company March 13, 2001
The costs and methods of financing for each significant acquisition are
discussed under "Capital Requirements for Recent Transactions."
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 they are identified. We cannot
assure you 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 by borrowings under its bank
credit facilities or by issuing commercial paper, and subsequently reduce these
short-term borrowings 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.
On March 15, 2001, Kinder Morgan Energy Partners, L.P. announced its
intention to increase the quarterly distribution for the first quarter of 2001
to $1.00 per common unit, or $4.00 per common unit on an annualized basis.
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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
unitholders and general partner. 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 the issuance of additional units.
At December 31, 2000, Kinder Morgan Energy Partners, L.P.'s current
commitments for capital expenditures were approximately $37 million. This amount
has primarily been committed for the purchase of plant and equipment. Kinder
Morgan Energy Partners, L.P. expects to fund these commitments through
additional borrowings or the issuance of additional units. All of Kinder Morgan
Energy Partners, L.P.'s capital expenditures, with the exception of sustaining
capital expenditures, are discretionary.
OPERATING ACTIVITIES
Net cash provided by operating activities was $301.6 million in 2000
compared to $182.9 million in 1999. The $118.7 million increase in Kinder Morgan
Energy Partners, L.P.'s period-to-period cash flows from operations resulted
from a net increase of $118.5 million in cash receipts from the sales of
services and products, net of cash operating expenses. Higher net cash flows
generated from sales and expenses were primarily due to the business
acquisitions and capital investments made during 2000. Other significant
year-to-year changes in cash from operating activities include:
- a $52.5 million payment of accrued rate refund liabilities;
- a $20.3 million increase in collections of trade receivables, net of
payments on trade payables;
- a $13.8 million increase in distributions from equity investments; and
- a $11.3 million net increase in insurance receivables.
The payment of the rate refunds was made under settlement agreements with
shippers on Kinder Morgan Energy Partners, L.P.'s natural gas pipelines. Higher
cash inflows from collections on accounts receivable, net of accounts payable
payments, were mainly due to collections from Kinder Morgan Energy Partners,
L.P.'s natural gas pipelines, which were included in Kinder Morgan Energy
Partners, L.P.'s 2000 operating results. The increase in distributions from
equity investments was mainly due to distributions 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
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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 it no
longer accounted for this investment on an equity basis. The increase in cash
flows from insurance receivables reflects higher collections on its Pacific
operations' insurance receivables.
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 its 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 its interests in the Canyon Reef Carriers
CO(2) pipeline and SACROC oil field; and
- a $45.7 million payment for the acquisition of Kinder Morgan Transmix
Company, LLC, formerly 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 $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 oil field 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 a 27% interest in Plantation Pipe Line Company
(increasing Kinder Morgan Energy Partners, L.P.'s interest to 51%); and
- $37.6 million for a one-third interest in Trailblazer Pipeline Company.
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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 that 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
public offering of 4,500,000 common units 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 its 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.
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 0.5% interest in SFPP, L.P.
Kinder Morgan Energy Partners, L.P.'s general partner is granted discretion
by the Kinder Morgan Energy Partners, L.P. partnership agreement, which
discretion has been delegated to us, subject to the approval of the general
partner, to establish, maintain and adjust reserves for future operating
expenses, debt service, maintenance capital expenditures, rate refunds and
distributions for the next four quarters. These reserves are not restricted by
magnitude, but only by type of future cash requirements with which they can be
associated. When we determine our quarterly distributions, we consider current
and expected reserve needs along with current and expected cash flows to
identify the appropriate sustainable distribution level. For 1998, 1999, and
2000 Kinder Morgan Energy Partners, L.P. distributed 93%, 97%, and 102%, of the
total of cash receipts less cash disbursements, respectively. The difference
between these numbers and 100% reflects net additions to or reductions in
reserves.
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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 made 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 the owners of all classes of units pro rata and 2% to the
general partner until the owners of all classes of units have received a
total of $0.3025 per unit in cash or equivalent i-units for that quarter;
- second, 85% of any available cash then remaining to the owners of all
classes of units pro rata and 15% to the general partner until the owners
of all classes of units have received a total of $0.3575 per unit in cash
or equivalent i-units for that quarter;
- third, 75% of any available cash then remaining to the owners of all
classes of units pro rata and 25% to the general partner until the owners
of all classes of units have received a total of $0.4675 per unit in cash
or equivalent i-units for that quarter; and
- fourth, 50% of any available cash then remaining to the owners of all
classes of units pro rata, paid in cash to owners of all classes of units
and to us in the equivalent number of i-units, and 50% in cash to the
general partner.
Distributions to us as the owner of all i-units will be made in additional
i-units or fractions of i-units. These distributions of additional i-units will
be treated as if their cash equivalent amount had actually been distributed 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
related cash but will retain the cash and use the cash in its business.
Incentive distributions are generally defined as all cash distributions
made 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, Class B unitholder, the i-unitholders and
the general partner as described under "Kinder Morgan Energy Partners, L.P.'s
Distribution Policy." Except upon the liquidation of Kinder Morgan Energy
Partners, L.P., distributions will be made in cash to holders of common units,
Class B units and to the general partner and in additional i-units to us as the
owner 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,
which also supports a commercial paper program of equivalent size;
- a $300 million unsecured five-year credit facility due September 29,
2004;
- $200 million of Floating Rate Senior Notes due March 22, 2002;
- $200 million of 8.00% Senior Notes due March 15, 2005;
- $250 million of 6.30% Senior Notes due February 1, 2009;
- $250 million of 7.50% Senior Notes due November 1, 2010;
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- $20.2 million of Senior Secured Notes due September 2002 (Trailblazer
Pipeline Company, of which Kinder Morgan Energy Partners, L.P. owns
66 2/3%, is the obligor on the notes);
- $119 million of Series F First Mortgage Notes due December 2004 (Kinder
Morgan Energy Partners, L.P.'s subsidiary, SFPP, L.P., is the obligor on
the notes); and
- $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).
First Union National Bank is the administrative agent under the $600
million and $300 million credit facilities referred to above.
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%) (As of March 31, 2001, First Union National Bank's
base rate was 8.0%); or
- LIBOR, plus a margin, which varies depending upon the credit rating of
its long-term senior unsecured debt (As of March 31, 2001, Kinder Morgan
Energy Partners, L.P. could borrow for one month at a rate of 5.5% under
the 364-day facility and 5.55% under the 5-year facility).
These rates have decreased since the beginning of the year as short term
interest rates have fallen. 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 the following restrictive covenants:
- requirements to maintain certain financial ratios; total debt divided by
EBITDA for the prior four quarters may not exceed 4.5 prior to July 1,
2001 and 4.0 thereafter and EBITDA for the prior four quarters divided by
interest expense for the prior four quarters may not fall below 3.0 prior
to July 1, 2001 and 3.5 thereafter;
- restrictions on the type of additional indebtedness that may be incurred
and on the incurrence of additional indebtedness of our subsidiaries.
- 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.
Kinder Morgan Energy Partners, L.P. is in compliance with these covenants.
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;
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- $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;
- $72 million borrowed to fund principal and interest payments on SFPP,
L.P.'s Series F First Mortgage 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 oil field 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 SFPP, L.P.'s 10.70% Series F 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%.
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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 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 by SFPP, L.P. and limiting the amount of cash distributions,
investments, and property dispositions by SFPP, L.P.
At December 31, 1999, the outstanding balance under SFPP, L.P.'s bank
credit facility was $174 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 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 as of December 31, 2000, 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%; and
- $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 Part-
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ners, 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 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 Federal Energy Regulatory Commission. If
the expansion is approved, which is expected in the first quarter of 2001,
Kinder Morgan Energy Partners, L.P. plans 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 an interest in SACROC oil field and Canyon Reef Carrier CO(2) Pipeline
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 October 25, 2000, Kinder Morgan Energy Partners,
L.P. acquired Kinder Morgan Transmix Company, LLC, formerly known as Buckey
Refining 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. Effective December 1, 2000, Kinder Morgan
Energy Partners, L.P. acquired Delta Terminal Services, Inc. for $114.1 million.
Kinder Morgan Energy
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Partners, L.P. borrowed $114 million under its credit facilities and its
commercial paper program to fund this acquisition.
Cochin Pipeline. On November 3, 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 to partially fund this
acquisition.
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 oil field 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 to fund this acquisition.
Natural Gas Pipelines. On 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 to fund the
cash portion of the purchase price.
GATX Acquisition. On February 22, 2001, Kinder Morgan Energy Partners,
L.P. entered into an additional $1.1 billion unsecured credit facility that
expires on December 31, 2001 with a syndicate of financial institutions to fund
the GATX acquisition. With the proceeds from issuing $1 billion in notes
described below, on March 23, 2001, this facility was reduced by $600 million to
$500 million. This facility supports the issuance of commercial paper used to
finance the GATX acquisition. Following the closing of this offering, Kinder
Morgan Energy Partners, L.P. expects to terminate this facility. First Union
National Bank, an affiliate of First Union Securities, Inc., is the
administrative agent under this facility. As of March 31, 2001, Kinder Morgan
Energy Partners, L.P. could borrow for one month at a rate of 5.5% under this
364-day facility. Kinder Morgan Energy Partners, L.P. issued $700 million of
6.75% notes due 2011 and $300 million of 7.40% notes due 2031 and applied the
proceeds to retire short-term debt used to fund the GATX acquisition.
Pinney Dock. On March 13, 2001, Kinder Morgan Energy Partners, L.P.
purchased Pinney Dock and Transportation Company for approximately $41.5 million
in cash. Kinder Morgan Energy Partners, L.P. borrowed the necessary funds under
its commercial paper program.
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DESCRIPTION OF OUR SHARES
The following is a summary of the principal documents which relate to our
shares, as well as documents which relate to the i-units to be purchased by us
upon completion of the offering. 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. 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 limited voting rights and which
establishes the rights, obligations and 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 our shares in the limited
circumstances set forth in our limited liability company agreement;
- the Kinder Morgan, Inc. exchange agreement, which is part of our limited
liability company agreement and which provides the owners of our shares
the right to exchange their shares for common units of Kinder Morgan
Energy Partners, L.P., subject to Kinder Morgan, Inc.'s election to
deliver cash rather than common units on the exercise of that right;
- the Kinder Morgan Energy Partners, L.P. registration rights agreement
which provides for the registration with the SEC of the exchange by
Kinder Morgan, Inc. of common units for shares, as contemplated in the
Kinder Morgan, Inc. exchange agreement;
- the Kinder Morgan, Inc. tax indemnity agreement, which is part of our
limited liability company agreement and which provides that Kinder
Morgan, Inc. will indemnify 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;
- 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; and
- the delegation of control agreement among Kinder Morgan G.P., Inc.,
Kinder Morgan Management, LLC and Kinder Morgan Energy Partners, L.P. and
its operating partnerships which delegates to us, to the fullest extent
permitted under Delaware law and the Kinder Morgan Energy Partners, L.P.
partnership agreement, the power and authority to manage and control the
business and affairs of Kinder Morgan Energy Partners, L.P. and its
operating partnerships, subject to Kinder Morgan G.P., Inc.'s right to
approve specified actions.
DISTRIBUTIONS
General. Under the terms of our limited liability company agreement,
except in connection with our liquidation, we will not pay distributions on our
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 to each
share that fraction of a share determined by dividing the amount of the cash
distribution to be made by Kinder Morgan Energy Partners, L.P. on each common
unit by the average market price of a share determined for a 10 trading day
period ending on the trading day immediately prior to the dividend date for the
shares.
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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 within approximately 45 days after the end of each
quarter. "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. made a quarterly distribution to owners of its
common units of $0.95 per common unit, or $3.80 on an annual basis. On March 15,
2001, Kinder Morgan Energy Partners, L.P. announced its intention to increase
quarterly distributions for the first quarter of 2001 to $1.00 per common unit,
or $4.00 per common unit 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, Class B
unitholders and the general partner in cash and to us in additional i-units
except in the event of a liquidation or dissolution, in which event the
distribution will be in cash. Therefore, future, non-liquidating distributions
will be made in cash to owners of common units, Class B unitholders and to the
general partner and in additional i-units to us.
We also will distribute to owners of shares additional shares if owners of
common units receive a cash distribution or other cash 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
determined for a 10 trading day period ending on the trading day immediately
prior to the ex-dividend date for the shares.
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 our shares or after the occurrence of an event
triggering a mandatory purchase of our shares.
There will be no public market for trading fractional shares. We will issue
fractional shares in payment of the distribution to owners of our shares. No
fraction of a share can be traded on any exchange on which our 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 our shares. When we refer to the average market price of a share or
a common unit, we mean the average closing price of a share or common unit
during the 10 consecutive trading days prior to the determination date but not
including that date, unless a longer or shorter number of trading days is
expressly noted.
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, in
the cases of exchanges for common units or mandatory or optional
purchases, the board of directors of Kinder Morgan, Inc.); or
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- 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 (or,
in the cases of exchanges for common units or mandatory or optional
purchases, the board of directors of Kinder Morgan, Inc.).
A "trading day" for securities means a day on which:
- the principal United States national or regional securities exchange on
which the securities are listed is open for business, or
- if the securities are not listed, on any United States national or
regional securities exchange, a day in which banking institutions in the
city of New York generally are open.
LIMITED VOTING RIGHTS
Under the terms of our limited liability company agreement, you have
limited voting rights as an owner of our shares. The limited liability company
agreement provides that:
- We will not, without the approval of the owners 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. exchange agreement, the
Kinder Morgan Energy Partners, L.P. registration rights agreement, the
Kinder Morgan, Inc. tax indemnification agreement or the delegation of
control agreement in a manner that materially adversely affects our
powers, preferences or rights of our company or the owners of our shares
or reduces the time for any notice to which the holders of our shares may
be entitled.
- We will not, without the approval of the owners of a majority of the
shares then outstanding, consent to an amendment, alteration or repeal of
any of the provisions of Kinder Morgan Energy Partners, L.P.'s
partnership agreement in a manner that materially adversely affects the
powers, preferences, rights and privileges of owners of the i-units as
compared to the preferences or rights of the owners of other classes of
units.
- On any matter submitted to us as the owner of i-units, the i-units we own
will be voted in the same proportion as our shares are voted including
non-votes or abstentions. 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 its common units or shares. This
limitation does not apply to Kinder Morgan G.P., Inc., the general partner of
Kinder Morgan Energy Partners, L.P., and its affiliates.
Nevertheless, shares owned by Kinder Morgan, Inc. or any of its affiliates
will not have any voting rights except on matters where the shares and the
common units, Class B units and i-units vote together as a single class. Except
as provided in the preceding sentence, in determining if approval of the holders
of a majority of the shares has been received, shares owned by Kinder Morgan,
Inc. and its affiliates will be treated as if they are not outstanding. This
limitation on voting of shares by Kinder Morgan, Inc. or its affiliates will not
affect the rights of Kinder Morgan G.P., Inc. to vote our voting shares.
The relevant agreements provide that we may make changes in the terms of
our limited liability company agreement, the shares, the exchange agreement, tax
indemnification agreement, purchase agreement, registration rights agreement and
delegation of control agreement without
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the approval of the shares, in order to meet the requirements of applicable
securities and other laws and regulations and exchange rules and other changes
which our board of directors determines in its sole discretion will not have a
material adverse effect on the powers, preferences, rights and privileges
associated with the shares. The agreements provide that we are also permitted to
amend the terms of the shares and these agreements without the approval of the
shares to accommodate changes resulting from a person other than Kinder Morgan,
Inc. and its affiliates 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 does not constitute a mandatory
purchase event, or from mergers, recapitalizations, reorganizations and similar
transactions which in each case do not constitute a mandatory purchase event.
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 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 all of
our outstanding shares shall at all times equal the number of i-units we own. If
there is a change in the number of i-units we own, we will pay to all
shareholders 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 we own. 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 outstanding shares and
i-units will be equal.
COVENANTS
Our limited liability company agreement provides that our activities will
be limited to being a limited 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 we own and our
outstanding shares, including provisions:
- prohibiting our sale, pledge or other transfer of i-units;
- requiring the proceeds from our sale of shares 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 liquidation, merger or recapitalization or similar
transactions involving our company; 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 owners of 50% of our
outstanding shares. Prior to the date on which all shares have been acquired by
Kinder Morgan, Inc. or its affiliates pursuant to the optional or mandatory
purchase provisions or otherwise, shares held by Kinder Morgan Inc., and its
affiliates will be treated as not outstanding.
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Under the terms of the Kinder Morgan Energy Partners, L.P. partnership
agreement, Kinder Morgan Energy Partners, L.P. agrees that except in conjunction
with its liquidation prior to a date on which all shares have been acquired by
Kinder Morgan, Inc. or its affiliates pursuant to the optional or mandatory
purchase provisions in the Kinder Morgan, Inc. purchase agreement or otherwise,
Kinder Morgan Energy Partners, L.P. will not:
- make a distribution on an i-unit other than an i-unit or a security that
has in all material respects the same rights and privileges as the
i-units.
- make a distribution on a common unit other than in cash, common units or
a security that has in all material respects the same rights and
privileges as the common units;
- allow an owner of common units to receive any consideration other than
cash or common units or a security which has in all material respects the
same rights and privileges as the common units or allow us, as the
holders of the i-units, to receive any consideration other than i-units
or a security which has in all material respects the same rights and
privileges as the 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:
-- 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 360 days and the aggregate amount of any cash
distributions to all holders of common units made within the
preceding 360 days, is less than 12% of Kinder Morgan Energy
Partners, L.P.'s aggregate market value of the units of Kinder
Morgan Energy Partners, L.P. determined on the trading day
immediately preceding the commencement of the tender offer;
or
- issue any of its i-units to any person other than us.
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.
The fraction of an additional share distributed will be equal to the cash
distribution on each common unit divided by the average market price of one of
our shares determined for a 10 trading day period ending immediately prior to
the effective date of
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the transaction. This will result in us also issuing a matching number of shares
to the holders of shares.
OPTIONAL PURCHASE
The Kinder Morgan, Inc. purchase agreement, which is part of 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 but not the obligation to purchase for cash all of
the outstanding shares that it and its affiliates do 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 selects for the
purchase. We will cause the transfer agent to mail the notice of the purchase to
the record holders of the shares. Upon closing of this offering, Kinder Morgan,
Inc. and its affiliates will own approximately 10% of our outstanding 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 ten consecutive
trading days ending on the fifth trading day prior to the date the notice
of the purchase is given; and
- the highest price Kinder Morgan, Inc. or its affiliates paid for the
shares during the 90 days prior to the giving of the notice, excluding
exchanges or cash settlements pursuant to the exchange feature of the
shares.
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. has the right to purchase
all of the shares and common units that it and its affiliates do not own. Upon
closing of this offering, Kinder Morgan, Inc. and its affiliates will own,
excluding the general partner's net 2% interests, approximately 19.5% of the
outstanding common and Class B units and shares on a combined basis. The price
at which Kinder Morgan Inc. may make the purchase is equal to the highest of:
- the average closing price of the shares or the common units for the 20
consecutive trading days ending five days prior to the date on which the
notice of the purchase is given; and
- the highest price Kinder Morgan, Inc. or its affiliates paid in cash for
such shares or common units during the 90 days prior to the giving of the
notice, excluding exchanges or cash settlements pursuant to the exchange
feature of the shares.
Kinder Morgan, Inc. may exercise its right to make that purchase by giving
notice to the transfer agents for the shares and for the common units of its
election to make the purchase not less than ten days and not more than 60 days
prior to the date which it selects for the purchase. We and the general partner
or Kinder Morgan, Inc. shall also cause the transfer agents to mail that notice
of the purchase to the record holders of the shares and 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 or the common units, as the case may be,
shall have no rights as holders of shares or common units, except to receive the
purchase price, and their shares or common units 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 for cash all of our shares that it and its
affiliates do not own at a purchase price equal to the higher of the average
market price of the shares and the common units as determined for the ten-day
trading period immediately prior to the date of the applicable event.
A purchase event means any of the following:
- aggregate distributions or other payments by Kinder Morgan Energy
Partners, L.P., other than in common units or in securities which have in
all material respects the same rights and privileges as common units but
including pursuant to an Issuer tender offer, during a 360-day period in
amount exceeding 50% of the average market price of a common unit during
the ten consecutive trading day period ending on the last trading day
prior to that 360-day period.
- the occurrence of an event resulting in Kinder Morgan, Inc. and its
affiliates 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;
-- that other person 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
-- that other person assumes all obligations of Kinder Morgan, Inc. to
us and to the owners 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 subsidiaries taken as a
whole to another person, unless in the transaction:
-- the owners of common units receive a security that has in all
material respects the same rights and privileges as the common
units;
-- we receive a security which has in all material respects the same
rights and privileges as the i-units;
-- no consideration is received by an owner of common units other than
securities that have in all material respects the same rights and
privileges as the common 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 for the ten trading day period ending
immediately prior to the date of the transaction; and
-- no consideration is received by us or the owners of i-units other
than i-units or securities that have in all material respects the
same rights and privileges as the i-units.
Procedure. Within three business days following any purchase event
requiring a mandatory purchase by Kinder Morgan, Inc., Kinder Morgan, Inc. shall
mail to each holder of record of the
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shares on the earlier of the date of the purchase event and the latest
practicable date, a notice 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.
On or prior to the date of the purchase, Kinder Morgan, Inc. shall
irrevocably deposit with the transfer agent funds sufficient to pay the purchase
price. Following the purchase date, a share owned by any person other than
Kinder Morgan, Inc. and its affiliates will 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, which will
constitute a part of our limited liability company 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 of your shares for common units of Kinder Morgan Energy Partners, L.P. owned
by Kinder Morgan, Inc., directly or indirectly through its subsidiaries, 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 they had been delivered for that purpose.
At any time, instead of delivering a common unit, Kinder Morgan, Inc. may
elect to make a cash payment in respect of any share surrendered for exchange by
giving notice thereof to the tendering holder not more than three trading days
after such share is surrendered for exchange. This cash payment 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 Kinder Morgan, Inc. gives such notice to such holder. Kinder Morgan, Inc.
will make this cash payment as promptly as practicable after the completion of
such three trading day period.
The decision to deliver common units or make a cash payment upon a tendered
exchange of shares will be made solely by Kinder Morgan, Inc. at the time of
each exchange. Kinder Morgan, Inc. will make these decisions based on what it
believes to be in its best interests at the time, rather than the best interests
of the owner of the shares. Kinder Morgan, Inc. expects to consider such factors
as the number of common units it and its affiliates hold, the market price of
the common units, the tax cost to it of delivering common units, whether a
registration statement is in effect at the time with respect to the common units
to be delivered, its financial condition, cash flows and results of operations,
and other matters which at the time it believes are relevant.
The right of exchange attaching to any share may be exercised by the owner
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 will be irrevocable. The exchange date will be immediately prior to the
close of business on the date on which the share and the duly signed and
completed notice of exchange are so delivered. Unless Kinder Morgan, Inc. has
elected to make a cash payment, Kinder Morgan, Inc. will, within three trading
days after the exchange date, deliver to the transfer agent for mailing to the
owner 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.
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Although the exchange is a taxable event for federal and state income tax
purposes to the exchanging shareholder, an owner 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 registered owner 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 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 to the exchanging shareholder
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.
Owners of shares have no rights in respect of the common units unless and
until the shares are exchanged and common units registered in the name of the
owner have been issued and delivered as described above.
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 that it will at all times own either directly or through its
subsidiaries common units equal to 20% of the number of outstanding shares not
held by Kinder Morgan, Inc. and its affiliates. This ownership will serve as a
source of common units that will be available to satisfy the exchange obligation
of Kinder Morgan, Inc. Kinder Morgan, Inc. may use those common units or other
common units acquired by it to satisfy its exchange obligations with you. 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 become effective no later than the effective date
of our registration statement, a 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 or a
replacement registration statement. Pursuant to the registration rights
agreement, Kinder Morgan Energy Partners, L.P. has the right at any time and
from time to time after such registration statement has been filed and declared
effective, to 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. 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 Securities and Exchange Commission.
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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 this 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.
TRANSFER AGENT AND REGISTRAR
has agreed to serve as transfer agent and registrar for our
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
and registrar, 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 and registrar 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
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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 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.
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 transfer
agent. We will replace certificates that become destroyed, lost or stolen at
your expense upon delivery to us and the transfer agent of satisfactory evidence
that the certificate has been destroyed, lost or stolen, together with any
indemnity that may be 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. All fractions of shares will be calculated
to six decimal places and rounded down if necessary.
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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. A number of the covenants in our limited liability company
agreement and in Kinder Morgan Energy Partners, L.P.'s partnership agreement
affect us as the holder of i-units. For a description of the material covenants,
see "Description of Our Shares -- Covenants."
VOTING RIGHTS
Owners of i-units generally will vote together with the common units and
Class B units as a single class and sometimes will vote as a class separate from
the holders of common units and Class B units. The i-units will have the same
voting rights as the common units and Class B 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 a
corporation for income tax purposes.
The 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 holders of the i-units in relation to the 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 in proportion to the votes and
non-votes of owners of our shares.
DISTRIBUTIONS AND PAYMENTS
The number of i-units distributed to us by Kinder Morgan Energy Partners,
L.P. will be based upon the amount of cash to be distributed by Kinder Morgan
Energy Partners, L.P. to an owner 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.
Generally, if cash is paid to the holders of common units as a result of a
transaction which is not a mandatory purchase event, we, as the owner of
i-units, will receive additional i-units instead of cash. The fraction of an
i-unit received per i-unit held by us will be determined as if the cash payment
on the common unit were a cash distribution. If additional units are paid to the
holders of common units as a result of a transaction which is not a mandatory
purchase event, as the owner of i-units we will receive an equivalent amount of
units based on the number of i-units that we own.
If a transaction, other than a liquidation, occurs which is a mandatory
purchase event, we will generally receive per i-unit the same consideration as
an owner of common units receives per common unit.
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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 owner 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 an owner of
the number of Kinder Morgan Energy Partners, L.P. common units into which such
i-unit was exchangeable immediately prior thereto, assuming that owner 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. may have been required to purchase the shares. See
"Description of Shares -- Mandatory Purchase."
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 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 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
We are a limited liability Company formed in Delaware on February 14, 2001.
We will have no operations prior to the closing of the offering. Pursuant to a
delegation of control agreement among Kinder Morgan G.P., Inc., 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
Partners, 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 power and authority to manage
and control the business and affairs of Kinder Morgan Energy Partners,
L.P.; and
- We 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. common 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. common
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 our or the general
partner's (and respective affiliates) 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 if
the aggregate amount of its indebtedness then exceeds 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,
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-- will own all of our voting shares, and
-- will not withdraw as general partner of Kinder Morgan Energy
Partners, L.P. or transfer to a non-affiliate all of its interest as
general partner, unless approved by both the holders of a majority
of each of the i-units and the holders of a majority of all units
voting as a single class, 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. has not
withdrawn or been removed as the general partner of Kinder Morgan Energy
Partners, L.P. and all of our shares are not 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 or other entities 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 or other
entities.
The withdrawal or removal of Kinder Morgan G.P., Inc. as general partner of
Kinder Morgan Energy Partners, L.P. will simultaneously result in the
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 of control
agreement cannot be amended unless all parties to that amendment agree, and on
any amendment that would reduce the time for any notice to which owners of our
shares are entitled or would have a material adverse effect on the shares, as
determined by our board of directors in its discretion, the owners of a majority
of the shares, excluding shares owned by Kinder Morgan, Inc. and its affiliates.
We are a limited 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 receive quarterly distributions of additional i-units
from Kinder Morgan Energy Partners, L.P. The number of additional i-units we
receive will be based on the amount of cash to be distributed by Kinder Morgan
Energy Partners, L.P. to an owner 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 in
terms of market capitalization and has one of the largest products pipeline
systems in the United States based on volumes delivered. Its operations are
grouped into five 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 Westlake Petrochemicals Corporation 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 separates, for a fee, different types of
refined petroleum products that become blended together when shipped
through pipelines via 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 transports
natural gas from Colorado through southeastern Wyoming to Beatrice,
Nebraska;
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-- 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;
-- 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: a 50% interest in
Cortez Pipeline, a 100% interest in Central Basin Pipeline, an 81%
interest in Canyon Reef Carriers CO(2) Pipeline, a 13% interest in
Bravo Pipeline;
-- interests in two CO(2) reserve fields, including a 45% interest in
McElmo Dome and an 11% interest in Bravo Dome; and
-- interests in four oil fields in West Texas, including in 71% working
interest in the SACROC oil field, and minority interests in the
Sharon Ridge oil field, the Reirecke oil field, and the Yates oil
field.
- Bulk Terminals, consisting of 29 owned and operated terminal facilities
that load, unload and store bulk materials such as coal, petroleum coke
and other dry aggregate products, 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.
- Liquids Terminals, a new business segment beginning in 2001, consisting
of five petroleum products and chemicals terminals recently acquired from
GATX located in Houston, Texas; Carteret, New Jersey; Philadelphia,
Pennsylvania; and Chicago, Illinois.
For a description of the debt incurred in acquisitions, please see "Capital
Requirements for Recent Transactions" under "Management's discussion and
analysis of financial condition and results of operations -- Kinder Morgan
Energy Partners, L.P."
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.
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Since February 1997, Kinder Morgan Energy Partners, L.P. has announced 20
acquisitions valued at approximately $4.8 billion. These acquisitions have
assisted Kinder Morgan Energy Partners, L.P. in growing its net income from
$17.7 million in 1997 to $278.3 million 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.
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
business of separating, for a fee, different types of refined petroleum products
that become blended together when shipped through pipelines 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 natural gas volumes 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 volume 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 make the
transition from traditional production to methods involving the injection of
other products, such as carbon dioxide, to increase production of oil from the
basins.
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,
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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.
Liquids Terminals. Kinder Morgan Energy Partners, L.P. intends to grow its
liquids terminals business through selective acquisitions, expansions and the
development of new terminals. Kinder Morgan Energy Partners, L.P.'s management
believes it can leverage its relationships with major oil companies,
petrochemical companies, and other customers who store liquid petroleum and
chemical products to increase utilization of its existing facilities and acquire
new assets.
RECENT DEVELOPMENTS
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 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 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 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 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. 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.
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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 oil field and a 49.9% interest in the Yates Field oil
field, the largest single interest in that oil field. 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 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
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 products Kinder Morgan Energy Partners, L.P. processes for it at the Colton
facility.
On March 13, 2001, Kinder Morgan Energy Partners, L.P. purchased the Pinney
Dock and Transportation Company for approximately $41.5 million in cash. Pinney
Dock and Transportation Company has six docks with 15,000 feet of vessel
berthing space, 300 acres of outside storage space, 350,000 feet of warehouse
space and two 45-ton gentry cranes.
In two closings on March 1, 2001 and March 30, 2001, Kinder Morgan Energy
Partners, L.P. purchased GATX Corporation's U.S. pipeline and terminal
businesses for approximately $1.17 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 the Orlando, Florida market. The 12 liquids
terminals 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, six other terminals acquired from GATX with a capacity of
3.6 million barrels that are part of the CALNEV and Central Florida pipeline
systems.
Kinder Morgan Energy Partners, L.P. entered into an additional $1.1 billion
unsecured 364-day credit facility with a syndicate of financial institutions on
February 22, 2001 to fund the GATX Acquisition. On March 23, 2001 this facility
was reduced by $600 million to $500 million. Following the close of this
offering, Kinder Morgan Energy Partners, L.P. expects to terminate this
facility. First Union National Bank, an affiliate of First Union Securities,
Inc., is the administrative agent under this agreement.
On March 12, 2001, Kinder Morgan Energy Partners, L.P. sold $700 million
aggregate principal amount of its 6.75% Notes due March 15, 2011 and $300
million aggregate principal amount of its 7.40% Notes due March 15, 2031. The
proceeds of the sale of the notes were used to repay short-term debt incurred to
complete the GATX acquisition.
On March 15, 2001, Kinder Morgan Energy Partners, L.P. announced its
intention to increase the cash distribution per common unit for the first
quarter from $0.95 (an annualized rate of $3.80) to $1.00 (an annualized rate of
$4.00). This distribution will be payable on May 15, 2001 to common unitholders
of record on April 30, 2001. In addition, management revised its estimate for
the year 2001 from an average annual distribution of $3.90 to an average annual
distribution of approximately $4.10.
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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 energy
transportation and storage 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 whom 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. The table also sets forth the
percentage of professional time each officer intends to devote solely to Kinder
Morgan Management, LLC, which is almost exclusively composed of time spent
managing the business and affairs of Kinder Morgan Energy Partners, L.P.
PERCENTAGE OF
OFFICERS' TIME
DEVOTED TO KINDER
MORGAN
NAME AGE POSITION WITH KINDER MORGAN MANAGEMENT, LLC MANAGEMENT, LLC
---- --- ------------------------------------------- -----------------
Richard D. Kinder.............. 56 Director, Chairman and CEO 50%
William V. Morgan.............. 57 Director, Vice Chairman and President 50%
Edward O. Gaylord.............. 69 Director NA
Gary L. Hultquist.............. 57 Director NA
Perry Waughtal................. 65 Director NA
William V. Allison............. 53 President, Natural Gas Pipeline Operations 75%
Thomas A. Bannigan............. 47 President, Products Pipeline Operations 100%
David G. Dehaemers, Jr......... 40 Vice President, Corporate Development 75%
Joseph Listengart.............. 32 Vice President, General Counsel and 60%
Secretary
Michael C. Morgan.............. 32 Vice President, Strategy and Investor 60%
Relations
C. Park Shaper................. 32 Vice President, Treasurer and Chief 60%
Financial Officer
Thomas B. Stanley.............. 50 President, Bulk Terminals 100%
James E. Street................ 44 Vice President, Human Resources and 50%
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 has served as Chairman of the Board for EOTT
Energy Corporation, an oil trading and transportation company also located in
Houston, Texas, including a term as chairman, from February 1993 until May 2000.
Mr. Gaylord owned and managed Gaylord & Company, a private venture capital firm,
and he has owned interests in and managed various trucking, storage and
manufacturing entities in his career of more than 30 years. Mr. Gaylord serves
on the Board of Directors of Imperial Sugar Company, Seneca Foods Corporation
and Federal Reserve Bank of Dallas -- Houston Branch.
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. Since 1995, Mr. Hultquist has been the Managing Director
of Hultquist Capital, LLC, a San Francisco-based strategic and merger advisory
firm. Since 1996, he also has served 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 G.P.,
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.
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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 to February
1999, he served as Vice President and General Counsel of Kinder Morgan G.P.,
Inc. From 1976 to May 1996, 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 Federal Energy Regulatory Commission.
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. Mr. 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.
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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 on the
distribution of web-based investment research for the financial services
industry, from June 1999 to December 1999. 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 August
1993 to September 1996, Mr. Street was President of BRI Consulting, Inc. 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 from August 1988 to August 1993.
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 charts depict the current organizational structure of Kinder
Morgan, Inc. and Kinder Morgan Energy Partners, L.P. and the organizational
structure following the offering.
[CHART]
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[CHART]
OWNERSHIP OF KINDER MORGAN ENERGY PARTNERS, L.P. AND ITS
SUBSIDIARY OPERATING PARTNERSHIPS, ON A COMBINED BASIS AFTER THE
OFFERING:
i-units (entire class owned by Kinder Morgan Management,
LLC)...................................................... 11.0%
Common units owned by the public............................ 69.0%
Common units and Class B units owned by Kinder Morgan, Inc.
and affiliates............................................ 18.0%
General partner interest.................................... 2.0%
------
Total............................................. 100.0%
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The following table sets forth certain information, as of March 31, 2001,
regarding the beneficial ownership by Kinder Morgan, Inc. and its affiliates of
our shares sold in this offering and our voting shares.
KINDER MORGAN MANAGEMENT, LLC -- SHARES
--------------------------------------------------------------------
CURRENT CURRENT PERCENT PRO FORMA PRO FORMA
# OF SHARES OF CLASS NUMBER OF SHARES PERCENT OF CLASS
----------- ---------------- ---------------- ----------------
Kinder Morgan, Inc. ............ 0 0% 850,000 10%
KINDER MORGAN MANAGEMENT, LLC -- VOTING SHARES
--------------------------------------------------------------------
CURRENT CURRENT PERCENT PRO FORMA PRO FORMA
# OF SHARES OF CLASS NUMBER OF SHARES PERCENT OF CLASS
----------- ---------------- ---------------- ----------------
Kinder Morgan G.P., Inc. ....... 1 100% 1 100%
The following table sets forth information as of February 15, 2001,
regarding (a) the beneficial ownership of (i) our units and (ii) the common
stock of Kinder Morgan, Inc., the parent company of our general partner, by all
directors of Kinder Morgan G.P., Inc., each of the named executive officers and
all directors and executive officers as a group and (b) all persons known by
Kinder Morgan G.P., Inc. to own beneficially more than 5% of Kinder Morgan
Energy Partners, L.P.'s units.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
KINDER MORGAN, INC.
COMMON UNITS CLASS B UNITS VOTING STOCK
--------------------- -------------------- ---------------------
NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT
UNITS(2) OF CLASS UNITS(3) OF CLASS SHARES(4) OF CLASS
---------- -------- --------- -------- ---------- --------
Richard D. Kinder(5)....... 145,000 * -- -- 23,989,992 20.87%
William V. Morgan(6)....... 2,000 * -- -- 4,500,000 3.92%
Edward O. Gaylord(7)....... 19,000 * -- -- -- --
Gary L. Hultquist(8)....... 2,500 * -- -- -- --
Perry M. Waughtal.......... 10,000 * -- -- 10,000 *
William V. Allison(9)...... 6,000 * -- -- 85,000 *
David G. Dehaemers,
Jr.(10).................. 4,000 * -- -- 197,500 *
Joseph Listengart(11)...... 6,699 * -- -- 49,050 *
Michael C. Morgan(12)...... 2,500 * -- -- 223,500 *
Directors and Executive
Officers as a group (13
persons)(13)............. 263,765 * -- -- 29,227,690 25.29%
Kinder Morgan, Inc.(14).... 11,312,000 17.44% 2,656,700 100.00% -- --
---------------
* Less than 1%.
(1)Except as noted otherwise, all units and Kinder Morgan, Inc. shares involve
sole voting power and sole investment power.
(2)As of February 15, 2001, we had 64,861,509 common units issued and
outstanding.
(3)As of February 15, 2001, we had 2,656,000 class B units issued and
outstanding.
(4)As of February 15, 2001, Kinder Morgan, Inc. had a total of 114,931,387
shares of outstanding voting common stock.
(5)Does not include (a) 2,987 common units owned by Mr. Kinder's spouse, Nancy
G. Kinder (b) 463,683 Kinder Morgan, Inc. shares held by a Kinder family
charitable foundation, a charitable not-for-profit corporation and (c) 2,500
Kinder Morgan, Inc. shares held by
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Mrs. Kinder. Mr. Kinder disclaims any and all beneficial or pecuniary
interest in these units and shares. Mr. Kinder's business address is One
Allen Center, Suite 1000, 500 Dallas St., Houston, Texas 77002.
(6)Morgan Associates, Inc., a Kansas corporation, wholly owned by Mr. Morgan,
holds the Kinder Morgan, Inc. shares. Mr. Morgan may be deemed to own the
4,500,000 Kinder Morgan, Inc. shares and thereby shares in the voting and
disposition power with Morgan Associates, Inc.
(7)Includes options to purchase 4,000 common units exercisable within 60 days
of February 15, 2001.
(8)Includes options to purchase 2,000 common units exercisable within 60 days
of February 15, 2001.
(9)Includes options to purchase 6,000 common units and 75,000 Kinder Morgan,
Inc. shares exercisable within 60 days of February 15, 2001, and includes
10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on
each of the first four anniversaries after the date of grant.
(10)Includes options to purchase 187,500 Kinder Morgan, Inc. shares exercisable
within 60 days of February 15, 2001, and includes 10,000 shares of
restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the
first four anniversaries after the date of grant.
(11)Includes options to purchase 6,000 common units and 39,050 Kinder Morgan,
Inc. shares exercisable within 60 days of February 15, 2001, and includes
10,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on
each of the first four anniversaries after the date of grant.
(12)Includes options to purchase 212,500 Kinder Morgan, Inc. shares exercisable
within 60 days of February 15, 2001, and includes 10,000 shares of
restricted Kinder Morgan, Inc. stock, 25% of which vests on each of the
first four anniversaries after the date of grant.
(13)Includes options to purchase 22,000 common units and 656,200 Kinder Morgan,
Inc. shares exercisable within 60 days of February 15, 2001, and includes
65,000 shares of restricted Kinder Morgan, Inc. stock, 25% of which vests on
each of the first four anniversaries after the date of grant.
(14)Kinder Morgan, Inc.'s address is One Allen Center, Suite 1000, 500 Dallas
St., Houston, Texas 77002. Common units owned include units owned by Kinder
Morgan, Inc. and its subsidiaries, including 862,000 common units held by
Kinder Morgan G.P., Inc.
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 our Shares."
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
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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. 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 a material
adverse effect on us or the holders of our shares; and
- amendments to the Kinder Morgan Energy Partners, L.P. partnership
agreement that would have a material adverse effect on the holders of the
i-units in relation to the common units.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Kinder Morgan, Inc. owns all of the stock of the general partner of Kinder
Morgan Energy Partners and elects all of its directors. The general partner of
Kinder Morgan Energy Partners, L.P. owns all of our voting stock and elects all
of our directors. Kinder Morgan, Inc. has a number of interests which differ
from your interests as a shareholder of ours. As a result, there is a risk that
important business decisions will not be made in your best interest.
SITUATIONS IN WHICH A CONFLICT OF INTEREST COULD ARISE
WE AND KINDER MORGAN ENERGY PARTNERS, L.P. MAY COMPETE FOR THE TIME AND
EFFORT OF OUR DIRECTORS AND OFFICERS WHO ARE ALSO DIRECTORS AND OFFICERS OF
KINDER MORGAN, INC. Kinder Morgan, Inc. and its affiliates conduct business and
activities of their own in which we have no economic interest. There could be
material competition for the time and effort of the directors, officers and
employees who provide services to us. Our officers are not required to work full
time on our affairs and will devote significant time to the affairs of Kinder
Morgan, Inc. or its affiliates, and are compensated by them for the services
rendered to them.
KINDER MORGAN, INC. MAY SELL ASSETS OR PROVIDE SERVICES TO KINDER MORGAN
ENERGY PARTNERS, L.P., GIVING RISE TO CONFLICTS OF INTEREST. Kinder Morgan,
Inc.'s interest as seller of these assets or provider of services in these
transactions would conflict with Kinder Morgan Energy Partners, L.P.'s interests
as buyer of the assets or recipient of services. Kinder Morgan, Inc. would want
to receive the highest possible price and Kinder Morgan Energy Partners, L.P.
would want to pay the lowest possible price. The same type of conflict would
arise if Kinder Morgan Energy Partners, L.P. were the seller of services or
assets and Kinder Morgan, Inc. were the purchaser.
THE FIDUCIARY DUTIES OF OUR BOARD OF DIRECTORS TO US AND OF THE GENERAL
PARTNER OF KINDER MORGAN ENERGY PARTNERS, L.P. TO THE UNITHOLDERS HAS BEEN
LIMITED UNDER THE LIMITED LIABILITY COMPANY AGREEMENT AND THE PARTNERSHIP
AGREEMENT, RESPECTIVELY. Our limited liability company agreement and the Kinder
Morgan Energy Partners, L.P. partnership agreement limit the fiduciary duties of
our board of directors and of the general partner of Kinder Morgan Energy
Partners, L.P., respectively. This limitation reduces the rights of our
shareholders under the limited liability company agreement and the unitholders
under the Kinder Morgan Energy Partners, L.P. partnership agreement to sue the
board of directors and the general partner of Kinder Morgan Energy Partners,
L.P., respectively, should they act in a way that, were it not for this
limitation of liability, would be a breach of fiduciary duties.
OWNERS OF THE SHARES WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF KINDER
MORGAN, INC. AND ITS AFFILIATES UNDER AGREEMENTS WITH US. Any agreements between
us, on the one hand, and Kinder Morgan, Inc. and its affiliates, on the other
hand, will not grant to holders of our shares any right to enforce the
obligations of Kinder Morgan, Inc. and its affiliates in our favor.
CONTRACTS BETWEEN US AND KINDER MORGAN ENERGY PARTNERS, L.P., ON THE ONE
HAND, AND KINDER MORGAN, INC. AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE
RESULT OF ARM'S-LENGTH NEGOTIATIONS. Neither the limited liability company
agreement nor any of the other contracts or arrangements between us and Kinder
Morgan, Inc. and its affiliates are or will be the result of arm's-length
negotiations.
THE SIMILARITY OF THE ACQUISITION STRATEGY OF KINDER MORGAN, INC. TO THE
STRATEGY OF KINDER MORGAN ENERGY PARTNERS, L.P. CREATES CONFLICTS OF INTEREST.
Since Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P. plan to grow
their business through acquisitions, conflicts of interest may arise because
Kinder Morgan, Inc. is not prohibited from making acquisitions which would also
be of interest to Kinder Morgan Energy Partners, L.P. Therefore, regardless of
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any arrangement for sharing or allocating investment opportunities which may be
established between them, this conflict may result in Kinder Morgan Energy
Partners, L.P. being unable to make all of the favorable acquisitions it would
otherwise make.
KINDER MORGAN, INC. AND ITS AFFILIATES MAY COMPETE WITH KINDER MORGAN
ENERGY PARTNERS, L.P. Kinder Morgan, Inc. and its affiliates are not prohibited
from engaging in other businesses or activities, including those that might be
in direct competition with Kinder Morgan Energy Partners, L.P.
THERE COULD BE A CONFLICT AS TO WHETHER KINDER MORGAN ENERGY PARTNERS, L.P.
SHOULD ISSUE EQUITY DILUTING KINDER MORGAN, INC.'S OWNERSHIP. It may be in the
best interests of Kinder Morgan Energy Partners, L.P. to finance a transaction
or operation by means of the issuance of equity which would result in a
reduction of Kinder Morgan, Inc.'s percentage ownership of Kinder Morgan Energy
Partners, L.P. Kinder Morgan, Inc. may not find it in its interest to have its
percentage interest in the partnership reduced at that time. This could result
in Kinder Morgan Energy Partners, L.P. either having to forego a transaction
that would otherwise be beneficial to it or to finance the transaction or
operations in whole or in part by indebtedness which could increase its
leverage.
KINDER MORGAN, INC. MAY EXERCISE ITS PURCHASE RIGHTS AT A TIME OR PRICE
THAT MAY BE UNDESIRABLE TO YOU. Kinder Morgan, Inc. or its affiliates may
exercise its optional purchase rights to acquire your shares at any time in its
sole discretion after the conditions for such exercise have been satisfied. In
exercising the rights, Kinder Morgan, Inc. and its affiliates do not have to
consider whether the exercise is in your best interest. As a result, a
shareholder may have his shares purchased from him at an undesirable time or
price. For more information, please read "Description of Our Shares -- Optional
Purchase."
FIDUCIARY DUTIES OWED TO OUR SHAREHOLDERS AND TO THE OWNERS OF UNITS
The fiduciary duties owed to you by our board of directors are prescribed
by Delaware law and our limited liability company agreement. Similarly, the
fiduciary duties owed to the owners of common units of Kinder Morgan Energy
Partners, L.P. by the board of directors of the general partner of Kinder Morgan
Energy Partners, L.P. are prescribed by Delaware law and the partnership
agreement. The Delaware Limited Liability Company Act and the Delaware Limited
Partnership Act provide that Delaware limited liability companies and Delaware
limited partnerships, respectively, may, in their limited liability company
agreements and partnership agreements, as applicable, restrict the fiduciary
duties owed by the board of directors to the shareholders and us and by the
general partner to the limited partners.
Our limited liability company agreement and the Kinder Morgan Energy
Partners, L.P. partnership agreement contain various provisions restricting the
fiduciary duties that might otherwise be owed. The following is a summary of the
material restrictions of the fiduciary duties owed by our board of directors to
us and the other shareholders and by Kinder Morgan G.P., Inc. to the limited
partners. Any fiduciary duties owed to you by Kinder Morgan, Inc. and its
affiliates, as the beneficial owner of all our voting shares, are similarly
limited.
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State-law fiduciary duty standards... Fiduciary duties are generally considered to include an
obligation to act with due care and loyalty. The duty of
care, in the absence of a provision in a limited liability
company agreement or partnership agreement providing
otherwise, would generally require a manager or general
partner to act for the limited liability company or limited
partnership, as applicable, in the same manner as a prudent
person would act on his behalf. The duty of loyalty, in the
absence of a provision in a limited liability company
agreement or partnership agreement providing otherwise,
would generally prohibit a manager of a Delaware limited
liability company or a general partner of a Delaware limited
partnership from taking any action or engaging in any
transaction where a conflict of interest is present.
Limited liability company agreement
modifies these standards........... Our limited liability company agreement contains provisions
that waive claims arising from, or consent to, conduct by
our board of directors that might otherwise raise issues as
to compliance with fiduciary duties or applicable law. For
example, our limited liability company agreement permits the
board of directors to make a number of decisions in its
"sole discretion." This entitles the board of directors to
consider only the interests and factors that it desires, and
it has no duty or obligation to give any consideration to
any interest of, or factors affecting, us, our affiliates or
any shareholder.
Kinder Morgan, Inc., its affiliates, and their officers and
directors who are also our officers or directors are not
required to offer to us any business opportunity. Each
shareholder waives any claim that any business opportunity
pursued by those persons constitutes a business opportunity
that was misappropriated. Each shareholder also waives any
right to complain or make any claim as a result of any
competition for business between those persons and us.
In addition to the other more specific provisions limiting
the obligations of our board of directors, our limited
liability company agreement further provides that our board
of directors will not be liable for monetary damages to us
or our shareholders for any acts or omissions if our board
of directors acted in good faith. Please read "Limited
Liability Company Agreement -- Indemnification."
Kinder Morgan Energy Partners, L.P.
limited partnership agreement
modifies these standards........... The general partner of Kinder Morgan Energy Partners, L.P.
is permitted to attempt to avoid personal liability in
connection with the management of Kinder Morgan Energy
Partners, L.P., pursuant to the partnership agreement of
Kinder Morgan Energy Partners, L.P. This partnership
agreement provides that the general partner does not breach
its fiduciary duty even if the partnership could have
obtained more favorable terms without limitations on the
general partner's liability.
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The partnership agreement of Kinder Morgan Energy Partners,
L.P. contains provisions that allow the general partner to take
into account the interests of parties in addition to Kinder
Morgan Energy Partners, L.P. in resolving conflicts of interest,
thereby limiting its fiduciary duty to the limited partners. Also,
this partnership agreement contains provisions that may restrict
the remedies available to limited partners for actions taken that
might, without such limitations, constitute breaches of fiduciary
duty. The duty of the directors and officers of Kinder Morgan,
Inc. to the shareholders of Kinder Morgan, Inc. may, therefore,
come into conflict with the duties of the general partner, to the
limited partners. The general partner's conflicts and audit
committee of the board of directors will, at the request of the
general partner, review and resolve conflicts of interest that
may arise between Kinder Morgan, Inc. or its subsidiaries, on
the one hand, and Kinder Morgan Energy Partners, L.P., on the
other hand.
In order to become one of our shareholders, a shareholder is required to
agree to be bound by the provisions in the limited liability agreement,
including the provisions discussed above. This is in accordance with the policy
of the Delaware Limited Liability Company Act favoring the principle of freedom
of contract and the enforceability of limited liability company agreements. The
failure of a shareholder to sign a limited liability company agreement does not
render the limited liability company agreement unenforceable against that
person.
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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.
FEDERAL INCOME TAX STATUS AS A CORPORATION
An election has been made to treat us as a corporation for federal income
tax purposes. 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 Kinder Morgan Energy Partners, L.P. is liquidated. Thus, we do not
expect to have material amounts of taxable income resulting from 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 "Kinder Morgan
Management, LLC Status as a Corporation For Federal Income Tax Purposes" below.
POWER OF ATTORNEY
Each shareholder appoints any person specifically authorized by our board
of directors to act as its true and lawful representative and attorney-in-fact,
in its name, place and stead, to make, execute, sign, deliver and file:
- any amendment of the organizational certificate required because of an
amendment to this Agreement or in order to effectuate any change in the
ownership of the Company Securities;
- any amendments to the limited liability company agreement made in
accordance with the terms of that agreement; and
- all such other instruments, documents and certificates which may from
time to time be required by law to effectuate, implement and continue the
valid and subsisting existence of the Company or to dissolve the Company
or for any other purpose consistent with the limited liability company
agreement and this offering.
The power of attorney is irrevocable and coupled with an interest, and it
survives and is not affected by the subsequent death, incompetency, disability,
incapacity, dissolution, bankruptcy or termination of any shareholder or the
transfer of any of the shareholder's shares. The power of attorney also extends
to the shareholder's heirs, successors, assigns and personal representatives.
MEMBERS
Kinder Morgan G.P., Inc. is our organizational shareholder and owns all of
our voting shares as our sole voting member. Our other members are the owners of
the class of shares being sold in this offering.
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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 organizational
shareholder 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.
LIMITED LIABILITY
All of our debts, obligations and liabilities, whether arising in contract,
tort or otherwise, will be our debts, obligations and liabilities alone, and no
owner of shares will be obligated for any of these debts, obligations or
liabilities as a result of being an owner of shares.
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
organizational shareholder. 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 of Kinder Morgan Limited Partners, L.P.
with our employees. The costs of these employees will be borne directly or
reimbursed by Kinder Morgan Energy Partners, L.P. without profit to the
affiliate.
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,
provided that all shares of any such additional class must be approved by a vote
of the owners of our shares of the class sold in this offering.. We are also
authorized to issue an unlimited number of additional shares of the voting
shares and the class of shares being sold in this offering.
DISSOLUTION AND LIQUIDATION
We will be dissolved only upon a judicial decree, upon the approval by the
organizational shareholder and by the holders of a majority of our outstanding
shares of the class sold in this offering, or upon the approval of 66 2/3% of
our outstanding shares of the class sold in this offering. 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 pro rata to our outstanding
shares of all classes.
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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 owners 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 organizational
shareholder, 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 owners of a majority of the outstanding shares of the class
being sold in this offering.
MEETINGS; VOTING
Meetings of the shareholders may be called by the board of directors, the
chairman of the board or by the organizational shareholder. Within 60 days after
such a call or within such greater time as may be reasonably necessary for us to
comply with applicable law or the regulations of any securities exchange on
which the shares are listed, the board of directors shall send a notice of the
meeting to the shareholders owning shares for which a meeting is being called
either directly or indirectly through the transfer agent. The meeting shall be
held at a time and place determined by the board of directors on a date not more
than 60 nor less than ten days after the mailing of notice of the meeting. The
owners of Kinder Morgan Management, LLC shares do not have the right to call a
meeting of the shareholders. For more information on the voting rights of owners
of Kinder Morgan Management, LLC shares, please see "Description of Our
Shares -- Limited Voting Rights."
BOOKS AND RECORDS; LIST OF SHAREHOLDERS
We will keep at our principal office complete and accurate books and
records, supporting documentation of the transactions with respect to the
conduct of our business and affairs and minutes of the proceedings of our board
of directors, the shareholders and each committee of the board of directors. The
records will include:
- complete and accurate information regarding the state of our business and
financial condition;
- a copy of the limited liability company agreement and the organizational
certificate, and any amendments thereto;
- a current list of the names and last known business, residence, or
mailing addresses of all directors and officers; and
- our federal, state and local tax returns for our six most recent tax
years.
Subject to reasonable standards (including standards governing what information
and documents are to be furnished and at what time and location and at whose
expense) as may be established
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by the board of directors or any officer, each shareholder is entitled to all
information to which a member of a Delaware limited liability company is
entitled to have access pursuant to the Delaware Limited Liability Company Act
under the circumstances and subject to the conditions therein stated.
Specifically, each shareholder will have access to:
- true and full information regarding the status of our business and
financial condition;
- a copy of our federal, state and local income tax returns for each year;
- a current list of the name and last known business, residence or mailing
address of each director and shareholder;
- a copy of our limited liability company agreement and certificate of
formation, including all amendments, together with executed copies of any
written powers of attorney pursuant to which our limited liability company
agreement and any certificate and all amendments have been executed;
- true and full information regarding the amount of cash and a description
and statement of the agreed value of any other property or services
contributed by each shareholder and which each shareholder has agreed to
contribute in the future, and the date on which each became a shareholder;
and
- other information regarding our affairs as is just and reasonable.
Our board of directors will have the right to keep confidential from the
shareholders, for such period of time as the board of directors deems
reasonable, any information which the board of directors reasonably believes to
be in the nature of trade secrets or other information the disclosure of which
the board of directors in good faith believes is not in our best interest or
could damage us or our business or which the we are required by law or by
agreement with a third party to keep confidential.
NO REMOVAL
A shareholder may not be expelled or removed.
DISTRIBUTIONS
For information regarding distributions payable on each Kinder Morgan
Management, LLC share, please see "Description of Our Shares -- Distributions."
EXCHANGE
For information regarding the right of owners of Kinder Morgan Management,
LLC shares, please see "Description of Our Shares -- Exchange Feature."
OPTIONAL AND MANDATORY PURCHASE
For information regarding the obligation of owners of Kinder Morgan
Management, LLC shares to sell their shares under specified circumstances,
please see "Description of Our Shares -- Optional Purchase" and Description of
Our Shares -- Mandatory Purchase."
PURCHASE EVENTS
Our limited liability company agreement requires owners 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."
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DESCRIPTION OF COMMON UNITS AND CLASS B UNITS
NUMBER OF 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, Class B units or other securities it
may issue. If Kinder Morgan Energy Partners, L.P. issues other securities, these
securities may have rights and preferences that are superior to those of the
common units, the Class B units and the i-units.
WHERE 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. The Class B units are owned by
an affiliate of Kinder Morgan, Inc. and are not listed for trading on any
exchange.
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, Class B unitholders,
i-unitholders and the general partner as described under "Kinder Morgan Energy
Partners, L.P.'s Distribution Policy." Except upon its liquidation,
distributions will be made in cash to owners of common units, Class B units and
the general partner and in additional i-units to us as the owner 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 under the caption "Description of the
Partnership Agreement in the Form 10-K for Kinder Morgan Energy Partners, L.P.
filed with the Securities and Exchange Commission on March 14, 2001.
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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.
After the closing of this offering, Kinder Morgan, Inc. will hold the
850,000 shares. The future resale of these shares by Kinder Morgan, Inc. could
have an adverse impact on the price of the shares or on any trading market that
may develop.
The shares sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act of 1933,
except that any shares owned by an "affiliate" of our company, including Kinder
Morgan, Inc., may not be resold publicly other than in compliance with the
registration requirements of the Securities Act of 1933 or under an exemption
under Rule 144 or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount that does not
exceed, during any three-month period, the greater of:
- 1% of the total number of the securities outstanding; or
- the average weekly reported trading volume of the securities for the
four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale
provisions, notice requirements and the availability of current public
information about us.
Under a registration rights agreement, Kinder Morgan, Inc. and its
affiliates have the right to cause us to register under the Securities Act of
1933 and state laws the offer and sale of any shares that they hold. Subject to
the terms and conditions of the registration rights agreement, these
registration rights allow Kinder Morgan, Inc. and its affiliates or their
assignees holding any shares to require registration of any of these shares and
to include any of these shares in a registration by us of other shares,
including shares offered by us or by any shareholder. In connection with any
registration of this kind, we will indemnify each shareholder participating in
the registration and its officers, directors and controlling persons from and
against any liabilities under the Securities Act of 1933 or any state securities
laws arising from the registration statement or prospectus. Kinder Morgan Energy
Partners, L.P. will bear or reimburse us for all costs and expenses incidental
to any registration, excluding any underwriting discounts and commissions.
Except as described below, Kinder Morgan, Inc. and its affiliates may sell their
shares in private transactions at any time, subject to compliance with
applicable laws.
Kinder Morgan, Inc. and its affiliates, have agreed not to sell any shares
they beneficially own for a period of 180 days from the date of this prospectus.
Please read "Underwriting" for a description of these lock-up provisions.
INCOME TAX CONSIDERATIONS
RELATING TO THE SHARES AND THE COMMON UNITS
This section is a summary of material 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
States 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,
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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 owners 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, dealers and
persons entering into hedging transactions. 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.
LEGAL OPINIONS
Counsel is of the opinion that, based on the accuracy of the
representations made by us and Kinder Morgan G.P., Inc. and subject to the
qualifications set forth in the detailed discussion that follows, for federal
income tax purposes (1) Kinder Morgan Energy Partners, L.P. and the operating
partnerships will each be treated as a partnership, and (2) owners of units
(with certain exceptions, as described in "Limited Partner Status" below) will
be treated as partners of Kinder Morgan Energy Partners, L.P. In addition, all
statements as to matters of law and legal conclusions contained in this section,
unless otherwise noted, reflect the opinion of counsel.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective owners 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 owners 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 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.
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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. Because these distributions of additional
shares will be made proportionately to all owners of shares, the receipt of
these additional shares will not be includable in the gross income of an owner
of shares for federal income tax purposes. As each owner of shares receives
distributions of additional shares, it 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 them. As additional shares are distributed to an owner of
shares, that owner 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 owner can identify each separate
lot, then the basis of each old lot of shares can be used separately in the
allocation. If an owner of shares cannot identify each lot, then it 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 owner's tax basis for the shares
sold or otherwise disposed of. An owner'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 owner 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 owner's tax basis in the shares sold or exchanged.
Except as noted below, gain or loss recognized by an owner, 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.
Capital gain treatment may not result from a disposition of shares 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.
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, an owner's holding period begins on its acquisition of
shares pursuant to this offering. As additional shares are distributed to an
owner of shares, the holding period of each new share received will also include
the period for which the owner held the old shares to which the new share
relates.
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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
diminution of a share purchaser's risk of loss from owning its shares. In that
case, any owner who incurs interest or other carrying charges that are allocable
to the shares (as would be the case if the owner 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 rather than
deducting them currently. 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 diminution of a
share purchaser's risk of loss from owning 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
an owner'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 an owner receives common units in exchange for its shares, it 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, REGULATED INVESTMENT
COMPANIES AND NON-U.S. PERSONS. 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, an owner 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 owner 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, an owner 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 that 90% test. 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.
Because distributions of additional shares will be made proportionately to
all owners of shares, the receipt of these additional shares will not be
includable in the gross income of an owner of shares for United States federal
income tax purposes. Therefore, no withholding taxes will be imposed on
distributions of additional shares to non-resident aliens and foreign
corporations, trust or estates. A non-United States owner of shares generally
will not be subject
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to United States federal income tax or subject to withholding on any gain
recognized on the sale or other disposition of shares unless:
- the gain is considered effectively connected with the conduct of a trade
or business by the non-United States owner within the United States and,
where a tax treaty applies, is attributable to a United States permanent
establishment of that owner (and, in which case, if the owner is a foreign
corporation, it may be subject to an additional branch profits tax equal
to 30% or a lower rate as may be specified by an applicable income tax
treaty);
- the non-United States owner is an individual who holds the shares as a
capital asset and is present in the United States for 183 or more days in
the taxable year of the sale or other disposition and other conditions are
met; or
- we are or have been a "United States real property holding corporation,"
or a USRPHC, for United States federal income tax purposes.
We believe that we will be a USRPHC for United States federal income tax
purposes. Therefore, any gain on the sale or other disposition of shares by a
non-United States owner will be subject to United States federal income tax
unless the shares are regularly traded on established securities market and the
non-United States owner does not actually or constructively own more than 5% of
the shares during the shorter of the five-year period preceding the disposition
or that owner's holding period. We expect our shares to be traded on such an
established securities market.
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 upon such a liquidation. 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 and deduction 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
treatment for federal income tax purposes. As of January 1, 1997, Kinder Morgan
Energy Partners, L.P. and the operating partnerships were each treated as a
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partnership for federal income tax purposes. Pursuant to the Check-the-Box
Regulations, this prior treatment will be respected for all periods prior to
January 1, 1997, if:
- the entity had a reasonable basis for the claimed treatment;
- the entity recognized the federal tax consequences of any change in
treatment within five years prior to January 1, 1997; and
- the entity was not notified prior to May 8, 1996 that the entity
treatment 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 treated 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 a corporation for
tax purposes;
- 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, 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.
Counsel's opinion is valid 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, real
property rents 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
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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 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 and deduction 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 unitholders's tax basis in
its units, or taxable capital gain, after the unitholder's tax basis in its
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.
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
Unitholders, including an owner of i-units, 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
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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 unitholder will be required to
report on that unitholder's federal income tax return its share of Kinder Morgan
Energy Partners, L.P.'s income, gains, losses and deductions without regard to
whether corresponding cash distributions are received by it. 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 its share of Kinder Morgan
Energy Partners, L.P.'s income, gains, losses and deductions 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 will not be taxable to the unitholder for
federal income tax purposes to the extent of the unitholder's tax basis in its
common units immediately before the distribution, unless 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
known collectively as "Section 751 Assets." Kinder Morgan Energy Partners,
L.P.'s cash distributions in excess of a common unitholder's tax basis will be
considered to be gain from the sale or exchange of the units except to the
extent the gain is attributable to Section 751 Assets of Kinder Morgan Energy
Partners, L.P., taxable in accordance with the rules described under
"Disposition of Common Units" 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
from Kinder Morgan Energy Partners, L.P. 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 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 its units will
be the amount paid for the units plus its share of Kinder Morgan Energy
Partners, L.P.'s nonrecourse liabilities. That
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basis will be increased by its share of Kinder Morgan Energy Partners, L.P.'s
income and by any increases in its share of Kinder Morgan Energy Partners,
L.P.'s nonrecourse liabilities. That basis will be decreased, but not below
zero, by distributions to it from Kinder Morgan Energy Partners, L.P., by any
decreases in its share of Kinder Morgan Energy Partners, L.P.'s nonrecourse
liabilities, by its share of Kinder Morgan Energy Partners, L.P.'s losses and by
its 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 its 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 its share of Kinder Morgan Energy Partners,
L.P. 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.
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 passive income
Kinder Morgan Energy Partners, L.P. generates may be deducted in full when the
unitholder disposes of its entire investment in Kinder Morgan Energy Partners,
L.P. 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
passive income may be offset by any of its suspended passive losses, but it may
not be offset by any other
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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. or an
operating partnership is required or elects under applicable law to pay any
federal, state, local or foreign 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 or the operating
partnerships' 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 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 common
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, other than i-units, 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 Kinder Morgan Energy Partners,
L.P. 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., or owned by Kinder Morgan Energy Partners, L.P. at the
time new units are issued, referred to in this discussion as "Contributed
Property." In addition, certain items of recapture income will be allocated to
the extent possible
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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 or deduction, 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 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 view, however, that such curative allocations are consistent with the
policy underlying these final regulations.
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
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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 and
loss 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
loaning 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 its 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. For corporations, the current minimum tax
rate is 20% on alternative minimum taxable income in excess of the exemption
amount. 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.
SECTION 754 ELECTION. Kinder Morgan Energy Partners, L.P. has 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. 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
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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 position intended to preserve the
uniformity of units even if that position 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 position 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."
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 the general partner's determination of 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, may be unamortizable and, if amortizable, 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
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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 its 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
its 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 its taxable year its share
of more than one year of Kinder Morgan Energy Partners, L.P.'s income, gain,
loss and deduction.
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 assets are placed in service.
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 KINDER MORGAN ENERGY PARTNERS, L.P.'S
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 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
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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 it plus the its share of any 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 to the extent attributable to Section 751 Assets Kinder Morgan Energy
Partners, L.P. owns. Ordinary income attributable to Section 751 Assets 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 based upon its value. 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"
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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.
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, 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
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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.
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 which apply, in part, to its assets.
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 positions 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 adopt any other reasonable depreciation and amortization
positions 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, MUTUAL FUNDS AND NON U.S. 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
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or mutual funds 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 it.
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 and deduction 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.
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 and deduction 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 and deduction. Kinder Morgan Energy Partners, L.P.
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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 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
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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.
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%.
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FOREIGN, 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.
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
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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 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
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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., Credit Suisse
First Boston Corporation, Lehman Brothers Inc., Dain Rauscher Incorporated and
First Union Securities, Inc. are the representatives of the underwriters.
Number of
Underwriters shares
------------ ---------
Goldman, Sachs & Co. .......................................
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc. .......................................
Dain Rauscher Incorporated..................................
First Union Securities, Inc. ...............................
---------
Total............................................. 8,500,000
=========
As part of this offering, the underwriters will sell 850,000 shares to
Kinder Morgan, Inc. The underwriters are not entitled to any discount or
commission of these shares.
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
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 1,275,000 additional shares.
Paid by
Kinder Morgan Management, LLC 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 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 or exchangeable for shares,
i-units or common units or any substantially similar securities, without the
prior written consent of
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Goldman, Sachs & Co. in its sole discretion. Goldman, Sachs & Co. has no set
criteria for the waiver of these restrictions and currently has no intention to
waive these restrictions. With respect to shares and i-units and securities of
such issuers that are substantially similar to the shares and i-units as
described above, but specifically excluding common units, the lock-up period
will be from the date of this prospectus and continuing through the date 180
days after the date of this prospectus. With respect to the common units and
securities of such issuers that are substantially similar to the common units as
described above, the lock-up period will be from the date of this prospectus and
continuing through the date of 60 days after the date of this prospectus. This
agreement does not apply to (1) 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, (2) the
disposal of such securities 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 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 of such
securities agrees not to dispose of the securities received in connection with
such acquisitions during the lock-up period, and (3) the disposal of such
securities pursuant to an employee stock or unit option plan existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, 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. 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.
A prospectus in electronic format may be made available on the Internet web
sites maintained by one or more of the underwriters. The representatives of the
underwriters may agree to allocate a number of shares to the underwriters for
sale to their online brokerage account holders. Any Internet distribution will
be allocated by the representatives to the underwriters that may make Internet
distributions on the same basis as other allocations.
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, i-units and common units 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 and registration statement, 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.
incorporated in this prospectus and registration statement by reference to its
Amendment No. 1 on Form 10-K/A for the year ended December 31, 2000 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. incorporated in this
prospectus and registration statement by reference to its Amendment No. 1 on
Form 10-K/A for the year ended December 31, 2000 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/A (Amendment No. 1) dated April 4, 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 (Amendment No. 2) dated April 4, 2001; 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
(Amendment No. 2) dated April 4, 2001 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 December 31, 2000 Form 10-K/A,
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 (Amendment No. 2) dated April 4, 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 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/A (Amendment No. 1) dated April 4, 2001, and
incorporated by reference in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent
125
129
auditors, to the extent indicated in their report thereon also incorporated
herein by reference. Such combined 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 SEC 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 SEC. 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.
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 SEC. 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 SEC 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
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.
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
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130
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
----------------------------------- ------
Current Report on Form 8-K/A Dated April 4, 2001
Current Report on Form 8-K/A Dated April 4, 2001
Annual Report on Form 10-K/A Dated April 4, 2001
Annual Report on Form 10-K Year ended December 31, 2000
Current Report on Form 8-K Filed March 5, 2001
Current Report on Form 8-K Filed February 20, 2001
Current Report on Form 8-K Filed February 1, 2001
Registration Statement on Form 8-A, as Filed July 2, 1992
thereafter amended
KINDER MORGAN, INC. SEC FILINGS
(FILE NO. 1-06446) PERIOD
------------------------------- ------
Current Report on Form 8-K/A Dated April 4, 2001
Annual Report on Form 10-K/A Dated April 4, 2001
Annual Report on Form 10-K Year Ended December 31, 2000
Current Report on Form 8-K Filed March 14, 2001
Current Report on Form 8-K Filed March 6, 2001
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.
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.
127
131
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
132
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
133
KINDER MORGAN MANAGEMENT, LLC
BALANCE SHEET
FEBRUARY 16, 2001
ASSETS
Cash........................................................ $100,000
--------
Total Assets...................................... $100,000
========
EQUITY
Voting shares; 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
134
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 14, 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 shares and (2) voting shares.
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 shares for cash to the public as
discussed in Note 3, using all of the net 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 and related rights from Kinder Morgan, Inc. 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.
At no time after our formation and prior to the public offering have we had
or do we expect to have any operations or own any interest in Kinder Morgan
Energy Partners, L.P. After the public offering, we will be a limited partner in
Kinder Morgan Energy Partners, L.P. and pursuant to a delegation of control
agreement 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., which will
represent an approximate 11.0% ownership interest in Kinder Morgan Energy
Partners, L.P.
4. INCOME TAX
We are a limited liability company that has elected to be treated as a
corporation for federal income tax purposes.
F-4
135
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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......................................... 20
Information Regarding Forward Looking Statements..... 30
Use of Proceeds...................................... 31
Our Policy Regarding Share Distributions............. 31
Kinder Morgan Energy Partners, L.P.'s Distribution
Policy............................................. 32
Capitalization of Kinder Morgan Management, LLC...... 38
Capitalization of Kinder Morgan Energy Partners,
L.P................................................ 39
Capitalization of Kinder Morgan, Inc................. 40
Selected Financial Data of Kinder Morgan Energy
Partners, L.P...................................... 41
Selected Pro Forma Financial Data of Kinder Morgan
Energy Partners, L.P............................... 43
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 45
Description of Our Shares............................ 61
Description of the i-Units........................... 72
Business............................................. 74
Management of Kinder Morgan Management, LLC.......... 81
Relationships and Related Party Transactions......... 85
Conflicts of Interest and Fiduciary
Responsibilities................................... 90
Limited Liability Company Agreement.................. 94
Description of Common Units and Class B Units........ 98
Shares Eligible for Future Sale...................... 99
Income Tax Considerations Relating to the Shares and
the Common Units................................... 99
ERISA Considerations................................. 119
Underwriting......................................... 122
Legal Matters........................................ 125
Experts.............................................. 125
Where You Can Find Additional Information............ 126
Index to Financial Statements........................ 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.
----------------------------------------------------------------
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8,500,000 SHARES
KINDER MORGAN
MANAGEMENT, LLC
Representing Limited Liability
Company Interests
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
FIRST UNION SECURITIES, INC.
Representatives of the Underwriters
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136
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. 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............................. 62,450
Printing and engraving expenses............................. 650,000
Legal fees and expenses..................................... 1,500,000
Accounting fees and expenses................................ 500,000
Blue Sky fees and expenses.................................. 25,000
Transfer agent and registrar fees........................... 50,000
Miscellaneous............................................... 35,425
----------
TOTAL............................................. $3,000,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (FORM S-1; ITEM 15 OF FORM
S-3).
Kinder Morgan Management, LLC
Section 18-108 of the Delaware Limited Liability Act provides that, subject
to such standards and restrictions, if any, as are set forth in its limited
liability company agreement, a limited liability company may, and shall have the
power to, indemnify and hold harmless any member or manager or other person from
and against any and all claims and demands whatsoever. 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.
Section 17-108 of the Delaware Limited Partnership Act provides that,
subject to such standards and restrictions, if any, as are set forth in its
partnership agreement, a limited partnership may, and shall have the power to,
indemnify and hold harmless any partner or other person from and against any and
all claims and demands whatsoever. 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.
II-1
137
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) ("Indemnitees") 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
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138
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 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).
The Company's sole voting share was sold to Kinder Morgan G.P., Inc. on
February 16, 2001.
Such sale was 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:
Unless otherwise indicated, all exhibits are filed herewith.
1.1 Form of Underwriting Agreement.
3.1 Form of Certificate of Formation of the Company.
3.2 Form of Amended and Restated 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.
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139
4.4 Form of Purchase Provisions between the Company and Kinder
Morgan, Inc. (included as Annex B to the Amended and
Restated Limited Liability Company Agreement filed as
Exhibit 3.2 hereto).
4.5 Form of Exchange Provisions between the Company and Kinder
Morgan, Inc. (included as Annex A to the Amended and
Restated Limited Liability Company Agreement filed as
Exhibit 3.2 hereto).
4.6 Form of Registration Rights Agreement between Kinder Morgan
Energy Partners, L.P. and Kinder Morgan, Inc.
4.7 Form of Third Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P.
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 Form of Tax Indemnity Agreement between the Company and
Kinder Morgan, Inc.
10.2 Form of Delegation of Control Agreement among Kinder Morgan
Management, LLC, Kinder Morgan G.P., Inc. Kinder Morgan
Energy Partners, L.P. and its operating partnerships
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.
---------------
* To be filed by amendment.
(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
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140
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.
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.
II-5
141
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 April 4, 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 April 4, 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
142
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 April 4, 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 April 4, 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
143
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 April 4, 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 April 4, 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
144
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement.
3.1 Form of Certificate of Formation of the Company.
3.2 Form of Amended and Restated 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 Form of Purchase Provisions between the Company and Kinder
Morgan, Inc. (included as Annex B to the Amended and
Restated Limited Liability Company Agreement filed as
Exhibit 3.2 hereto).
4.5 Form of Exchange Provisions between the Company and Kinder
Morgan, Inc. (included as Annex A to the Amended and
Restated Limited Liability Company Agreement filed as
Exhibit 3.2 hereto).
4.6 Form of Registration Rights Agreement between Kinder Morgan
Energy Partners, L.P. and Kinder Morgan, Inc.
4.7 Form of Third Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P.
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 Form of Tax Indemnity Agreement between the Company and
Kinder Morgan, Inc.
10.2 Form of Delegation of Control Agreement among Kinder Morgan
Management, LLC, Kinder Morgan G.P., Inc. and Kinder Morgan
Energy Partners, L.P. and Its operating partnerships.
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.
---------------
* To be filed by amendment.